Cryptocurrency is relatively new in our economy, and because of it, the world is still working to adapt to it. This is true in terms of technology, law, commerce, and today’s topic: estate planning.
It seems pretty clear that cryptocurrency is here to stay, at least until the foreseeable future. However, this poses a conundrum: what happens to your crypto if you die? Can you include it in your estate? How do you leave it as a part of an inheritance?
Worry no more! Trust & Will has your back. Below you will find your introductory cryptocurrency inheritance planning. You’ll find out why it’s so important to be intentional with your cryptocurrency so that it can be passed on to a loved one. We’ll also answer some FAQs and go over some key tips so that you’ll feel prepared to get started.
What happens to your crypto if you die?
If you die, there are typically one of three things that can happen to your assets. If you didn’t have a crypto inheritance plan, such as a Will, a loved one would need to apply for probate. The probate court would then apply intestacy laws to determine how your assets should be distributed.
If you have a Will, your assets would still go through probate. However, instead, your assets would be distributed to the heirs that you legally designated. Note that probate is a process that can take several months to years. In addition, there are court fees plus the possibility that part of the asset would be used to pay off your debts. This is true regardless of whether or not you left a Will.
Trust & Will now offersprobate help.Learn more about our different plan option, today.
Finally, you may have set up a Trust. In this case, your estate wouldn’t have to go through probate at all. A Trust will designate how beneficiaries should receive your property. You can also include any other special criteria or instructions regarding these assets.
It’s important to point out that cryptocurrency presents a dilemma. Oftentimes, investments are easy to find - they can be tracked down through a savings account or other financial records. However, cryptocurrencies are hard to discover.
Even if you were to leave a Will, it generally doesn’t include a full inventory of each of your assets. That’s why it’s so important to be extra careful when conducting your cryptocurrency inheritance planning.
Other common questions about Cryptocurrency Inheritance Planning
The discussion above may have triggered all sorts of questions for you. After all, crypto inheritance planning isn’t exactly a hot topic, and you may not have given it any thought before this. However, as you can tell, it’s a critical conversation to be having as a collective. Next, we’ll ease some of your worry by answering some frequently asked questions.
Can you inherit crypto?
Yes, you can inherit crypto. If you have a loved one who invested in cryptocurrency, they can legally bequeath it to you through their estate plan. Although cryptocurrency is a new asset class, it’s still an asset just the same. It can be legally passed on upon the owner’s death.
Can I put my crypto in a trust?
Yes, you can absolutely put your crypto in a Trust. As we mentioned above, cryptocurrency is not special in the sense that it is an asset. There are no laws that would prevent you from transferring your cryptocurrency into a Trust.
Can a trust own cryptocurrency?
Yes, a Trust can own cryptocurrency. Doing so can prevent the scenario that your crypto would go undiscovered after you pass away. You can transfer ownership of your cryptocurrency to a Trust just as you would with any other type of asset.
Don’t forget to provide the trustee with the passcode or keys necessary to access and manage your cryptocurrency account on your behalf. You could also opt to establish a Living Trust, which is where you serve as your own trustee during your lifetime. Then, you would appoint a backup trustee who would manage your assets after you pass away.
Read our guide on different types of trusts to find out which option is best for you.
How do you inherit bitcoins?
You can inherit Bitcoins in a number of ways. First and foremost, you could inherit Bitcoins through state intestacy laws. This means that someone in your family passed away without writing a Will. If the probate court discovers that this person owned Bitcoin, and you happen to be next in line to inherit it based on intestacy laws, then they would transfer ownership to you.
Next, a loved one could name you as the sole or one of several beneficiaries as a part of their Will. Although Wills do not necessarily include an inventory of all assets, it’s possible that the decedent had written something along the lines of “I bequeath all of my digital assets to my daughter, Lana.” This could provide a clue that the decedent owned Bitcoins, and that you are legally entitled to it.
As we discussed previously, a Trust is an estate planning tool that would allow your loved one to bequeath cryptocurrency to you in a more direct and specific manner.
Finally, some cryptocurrency exchanges allow the owner to designate a beneficiary. Although this is rare, beneficiary designations do not need to be included in estate plans, nor do they need to go through probate. The asset would be passed to you directly after the owner passes away.
Is there inheritance tax on bitcoin?
Yes, there is an inheritance tax on Bitcoin, but only if you are liable. It’s helpful to think of cryptocurrency as property, and not as a currency.
In the eyes of the Internal Revenue Service (IRS), any type of cryptocurrency will be treated the same as any other type of asset or property. This also drives up the total value of your inherited estate.
Inheritance tax is applied on a state by state basis, so it does not automatically mean that you would be taxed. As of 2020, only 6 states impose an inheritance tax. Even then, each state offers a set exemption amount.
To find out if you might be subject to an inheritance tax in your state, and how much, visit our comprehensive inheritance tax guide.
cryptocurrency inheritance planning tips
Now that we’ve answered several of common questions about cryptocurrency and inheritance, we now want to provide you with some actionable tips. We urge you to use this to move forward in your cryptocurrency estate planning.
1. Determine your crypto assets and what you want to protect
First, take an inventory of all of your crypto assets, and where you store them. It would prove helpful to create a literal list of each of your holdings, where they live (such as in a wallet or an exchange), and the current dollar value. You wouldn’t want to have a security breach on this data, so it would be best to create it offline.
Then, consider dividing up each of your assets into a few brackets. For example, one bracket could be designated for short-term use, one for near future use, and a third of long-term storage. The brackets that you choose are up to you.
