Start planning with our FREE 2024 Crypto Tax Playbook
This comprehensive guide covers everything you need to know about including cryptocurrency in estate planning and setting up digital asset trusts, from wallet access to tax implications.
Including cryptocurrency in estate planning is essential to securely transfer wealth to heirs and beneficiaries. This in-depth guide covers everything you need to know, from wallet access to tax implications.
Cryptocurrency represents a new asset class that has seen tremendous growth over the past decade. As the popularity of digital currencies like Bitcoin and Ethereum rises, an increasing number of investors now hold crypto assets. This introduces complexities when it comes to estate planning.
Unlike traditional investments, cryptocurrencies have unique attributes that require special consideration:
Proper planning is crucial for ensuring seamless, secure transfer of crypto wealth to future generations.
Several options exist for passing on cryptocurrency assets through estate planning:
For larger, more complex estates, trusts often emerge as the best approach.
Case Study: Crypto Asset Trust
John Watkins has a sizable crypto portfolio of $2.5 million spread across various tokens. He wants to make sure this wealth passes securely to his wife and children when he passes away.
By placing his cryptocurrency into an irrevocable living trust, John can name a professional trustee to manage the assets for his family’s benefit. The assets held in trust avoid probate court entirely.
The trust also has provisions in place in case private keys are misplaced. Multi-signature access requiring approval from John’s wife or two eldest children prevents any unilateral decisions or theft.
There are several types of trusts that can hold digital assets, each with their own pros, cons, and fiduciary roles:
In any trust arrangement, three key roles dictate management and distribution of assets:
Other common positions like trust protectors add oversight and accountability. Terms of the trust dictate exactly how and when beneficiaries receive distributions.
Crafting specialized trusts for cryptocurrency includes additional considerations like multi-signature protocols, smart contracts, and other technical integrations for managing digital assets. Retaining legal counsel well-versed in this emerging area is crucial.
The ideal trustee for overseeing crypto assets exhibits technical competence in blockchain management as well as financial proficiency with investments and tax compliance:
Desired Trustee Traits
Ideally at least one or more backup or successor trustees should be named in case the primary trustee resigns or passes away. Contingency protocols should establish procedures if private keys are compromised or lost.
Carefully designated beneficiaries should have the temperament and knowledge to steward cryptocurrency assets responsibly after inheritance. Gradual distribution schedules can prevent reckless liquidation or spending.
Custodial Trustees
For large or complex crypto estates, naming custodial services as trustee may provide seasoned technical and security expertise. South Dakota Trust Company LLC and Anchorage Digital are examples of platforms providing custodial trust services tailored specifically for digital assets.
While trusts allow centralized management of cryptocurrency assets, they do not eliminate tax obligations:
Meticulous recordkeeping and compliance best practices are imperative, often necessitating professional tax expertise.
Because cryptocurrency estate planning hinges so critically on securing wallet access, establishing prudent security protocols is paramount:
Hot Wallets
Cold Storage
No matter the wallet type selected, contingency provisions must address scenarios like lost or inaccessible private keys. Multisignature arrangements should be configured to restrict unilateral withdrawals or lockouts by a single trustee or heir.
This quick checklist summarizes key steps to begin safeguarding your cryptocurrency for estate transfers:
✔️ Catalog wallet addresses, private keys, and recovery seeds
✔️ Consult estate planning and crypto tax professionals
✔️ Establish irrevocable living trust and name tech-savvy trustee
✔️ Authorize multisignature protocols for wallets
✔️ Draft instructions for fiduciaries to access and manage assets
✔️ Update estate plan annually and after major crypto purchases
By tackling cryptocurrency estate planning early on, digital currency investors secure control over their legacy and protect against complications like lost keys, punitive taxes, and intrafamily conflicts over assets. An ounce of prevention is truly worth a pound of cure when it comes to safeguarding crypto wealth for future generations.
Next Step: Schedule a Consultation
Our team of estate planning attorneys and financial advisors specializes in digital asset protection and fiduciary services. Book a consultation today to discuss tailored solutions for your crypto assets.
Onchain Accounting stands as your vigilant financial co-pilot, ensuring compliance and peace of mind.
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