What are the benefits of an estate plan if I own cryptocurrency?
Unlike a bank account, crypto does not have a physical record. You have to declare it in your estate planning documents and let a trusted relative or an attorney know about it.
As a digital asset, cryptocurrency may remain unknown to your heirs after your death unless you told someone about it or disclosed it through an estate plan. In addition, your loved ones may need your username, private key, and passcode to access a crypto account. If you store cryptocurrencies in a hard drive, phone, or USB thumb drive, you may include this information in an estate plan document, such as a Living Trust.
It will be difficult for your family to access your cryptocurrency without an estate plan that details all relevant information and designates the transfer of the digital assets. The state cannot divide these virtual assets among your heirs as it may with physical assets. If access is possible, however, crypto may be sold and the proceeds divided. Your estate planning document should include the name of the beneficiaries, details of your cryptocurrency assets, passwords, keys, and PINs. These details ensure someone can access your cryptocurrency account.
How do you put cryptocurrency in a will?
The process of adding cryptocurrency to your Last Will and Testament is not as straightforward as adding traditional physical assets. It may require the help of an attorney to make it clear. Here are some steps to follow:
- Add cryptocurrency in your will: List cryptocurrency in your will as part of the assets to be divided and indicate which section in the will contains the details.
- Include all your digital wallets: List the various digital wallets you use to store currency.
- Write a memorandum with username, passwords, PINs, and passcodes: This document should be referenced in the will but kept in a secure place, and someone you trust should know its location.
- Write a cryptocurrency access guide: Cryptocurrency may be unfamiliar to your heirs, so a detailed guide may help them.
Putting your cryptocurrency in your will can be challenging. A lawyer can help guide you through the process to make sure you have all the right details in place.
What happens to crypto held in cold storage?
Cryptocurrency held in cold storage is kept in physical devices such as phones, USB drives, and hard drives. Cold storage keeps cryptocurrency offline and protects it from cyberattack and theft.
In a will or trust, a person may leave either the physical cold storage wallet to a single beneficiary, or may leave instructions to distribute the contents of it among several heirs. However, it is critical to specifically call out any cold storage devices in your will or estate plan, as these devices may be unassuming and can be easily lost. If a cold storage device or wallet is lost, the crypto stored there may also be permanently lost.
What if the beneficiary does not want or know about cryptocurrency?
Not all beneficiaries want to continue trading in cryptocurrency. Some may prefer to have the assets in other forms, like cash. As you make your estate plan, you may include a section on how they can sell it and close the crypto account.
Generally, there are two ways of selling cryptocurrency:
- Using an exchange service: A website or digital wallet with exchange services may be able to help cash out cryptocurrency.
- Selling peer-to-peer: Like any other good, or commodity, a person may sell cryptocurrency in a private sales transaction.
Does cryptocurrency go through probate?
Cryptocurrency goes through probate if included in a will, or if a person dies without a will and the crypto can be located. Assets in a trust, however, do not have to go through probate when you pass, which means cryptocurrency can be distributed to your beneficiaries faster than assets distributed via a will or probate. Probate proceedings for a will can take months, and your loved ones may become frustrated with the lengthy process.
Can trusts hold cryptocurrency?
Yes, trusts can hold and manage cryptocurrency. However, you may need to identify who has access, when the asset is transferred to the trust, and what the trust can do with it. The advantages of leaving cryptocurrency in a trust, include:
- Prevents the loss of your cryptocurrency after you die.
- Keeps cryptocurrency out of probate, saving your loved ones money and time.
- Reduces vulnerability to scammers and hackers when held in cold storage.
- Relieves the burden on beneficiaries of trying to access and manage your cryptocurrency account
As much as trusts ensure your loved one can access the cryptocurrency, you may not want to include all the details in your Digital Asset Trust. Generally, a separate document that maintains your usernames and passwords will explain how to find and access it, and other digital assets. The Rocket Lawyer Digital Asset Trust provides a Letter of Instruction page at the end of the document to store this information securely. Keep in mind that it is very important to inform someone you trust of its location, and store it securely, such as in a safe, or safe deposit box. That person can disclose the location to your beneficiaries upon your death.
Is cryptocurrency subject to estate tax?
Cryptocurrency is subject to the estate tax because inherited crypto is treated like other capital assets passed from one generation to the next. Your loved ones will incur an estate tax if the estate exceeds $12.9 million in value for 2023 (and $13.4 million for 2024).
One way of avoiding cryptocurrency taxes in estate planning is gifting cryptocurrency. A crypto gift is treated in the same way as a regular gift. It can only be subject to gift taxes if it exceeds $16,000. You can give each beneficiary $16,000 without incurring cryptocurrency taxes on the gift. The remaining cryptocurrencies will fall under the capped estate tax exemption bracket.
If you have more legal questions about cryptocurrency and your will or estate plan, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.