TaxesBy: Sol S. Reifer
Most assets are relatively straightforward to deal with when creating your estate plan. Real property can be deeded to a trust; bank and investment accounts can have the title changed or transfer on death designations made out to the trust; business interests can be assigned to the trust. But cryptocurrency is unlike any other asset. Cryptocurrency doesn’t have a title document, and no names appear on the account. So far, no forms of cryptocurrency or wallets allow “transfer on death” designations. You can assign cryptocurrency to trusts or other entities, but the assignment alone will be useless without further planning.
To ensure that your intended beneficiaries actually receive your cryptocurrency, the following steps should be part of your planning:
- Make sure your estate planning attorney knows about your cryptocurrency. By letting your attorney know, they should be able to assist you with all of the following steps that are critical to making sure your cryptocurrency is not lost. Importantly, when you are incapacitated or deceased, your estate planning attorney will be able to help your successor fiduciaries (your executor and/or trustee) and beneficiaries with securing the cryptocurrency. Finally, your estate planning attorney will be able to ensure your documents have special provisions so that cryptocurrency can be accessed properly and legally by your successor fiduciaries.
- List your cryptocurrency in your estate planning documents. Assets that are not specifically listed in a Will or Living Trust become part of the residue of the estate. Attorneys who help conduct trust administrations have various techniques to assist trustees and executors how to locate all assets that are part of the residue, but those techniques are unlikely to work for cryptocurrency, which is private and hard to find by nature. Therefore, it’s important for your successor fiduciaries to know you have cryptocurrency so they can collect it as part of your estate.
- Leave your successor fiduciaries instructions about how to access your cryptocurrency. The majority of people do not know how to access cryptocurrency, and even if someone is knowledgeable about crypto, it would be a huge task to try to locate it unless you have left specific information about how and where your cryptocurrency is stored.
- Create a mechanism by which your successor fiduciaries can access your private key(s). Even if your successors know how to find your crypto, they will have no way to access it unless they can find your keys. There is no legal document in the world that can provide access to cryptocurrency when the key is lost. This is a tricky line to walk, since anyone with your key can access your crypto at any time. You might write a memorandum and keep it with your estate planning documents; leave your information on a cold storage drive in a location your successor fiduciaries will be able to find; or use a password manager and leave instructions about how to access that manager. Again, you can discuss this with your estate planning attorney to determine the best way to give your successor fiduciaries access to your key.
- Keep your documents up to date. As you acquire more or different kinds of cryptocurrency, or use different wallets or storage devices, you will need to make sure your estate planning documents and instructions to successors contain full information. We recommend looking at your inventory and instruction documents at least every 6 months if you are actively acquiring or trading cryptocurrency.
- Taxes. Because cryptocurrency is considered ‘personal property’ (discussed further hereafter), not legal tender, it is taxed in a way that is similar to real estate or stock. When you sell or exchange your cryptocurrency, this may lead to capital gains or losses that are reportable on your tax returns. When you use cryptocurrency to make a purchase, the IRS sees that transaction as you “selling” your cryptocurrency for the value of the item purchased. This tax treatment should be kept in mind when completing personal, gift, trust and estate tax returns. For instance, any distribution of cryptocurrency from your trust to its beneficiaries will need to be reported on the trust’s tax return. For this reason, it will be important for your trustee to know the tax basis of your cryptocurrency as well as its value on the date of the transfer. Keeping records of how and when you acquired your cryptocurrency holdings will help the trustee comply with the reporting requirements.
- Choice of Fiduciary. Some professional fiduciaries, such as banks, may have policies against serving as trustee of trusts that hold cryptocurrency. If you are considering naming a professional fiduciary, interview them regarding their policies, and always name an alternative trustee in case your first choice is unwilling to accept the appointment.
- Authority. In most states, including Texas, a trustee has a fiduciary duty to invest trust assets as a reasonably prudent investor would. As a result, most trustees invest in a balanced portfolio of standard assets, such as stocks, bonds, mutual funds, cash, real estate, etc. Because cryptocurrency may be considered “speculative”, there is a possibility that it may fall outside the boundaries of what would be considered a reasonably prudent investment for a trust. The solution to this is to include language that gives your trustee the specific authority to hold cryptocurrency as a trust asset.