2. Create a plan for your assets (short term vs. long term)
Then, assign different action plans for each of these brackets that you created. Consider different aspects, such as how the crypto is currently secured, how they are stored, whether or not they have backup, and whether or not they could be passed on if you passed away tomorrow.
The intention behind this is not to be morbid. The intention is to ask yourself important questions, and to create action steps in case you are not satisfied with the answer.
For example, you may end up wanting to select a better digital wallet. Perhaps you’ll devise a way to create backups so that your heirs would be able to access your storage devices.
3. Decide who you want to inherit each category of asset
Next, decide who you would want to inherit each tier, and how. Do you want one loved one to inherit everything? Do you want several heirs to inherit your crypto assets? How will you balance who gets how much of what? And are there any risks for any particular person who inherits that cryptocurrency?
These are questions that can help you decide how to organize your cryptocurrency inheritance plan.
4. Consider creating a trust for your crypto assets
Based on some of our discussions earlier, you may have realized the appeal of creating a Trust. Having your cryptocurrency go through probate carries some risk. Your crypto assets could go undiscovered, they become exposed to the public eye, and they could also be passed to someone in your family that you wouldn’t have intended. Last but not least, your cryptocurrency is exposed to market volatility while it awaits a decision from the probate court.
You can prevent all these risks by transferring your crypto assets into a Trust. Any assets held in a Trust do not go through probate. Further, you get to designate exactly what should happen to the crypto currency. You can specify who shall inherit which asset, how much of it, and when. You can include any special criteria as well. Finally, you will have the opportunity to appoint a special trustee who has experience managing cryptocurrency and can provide your heirs with critical guidance.
5. Finalize your communication plan for keys, access information, etc.
Finally, we strongly recommend that you include a manual of sorts for your cryptocurrency. Think back to the time when you first discovered crypto, and your experience learning how it works, how to invest in it, and how to secure it. More likely than not, it was a complicated matter that involved some trial and tribulation.
When your investments have grown significantly, there often isn’t any room for error. By providing your loved ones with an instruction manual, plus numerous conversations with them in person, you’ll set them up for success.
Don’t forget to include instructions for how they can locate the keys. Many crypto investors choose to write down the keys as backup and place it in a secure location, such as a safe or safety deposit box. That way, you can point to the location in which the keys are stored without having to reveal this sensitive information.
Create your cryptocurrency estate plan today
Cryptocurrency inheritance planning is no easy feat. Cryptocurrency is complex in itself, so it can be even harder to wrap our minds around how to go about incorporating it in an estate plan.
Although the culture around cryptocurrency and estate planning is still underdeveloped, you can learn from others’ mistakes. Don’t feel like this is something you need to go alone. There are plenty of experts and information available, including through Trust & Will!
We may be biased, but our favorite estate planning tool for cryptocurrency is a Trust. This is because it’s the only surefire way that you can leave your cryptocurrency inheritance to a loved one, in the way that you would have wanted.
We hope that these FAQs and tips were helpful. If you feel ready to get started, we’re here to help! For more learning, be sure to check out our other guides on this series cryptocurrency inheritance planning series:
How to Leave Cryptocurrency in your Will
Digital Inheritance: Can Cryptocurrency be Inherited?
Protect Your Cryptocurrency with an Asset Protection Trust
Avoid Probate by Transferring your Crypto Assets into a Trust
Bitcoin Estate Planning: How to Leave Bitcoin to Heirs
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Estate planning involving cryptocurrency is a critical yet relatively novel aspect of financial planning. The fusion of traditional estate planning practices with the complexities of digital assets requires careful consideration and deliberate strategies to ensure seamless inheritance.
Firstly, establishing the need for deliberate planning hinges on the unique nature of cryptocurrencies. Unlike conventional assets, they are decentralized, encrypted, and can easily become inaccessible if the appropriate keys or access information are not properly documented and passed on. This complexity requires meticulous attention in estate planning to prevent loss or misallocation of digital assets.
The article emphasizes the importance of having a comprehensive plan in place for cryptocurrency inheritance. It delineates three primary scenarios regarding the distribution of assets upon one's demise: intestacy laws, wills, and trusts. Without a specific plan, cryptocurrency assets might be subject to probate, which can lead to delays, court fees, and potential exposure of these assets to public scrutiny.
To address these challenges, the article advises the creation of a detailed inventory of cryptocurrency assets and recommends categorizing them based on intended use—short-term, near future, or long-term storage. Additionally, it stresses the necessity of formulating action plans for each category, ensuring secure storage, backups, and accessibility for designated heirs.
Moreover, the article advocates for the use of trusts in estate planning for cryptocurrencies. Trusts circumvent probate, offering greater control over asset distribution, specifying beneficiaries, and outlining specific conditions for inheritance. This approach mitigates the risks associated with the legal and technical complexities of cryptocurrency inheritance.
Key considerations involve determining inheritance recipients, balancing asset allocation among beneficiaries, and potentially appointing specialized trustees with expertise in managing digital assets. Furthermore, it highlights the importance of clear communication regarding access information and keys to ensure smooth asset transfer to heirs.
Addressing common inquiries, the article clarifies the possibility of inheriting cryptocurrency, placing crypto assets in trusts, methods of inheriting bitcoins through intestacy laws, wills, or designated beneficiaries, and the implications of inheritance taxes on cryptocurrencies.
Finally, the article advocates proactive planning through actionable tips, such as meticulous asset assessment, formulation of tailored plans for different asset categories, trust establishment, and comprehensive communication plans for heirs to access sensitive information.
In essence, the article underscores the necessity of proactive, detailed, and specialized estate planning for cryptocurrency assets, leveraging trusts as a key tool to ensure seamless inheritance while navigating the complexities of digital assets in the realm of estate management.
