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Planning for Bitcoin and Crypto Assets

Sep 23, 2021

Paul S. Labiner

Paul Labiner

Managing
Partner

Cryptocurrencies like Bitcoin and Ethereum (“crypto” for short) have seen a meteoric rise in popularity and value in the last few years. Bitcoin, for example, soared from around $8,000 in January 2020 to over $60,000 in March 2021. Currently, it is hovering just under $50,000.

An increasing number of individuals are incorporating crypto into their asset portfolios or transferring existing assets into cryptocurrency. As cryptocurrency becomes a more common investment vehicle and constitutes ever-larger percentages of the value of estates, it’s important to remember that specific directions for the transfer and distribution of these digital assets need to be included in estate planning documents.

How Is Cryptocurrency the Same?

Despite the numerous ways that cryptocurrency is new, many of the same estate planning concerns that apply to more traditional assets apply to it as well.

Firstly, the value of your cryptocurrency assets will be subject to estate and gift taxes. The relative estate and gift tax exemptions are currently at an all time high ($11.7 million per person). However, these exemptions may be slashed relatively soon in upcoming tax policy legislation or will naturally sunset January 1, 2026.

Second, even though cryptocurrencies are “decentralized” and not under the direct control of the government, they are still subject to probate. However, just as with other probate assets, there are ways to avoid the time-consuming and expensive probate process by re-titling them in the name of a Revocable Trust.

How Is Cryptocurrency Different?

Unlike traditional financial assets, cryptocurrencies are an entirely digital creation and have no physical counterparts. Moreover, they are hidden behind multiple digital gates, each of which requires its own “key.”

The platform(s) used to buy and trade crypto as well as the locations where the currencies are held will need usernames and passwords, two-factor authentication, and public and private keys. Because of how they’re bought, traded, and stored, cryptocurrencies pose unique concerns in the asset protection and estate planning arena.

Keep It Secret, Keep It Safe

In the shorter term, investors need to ensure the safe storage of their crypto assets. And the safe and secure storage of crypto assets is absolutely vital. Bitcoin and other cryptocurrencies purchased on an exchange are automatically stored on that exchange’s default “crypto wallet” where they can be accessed electronically only by the investor via their private key.

This key needs to be kept secure because if someone gains access to a user’s private key, they can unlock and steal these cryptocurrencies, which will likely be unrecoverable since crypto isn’t backed by a central banking authority.

However, these exchanges themselves are susceptible to hacking (and internet security isn’t their primary business). So, it is recommended that investors store crypto outside of the exchange in a personal “hot” or “cold” wallet to ensure that only the owner has access to the private key.

Hot wallets (online wallets) are stored and accessed through internet-connected devices, such as tablets, computers, or phones. They are more secure than the platform-run exchange wallets and fairly easy to use, but any internet-connected device will be vulnerable to infiltration.

Cold wallets (paper or hardware wallets) are not connected to the internet and thus are more secure than hot wallets. They are external devices like a USB, hard drive, or a physical sheet of paper. Though inaccessible digitally, they can obviously be physically stolen (or damaged or lost) so they must be protected like any other valuable.

Pro Tip: Also consider how you purchased your crypto. Crypto brokers such as Robinhood or SoFi are popular alternatives to exchanges like Coinbase because the platforms are simpler to use. However, brokers often restrict transfers off of the platform. For instance, neither Robinhood nor SoFi allow users to transfer crypto assets out to personal, more secure wallets. This can have negative repercussions for these assets’ short-term security as well as on the estate planning front for heirs and beneficiaries who do not know much about crypto investing or simply want to cash out.

Most importantly, perhaps, is that there is no “recover password” option. If an investor loses the password to a crypto wallet—or loses or destroys a physical hardware wallet—the owner can permanently lose access to all of the cryptocurrency in the wallet. In fact, according to a recent New York Times story, around 20% of the existing Bitcoin (worth roughly $140 billion) appears to be stranded in inaccessible wallets.

Securing the Transfer of Crypto Assets

Cryptocurrency’s heightened digital security also has implications for the transfer of these assets to heirs and beneficiaries. Again, heirs will need a trove of information in order to access cryptocurrency holdings:

  • login information for exchanges or broker platforms,
  • any two-factor authentication credentials,
  • passwords for personal crypto wallets, and/or
  • location of physical paper or hardware wallets.

Investors and their heirs may permanently lose access to these valuable assets if the hardware wallet is misplaced or damaged or if the various passwords are lost.

Investors should record the password and other access information for their hardware wallets in a safe and secure place (such a Digital Asset Catalog) and explicitly designate in a will or revocable trust who should receive custody of this information.

Further, who gets access to this information should be specified in a Power of Attorney document so they can access this information during your lifetime.

Finally, as we mentioned above, cryptocurrency is a probate asset. This means that unless crypto assets are transferred into a Revocable Trust, they will be subject to probate, which will make the transfer will take longer and be more expensive. One’s cryptocurrency holdings—i.e. the wallet itself and the information necessary to access it—should be properly transferred to a Revocable Trust.

Be a Savvy Investor

If you have significant crypto assets or plan to diversify into this area, make sure you also take care for their short-term and long-term safety. The loss a crypto wallet’s password or a small USB drive could potentially be worth millions of dollars.

A few simple steps can ensure these valuable assets transfer safely and securely to your heirs.

Digital Asset Catalog [Free Template]

This free resource will help you plan and secure your valuable crypto assets. Catalog and store critical information for your heirs.

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