Cryptocurrency Adds a New (and more complex) Dimension to Your Estate Plan

Just when you thought you had a solid plan for how to distribute your assets through your estate plan when you passed away comes an entirely new and different asset to deal with…Cryptocurrencies. They are here and many people have (or are) participating in them as an investment. Being that they aren’t a real asset in the traditional term of an asset, how do you handle these as part of your estate plan?

There has been a lot of news lately about the volatility and uncertainty of cryptocurrency. It seems this is the way they are described and rightfully so since they are relatively new and still uncertain to most people. While some are making fortunes off these currencies, others are losing sizable amounts of money.

There is no question that a cryptocurrency is an asset…it has value. So like all the other assets in your portfolio of net worth, how does someone account for something that is unseen and handled in a completely different way? And what happens if you pass away and you have money tied up in this “asset?”

The very nature of how these currencies are held by their owners can create complex issues in an estate plan. One of the biggest issues is proof of ownership since it is nothing more than having the possession of a digital key. Anyone who has the key has access to your cryptocurrency. You might not think this is an issue since it will be passed along to your loved ones in the estate plan.

If this key is written down, whoever has access to this has access to your money. You certainly don’t want to make it public since anyone can use it to access the currency. So what if you have a Will that is designed to go through Probate? The idea of probate is to make things public so various relatives and others can claim the assets. Making this key available to the public through probate would not be a good idea. There are other problems with cryptocurrency and estate planning as discussed in the New Jersey Law Journal’s article, "Estate Planning in the Age of Cryptocurrency."

One of the biggest issues discussed in the article is taxation. Despite having "currency" in your name, cryptocurrencies are not treated as currency for tax purposes. They are instead treated as property. This has important implications for how these assets should be treated in an estate plan. For example, this changes the context of the plan if you wanted them to help you minimize your taxes. It may also affect the maximum amount you can give to another individual before estate taxes are assessed. So there are many implications that need to be taken into consideration with an estate that has cryptocurrency as one of its assets.

Another issue is how the cryptocurrency should be transferred. Owners need to decide in their plan whether it should be given to heirs as cryptocurrency or whether it should be sold and given to heirs at its cash value. And if it is being given as a specific item to a member of the family, what happens to the distribution percentages if the value is $100 vs. $10,000? These are just some of the issues you have to deal with when you own a cryptocurrency in your estate. I definitely advise anyone that holds cryptocurrencies to see specific financial and legal counsel prior to determining how they will be handled in your estate plan.