Estate Planning and Cryptocurrency: What You Need To Know

Estate planning and cryptocurrency intersect in surprising ways. Because crypto is treated as a bearer instrument (meaning that the person who controls the key is the owner), even basic planning decisions can have far-reaching consequences. As adoption grows, so does the need for clarity regarding the handling of these assets.

Crypto’s role in estate planning

Crypto is no longer a fringe topic. Today, CoinLedger reports that more people worldwide own cryptocurrency than the combined populations of the U.S., the European Union and Japan; it is estimated that nearly one in every 15 people globally owns crypto.

Some companies are now experimenting with blockchain — a digitized ledger that securely stores records across a network of computers in a transparent and immutable way — to support estate-planning tasks. These experimental platforms offer ways to notarize documents or quickly distribute crypto trust assets to beneficiaries, marking a new frontier in estate planning.

How crypto is classified

A central question is how cryptocurrency should be classified for estate-planning purposes. Should it be viewed as personal property, such as jewelry or art, or as intangible property, such stocks, bonds, copyrights or patents. Cryptocurrency is stored in a “wallet,” which is a device or program that maintains the owner’s private key and provides access to the coins. Wallets vary widely in design and security features. A key distinction is whether the wallet is “hot” or “cold.” Hot wallets store information online while cold wallets store it offline — often on a device such as a USB drive. While many may consider a cold wallet tangible and a hot wallet intangible, U.S. estate law generally treats cryptocurrency as an intangible asset regardless of the storage medium.

Four estate-planning questions

1. How will the fiduciary access the crypto? Plans must specify who can access the cryptocurrency and how. Passcodes and permissions are essential.
2. What are the pros and cons of holding crypto in a trust? Options may include irrevocable trusts or grantor-retained annuity trusts, each with its own risks and advantages.
3. What language should be used in the documents? Since cryptocurrency transactions and distributions must be reported on the trust’s income tax return, the trustee needs documentation showing the cost basis and date of transfer.
4. Who should serve as fiduciary? This choice is always important, but because crypto is a bearer instrument it becomes even more critical.

Tax considerations

Tax treatment is another major concern. Under IRS Notice 2014-21, cryptocurrency is classified as property rather than currency. However, since crypto can be exchanged for fiat currency, capital gains taxes may apply. The notice leaves many key issues unresolved, including a clear definition of whether cryptocurrency is tangible or intangible property.

Given these uncertainties and risks, ensuring tax and legal compliance is essential. Anyone including cryptocurrency in their estate plan should consult knowledgeable advisers to ensure their wishes can be fulfilled.

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