March 17, 2021
Estate Planning with Bitcoin and other Cryptocurrencies
By now, most of us are aware of how popular and potentially lucrative the uber volatile cryptocurrency (“crypto”) investment is. Clients are increasingly invested in various forms of crypto -they have them in cold wallets, warm wallets and hot wallets. These terms refer to the methods of storage and fall into each of these three categories depending on how often the wallet goes on-line. For example, the cold wallet may be your security code handwritten on paper and stored in various safety deposit boxes and is never exposed to the possibility of nefarious on line data breaches. The hot wallets are stored entirely on-line and usually managed by various hosting exchanges such as Coinbase, Anchor USA, etc. The warm wallets—you guessed it—are somewhere in between (such as flash drives).
What’s not very commonly discussed is the important aspect of estate planning for those in possession of cryptocurrencies. Is it even possible for Bitcoin to be held in Trust? Can someone add a beneficiary designation to avoid probate? How does one properly draft for the disposition of cryptocurrency in their Last Will and Testament?
As of today, there is no way to fund a Trust with cryptocurrencies as no provisions exist surrounding the possibility or supervision of such an act. There is similarly, no way to name a beneficiary. However, the only means of access to your cryptocurrency is your personal wallet access code. If someone has access to it, they can use it. If you lose the code, you also lose your crypto—it simply vanishes and there is no way for you to recover it. This is why for those having millions in crypto, the cold wallet storage is often preferred. Now we can also understand the reason why it is imperative that whomever you would want to act as your fiduciary and/or beneficiary, would have the means to access your wallet passcode/crypto.
Special considerations for drafting Wills for those holding cryptocurrency should also be taken. You want to be as specific as possible regarding where your cryptocurrency is held and what type of crypto it is. Given the volatility, you should also be aware that your intended gift may be a lot larger or smaller than intended if you don’t cap or otherwise define the value passing to a specific beneficiary.
In terms of tax consequences/valuation for cryptocurrency, be advised that the IRS recently determined that cryptocurrency is to be treated like property (not currency), see: https://www.irs.gov/newsroom/irs-reminds-taxpayers-to-report-virtual-currency-transactions
At the Law Offices of Irina Yadgarova, PLLC we are always ahead of the curve in terms of anticipating our clients legal needs in consideration with the ever evolving investment landscape. We are therefore able to plan and draft your estate planning documents with foresight, precision and in an ideal fashion.