As the cryptocurrency economy continues to grow, many of our clients and colleagues have asked for guidance relating to integration of this asset class into a wholistic estate plan. Crypto assets can be an outstanding addition to a diversified portfolio, especially as a means of counterbalancing more conservative investments like blue chip stocks or bonds. However, crypto assets present unique planning challenges and other issues of which holders should be aware. Here are a few:
Crypto Needs New State and Federal Laws, Most of Which Are Yet to Be Written
There exists a dearth of established law for cryptocurrencies (or virtual currency, the term preferred by the IRS). For example, the Internal Revenue Code still contains much uncertainty relating to proper treatment of crypto assets under certain circumstances. Most jurisdictions have few or no laws directly addressing cryptocurrency. Due to the relative novelty of this asset class, even sophisticated probate courts will have handled only a small handful of estates with crypto assets, if any. As a result, attorneys and judges may find themselves in the unenviable position of either attempting to force cryptocurrency into an existing legal framework that doesn’t quite fit or attempting to create new law on the fly.
As a corollary, assets held in the custody of a third party may be inaccessible if outside the United States or may require a formal probate proceeding if in the United States. While most financial accounts and insurance policies provide the option to name a beneficiary to whom the assets would be payable after the death of the owner (bypassing traditional probate), crypto exchanges do not yet allow beneficiary designations.
Crypto Assets that Are Part of a Decedent’s Estate Could Be Lost Forever Without a Roadmap for Heirs
Crypto assets may be difficult or impossible for heirs to locate without help. A skilled forensic accountant may be able to identify conditions suggesting the estate owns crypto assets (e.g. outgoing bank transfers to known crypto asset exchanges), but assets held in foreign exchanges or hardware wallets, self-created or mined assets may not be easily traceable. While US exchanges are probably subject to state laws requiring that they turn over unclaimed property to state governments, there is no guarantee that “abandoned” assets will ever be re-discovered by the rightful owner.
Crypto assets not held on exchanges are protected by strong encryption that will prevent access without private keys. However, most users are reluctant to store keys in a place known or accessible to others besides themselves. Additionally, keys written on plain paper or saved to magnetic storage media could be destroyed in a fire, flood, or other natural disaster. Take it from these folks - missing keys are bad.
Crypto Assets Have Other Special Characteristics That Require Detailed Planning
Cryptocurrencies and other crypto assets are generally considered capital assets in the hands of most taxpayers. This means they require extensive record keeping and reporting at tax time. At the same time, not all activity will be summarized and reported to taxpayers (including the estate of a deceased person) on Form 1099-B. Incomplete or inaccurate records, or failure to report activity in a timely manner, could leave heirs liable for back taxes, interest, and penalties.
Many estate plans incorporate one or more trusts to ensure assets go where they are intended. Crypto assets intended to be held in a trust may need to be converted to other asset classes. Some professional trustees or trust companies may be unfamiliar with this asset class or be unwilling to work with it, for various reasons.
Additionally, most crypto exchanges have strict “know your customer” requirements and daily withdrawal limits that may substantially extend the time needed to take custody of crypto assets or convert them to fiat currency for use by heirs. If cash is needed to settle a loved one’s affairs soon after death, it may not be available.
These are just a small sample of the issues that should be managed with estate planning by holders of crypto assets. If you need assistance developing or implementing your plan, please contact us for help. We can be reached online or by dialing (972) 737-4456.