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What’s the Importance of Estate Planning for Cryptocurrency?

A February 2023 survey conducted by Morning Consult found that about 20% of Americans own cryptocurrency. However, despite its popular usage and frequent topic of discussion, the basic principles behind cryptocurrency and the legal consequences of owning cryptocurrency are often misunderstood. As technology and society evolves, modern legal approaches must be taken for these new technological concepts to be integrated into our established property ownership laws and to be seriously considered when a person is working on their estate planning.

Cryptocurrency is, by its nature, an intangible asset. Cryptocurrencies are stored digitally in a “wallet” and can only be accessed with private and public digital keys, which are randomized strings of letters and numbers, similar to an online password. However, unlike an online password, if the keys are lost or unknown, there is no means of password recovery, and the wallet would be impossible to access – forever. The principal issue with cryptocurrency as it relates to one’s estate planning is the fact that if one passes away or becomes incapacitated and is unable to provide that crucial information to someone acting on his or her behalf, those cryptocurrencies held in the wallet will be forever lost.

Nevertheless, sharing a holder’s private and public keys with any person would grant that person unrestricted access to the holder’s wallet both during the owners lifetime and post- mortem, which he or she could then transfer all of the contents to the any other encrypted wallet. Rather than expose oneself to the risk of irreversible theft or embezzlement, a holder can devise ways in which to grant limited access to the wallet without the need to disclose the key codes. The most common form of sharing and facilitating the transfer of one’s wallet is for the cryptocurrency to be held in a “vault,” which is a third-party company that electronically stores and manages the cryptocurrency online, similar to an online bank account. Vaults often offer additional security measures for withdrawing funds to prevent theft or fraud.

The most prominent digital vault company at this time is Coinbase. According to Coinbase’s website, it is not currently possible to name a beneficiary directly within a Coinbase account, rather, in the event of the holder’s death, Coinbase would follow the standard ownership transfer procedures as outlined by state law. This means that if one wishes to leave his or her wallet to a specific person upon death, he or she must do so by executing a Last Will and Testament and specifically providing for such bequest. Allowing the property to pass under the state’s intestacy laws (i.e., by dying without a valid Will) could have serious unintended consequences if one does not have a thorough knowledge of the state’s rules of descent and distribution.

Additionally, the transfer of cryptocurrency could have possible tax consequences. For federal tax purposes, cryptocurrency is treated as property. General tax principles applicable to property transactions apply to transactions using cryptocurrency. Upon the death of a cryptocurrency holder, the beneficiaries or heirs of the holder’s estate generally receive the cryptocurrency at its fair market value on the holder’s date of death. Appreciation, depreciation, or a sale of cryptocurrency by the beneficiaries or heirs after the date of death will likely need to be reported on their federal income tax returns.

A comprehensive estate plan for cryptocurrency holders is important because it can address the above issues and provide a structured and effective means for passing on one’s wealth to his or her loved ones. Like any other investment, an investment in cryptocurrencies should be protected and secured in the event of one’s death.

You may visit our website at www.wrightabshire.com. Nothing contained in this publication should be considered as the rendering of legal advice to any person’s specific case but should be considered general information.