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Cryptocurrency – Protecting your Bitcoin within your estate plan
by Dan A. Baron, Baron Law LLC
Many of us have dabbled in the crypto market and most have at least heard of the various types of these digital exchanges. To name a few: Bitcoin, Ethereum, Tether, Polkadot, and my all-time favorite Dogecoin (or “Doggy Coin” as I like to call it) have become popular investment strategies for many Americans. The value of some of these digital exchanges has skyrocketed, making taxes and estate planning even more complex. I recently spoke to a client who in 2008 exchanged 1,000 Bitcoins for a used bicycle – today that Bitcoin would be worth more than US$27.9 million dollars. If you invest in Bitcoin or another cryptocurrency, you should pay close attention to how you are leaving your precious currency to your family. For those who understand how the cryptocurrency platform works, also understand how easy it is to lose your fortune.
What is cryptocurrency?
The US dollar, euro and Swiss franc are examples of currencies. They are also means of exchange. Before currency, we exchanged goods and services like spices, rum or shoes. Money, whether represented by a metal coin, a shell or a piece of paper, does not always have value. Its value depends on the importance people attribute to it – as a means of exchange, unit of measurement and store of wealth. When I think of cryptocurrencies, I think of my baseball card collection compared to a diamond necklace. My Minnie Miñoso baseball card is worth more to me than a diamond necklace because I don’t wear jewelry. Likewise, cryptocurrencies have become more sought after because our society finds value in what it represents, even though it is simply an arbitrary value.
Managing Crypto While We’re Alive
What makes cryptocurrency unique is that it is a digital payment system that does not rely on banks to verify transactions. Cryptocurrencies are currencies stored in a “wallet”. There are two types of wallets, hot and cold. A cold wallet is tangible and not digital – accessible on a hard drive, USB drive or simply written on a piece of paper. A hot wallet is intangible and digital – accessible through an online exchange with username and password. Since cold wallets are not stored digitally, they are easily lost. The New Yorker reports that in 2021, more than half a billion dollars worth of Bitcoin could be found in landfills around the world. This error most often occurs when someone accidentally throws away the USB drive or hard drive that contains the cryptographic key.
Hot wallets are much harder to lose. As mentioned, there are several platforms that allow users to log in via a username and password rather than a USB drive hidden under the pillow. The biggest problem with hot wallets is protection against hackers. Just this year, one of the world’s largest crypto platforms, Crypto.com, reported more than $30 million stolen by hackers.
Managing encryption if you are disabled
If you become incapacitated and need someone to manage your assets on your behalf, it is imperative that you specifically authorize access to those assets. The IRS views crypto as “property.” As such, your financial power of attorney must define cryptocurrency as property in the document. Since crypto is unregulated, it is also possible for your trusted agent to gain access to hot wallet accounts via a username and password as an unauthorized user.
Passing Crypto to Our Loved Ones
Passing your precious currency to your loved ones can be a challenge. The biggest problem with cryptocurrencies is their ghostly existence. Those with cold wallets go to great lengths to hide their flash drives and other tangible tokens. So, regardless of the assets you have, it is essential that you are organized and have the collaboration of family, lawyers and financial planners so that everyone knows that crypto exists. We recommend storing the private key in a secure, fireproof box. Keep in mind that a safe deposit box at a bank will require probate court involvement if the account is not jointly owned. Inside the vault we recommend a crypto summary describing the details of the investment. Most importantly, make sure your executor and interested parties are aware of the asset’s existence, otherwise your investment could end up in the trash as misguided trash.
Avoiding Probate and the IRS
If you have a simple will, your crypto will go through a long and expensive probate court process. Some platforms allow you to name a beneficiary and/or maintain joint ownership. In this case, you will be able to avoid probate; however, you will still have to face the IRS. The best way to avoid probate and obtain a favorable outcome from the IRS would be to link the cryptocurrency to a revocable trust.
The IRS views cryptocurrency as property and gains incur a capital gains tax. Additionally, unlike a stock listed on the Nasdaq, cryptocurrency can have different values on various exchanges, so converting the currency into US dollars can be complicated. Due to capital gains, it may be desirable to bequeath your crypto to a charitable organization through a trust fund. Doing so will reduce capital gains to the estate and avoid probate.
Estate Planning Professionals
It is imperative to ensure that a complete crypto inventory is accounted for, otherwise your precious currency could be lost forever. Advisors who provide clients with a digital asset inventory must fill out all usernames and passwords for their accounts in their estate planning portfolio. Careful and careful cryptocurrency planning can help you and your loved ones sleep (a little) better at night. For more information or to discuss your estate planning goals, contact Baron Law at 216-573-3723, or
dan@baronlawcleveland.com.
Dan A. Baron, Baron Law LLC
Sponsored by
Baron Law LLC
Crowne Center, Suite #600
5005 Rockside Road
Independence, Ohio 44131
216-573-3723
www.baronlawcleveland.com
The opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.