Best Practice Recommendations:
- list your cryptocurrency in your Will or Living Trust documents
- include information about your digital wallets in your Will or Living Trust
- create a memorandum to your Will or Living Trust with passwords and PINs, and
- include a step-by-step guide to explain how your beneficiaries can access your cryptocurrency.
List Cryptocurrency in Your Will or Living Trust
It may seem obvious, but you have to actually list cryptocurrency in your Will or Living Trust. If something you own isn’t listed in your Will or Living Trust, it falls into the residue or remainder of your estate—a sort of catch-all for your property. The remainder is a collection of everything you own that wasn’t accounted for in your Will or Living Trust, such as personal property, clothing, miscellaneous accounts, or subscriptions.
This isn’t an issue when tangible property falls into an estate’s remainder. Physical objects, like books or jewelry, can be seen and other assets can be discovered through a paper trail like bank accounts or stocks. However, cryptocurrency doesn’t leave much of a paper trail–if any–and it’s almost impossible to discover if you don’t know where to look. If your beneficiaries are unaware of your cryptocurrency, they might never find it if it falls into your estate’s remainder. To avoid this pitfall, clearly, describe your cryptocurrency (and where to find it) in your Will or Living Trust.
Also, you need to have an appreciation that cryptocurrency is considered personal property, rather than currency, for purposes of estate planning and administration. If the private key for your cryptocurrency is held in an online wallet, then it is considered ‘intangible’ personal property, much like accounts receivable, copyrights or patents. However, if the private key is held in some type of offline storage device, such as a USB drive, then it may be considered tangible personal property, like your clothing or furniture. Why does it matter whether your cryptocurrency is considered personal property? Standard language in Wills and Living Trusts might designate certain personal property for specific persons—for example, your jewelry should be given to your daughter. It is also common to have catchall language that gives all of your personal property to a specific person. That language will automatically include your cryptocurrency (because it is considered personal property), even if you only meant to include your household furnishings.
List Your Digital Wallets in Your Will or Living Trust
In addition to the existence of your cryptocurrency, your Will or Living Trust should also describe where to find it. Between the many types of digital wallets and the various online exchanges, your loved ones will be looking for a needle in a haystack unless you make it clear where your cryptocurrency is stored.
Keep in mind that your wallet may be on a computer, smartphone, or require a certain device to access. It’s important to include these devices in your Will or Living Trust so that the key elements of your digital wallet stay together until your beneficiaries can access your cryptocurrency. You should also include any wallet back-ups in your Will or Living Trust just in case something happens to the original. Therefore, we strongly recommend you create a memorandum to your Will/Living Trust.
Cryptocurrency presents a unique challenge when adding it to your Will—security. As Wills go through probate, they become part of the public record, so including too much detail, such as the passwords and PINs directly in your Will, could create a security issue. Many crypto-users are understandably leery about sharing this information for fear of getting hacked.
This need for security is why you should create a memorandum with your Will, instead of listing sensitive information in the Will itself. A memorandum is an separate document that is referenced in your Will but is not part of the Will itself. A memorandum typically doesn’t become part of the public record and is a good option to use when you want to maintain privacy. Since a Living Trust is a private document there is less concern about creating the memorandum; but it is still a planning consideration if you are concerned a court may require submitting the Living Trust should a contest be filed!
Since a memorandum is a separate document, it can be updated as often as needed without going through the formalities of changing or updating your Will or Living Trust. The memorandum should include:
- the type of digital wallet(s) you have
- any computer, smartphone, or device on which you’ve stored your cryptocurrency
- website links for any needed online exchanges or password managers, and
- any login and password information needed for each of these wallets, accounts, and websites.
Your cryptocurrency memorandum can be kept with the Will or Living Trust or in a separate location with your other estate planning documents, such as your Durable General Power of Attorney. Make sure that your executor can find the memorandum after you pass away.
