Ensure Accessibility To Crypto-Assets
The most sensitive aspect of owning cryptocurrencies is that the person with the password (“key”) is the “owner.” Anyone with the key to the crypto account, can access the cryptocurrency and move it to some other location which the original owner cannot access. As with all client passwords, advisors should never keep the passwords to any digital assets, but instead be familiar with password storage options available to clients and ensure that their clients have a documented process whereby named fiduciaries can access the accounts.
As an initial step in the estate planning process, clients should document their ownership of cryptocurrencies as part of their net worth statement and provide a document to their chosen fiduciary about how to access those assets after their death or disability The simple step of keeping an asset inventory and documenting where passwords can be found on an exchange or a “wallet,” can help ensure that crypto-assets are not lost at the death of the original owner.
Address Cryptocurrencies In Clients’ Estate Documents
The estate plan documents should outline how the cryptocurrencies are to be distributed at death and provide the named fiduciary with authority and the powers to own cryptocurrencies in the estate. The plan should also authorize fiduciaries to provide passwords to the beneficiaries who are to inherit the crypto-assets when the assets are “distributed.” Given the complexity involved with cryptocurrencies, it’s important to discuss with the client whether a special trustee should be selected to manage just the crypto-assets. As with all trustee selections, clients should select a trustee they trust since the passwords and encryption codes are extremely sensitive. Clients should also contemplate who will have the authority to deal with the cryptocurrency during disability, and ensure that any power of attorney executed have the proper provisions for this type of asset and have the information to access the crypto accounts.
Consider All Tax Implications
The IRS treats cryptocurrency as property, not as a currency. General tax principles applicable to property transactions apply to virtual currency, and as such, cryptocurrency transactions have tax consequences that may result in tax liability in the form of capital gains or losses.
Any transaction involving the sale of a cryptocurrency will result in capital gains or loss reflecting the need to track the tax basis in order to correctly report the gain or loss.
For tax purposes, gifts of cryptocurrency are treated as gifts of property, in which the donee receives the donor’s cost basis in the property. At the death of the “owner” cryptocurrencies receive a step-up in basis like other property assets. The carryover and step-up rules governing these assets should be factored into decisions about what to do with the cryptocurrencies in a clients’ estate plan.
To reduce tax liability, some clients may be interested in making gifts of cryptocurrency. By donating appreciated cryptocurrency to qualified charities, the taxpayer can receive a charitable deduction on his/her income taxes for the value of the gift and avoid paying capital gains taxes on the appreciation.
Some best practices for gifting cryptocurrency include obtaining an appraisal to establish the fair market value of the cryptocurrency being gifted and executing a separate memorandum that includes details of the gift, such as the date of the transfer, the donor’s basis in the gift, and the fair market value of the gift at the time of the transfer. Since blockchain transactions are anonymous, the memo should state that the donor has given up control and dominion over the donee’s cryptocurrency address to confirm that the gift is complete. If the gift is being made to a charitable organization, the memo should state that the gift meets the tax requirements to record that it qualifies for an income tax charitable deduction.
Keep The Estate Plan Up To Date
An estate plan should align with your client’s status and an annual review taking into account life and financial changes is good practice. Due to the significant gains experienced in many cryptocurrencies in the last few years tracking cryptocurrency assets is important given the estate, gift and income tax implications. An annual review of all asset values can ensure that advisors can assist clients with revising their plans as their net worth increases, and remind them to document passwords and keys so that fiduciaries have access to existing and new crypto-assets.
The very features that make cryptocurrency attractive, such as privacy and decentralization, can also increase the risk that your client’s fiduciaries may lack access to crypto holdings if not properly documented. You should address cryptocurrency and all digital assets with your clients to ensure that they minimize the risks of loss and maximize the opportunities for these assets to be distributed according to your client’s wishes after death.
Anna Byrne is an estate planning attorney and founding partner of Eckert Byrne.