Make a Cryptocurrency Access Guide
You may be comfortable using cryptocurrency, but your beneficiaries might not be. Some people find it difficult to get past cryptocurrencies’ learning curve. To make it easier for your loved ones, include a step-by-step guide that explains how to access your cryptocurrency. This can be a separate document or it can be included with your PINs and passwords memorandum.
Even if your beneficiaries are already familiar with cryptocurrency, they might not be familiar with how to access your coins. Leaving plain language instructions will help remove some of the stress and frustration of trying to figure it out on their own.
When writing the instructions, assume that your beneficiary knows nothing about cryptocurrency. This guide should be able to walk a cryptocurrency novice through every step—from accessing your wallet to exchanging coins for traditional currency. Like your cryptocurrency memorandum, this guide can be attached to your Will or Living Trust and updated as often as necessary.
Test the guide yourself after creating it. Doing a walkthrough of these instructions will ensure that you included all the information your loved ones need to access your cryptocurrency.
Example Cryptocurrency Will Provision
Including cryptocurrency in your Will or Living Trust means you need to balance necessary information and security. An estate planning lawyer can help you and may suggest a provision like this:
I leave all my cryptocurrency investments, crypto-coins, tokens, any other form of digital cash, or anything found in or on my cryptocurrency wallets to [insert name of beneficiary].
My cryptocurrency might be stored on digital wallets, paper wallets, online exchanges, or a combination of wallets and exchanges. The following items or devices might contain a cryptocurrency wallet: _______________, _______________, and _______________. These items should not be distributed to any person until such time as the cryptocurrency, digital cash, or any information related to the access of my cryptocurrency is transferred to [beneficiary named above].
I have created a separate writing from this Will(or Living Trust) that explains how to access my cryptocurrency wallets and online cryptocurrency accounts. This document needs to be kept private as it contains the passwords, PINs, and private keys needed to access my cryptocurrency. This document will likely be stored with my other estate planning documents or [insert specified location(s)].
Some people might never be comfortable with cryptocurrency. Even with instructions, your beneficiaries could still have a difficult time navigating this process. Instead of leaving cryptocurrency, it may be easier if your beneficiaries simply received the value of that investment. This requires the executor of your estate to have the technical skills needed to exchange cryptocurrency for traditional cash. If needed, your executor can hire a professional you have designated in your estate plan who has experience dealing with cryptocurrency.
If you are still concerned about privacy or what will happen to your cryptocurrency after you die, you can insert information about your cryptocurrency in your Living Trust. This will keep your cryptocurrency out of probate and will also help keep information about your coins private because trust documents don’t normally become part of the public record. But, at this time Coinbase, Bianance, and Kraken, which are the major cryptocurrency exchanges, don’t support any sort of beneficiary designation such as “Payable on Death”, “In Trust for”, “Transfer on Death”, “Totten Trust”, etc.; but, hopefully, this will change in the future! Currently , the aforementioned exchanges also only allow individual account owners. NO TRUSTS or LLCs.
Leaving cryptocurrency to your loved ones after your death requires more planning than traditional assets. With a little work now, you can simplify the process for your beneficiaries and ensure that they inherit your coins. The important thing is to ensure your loved ones know that you have cryptocurrency and that they have the information needed to access it after you pass away.
Call the estate planning attorneys at Coats Rose if you would like to ensure your estate plan has adequately addressed these matters.
Sol is a Director in the Dallas office, with over 40 years’ experience in probate administration, trusts and estate planning law, as well as, asset protection. He is involved in structuring family estates to maximize the amount of assets that pass to succeeding generations through the use of various types of trusts and business entities that will minimize the amount of shrinkage due to “transfer taxes” pertaining to such transfers (i.e, the estate, gift and generation skipping taxes). His practice includes legal consultation and structuring of business and family investment entities to protect key family assets from litigation risks. He counsels clients that estate planning done correctly is multi-generational. His philosophy is that estate planning is a lifetime “process” of planning for the accumulation, conservation and distribution of wealth between the generations.
Sol has received the designation as an Accredited Estate Planner from the National Association of Estate Planners, 1995, and was selected to “5-Star” Wealth Manager in 2010-2021 and to the Texas Super Lawyers list in 2011-2020.