How Do I Protect My Cryptocurrency?

With many moving pieces to consider, Estate Planning for high-net-worth individuals can be tricky. Traditional Estate Planners often fall short of appropriate planning for cryptocurrency. America’s wealth landscape is changing, and cryptocurrency has become a typical part of many sizable estates. 

Bitcoin, Litecoin, Ethereum, Ripple, Stellar are some of the most common cryptocurrencies that our clients have invested in. While the discussion of what will happen to these assets when you pass and how they will affect your estate and tax planning is important, it is one that is commonly not discussed with a traditional estate planning office. With more and more people dipping their toes into cryptocurrency ownership, it is important to discuss these assets with your estate planning attorney and financial advisor to ensure your estate and financial plan not only address the ownership; but to create a plan to minimize your taxable estate as well as how to protect these assets from creditors while you are alive.  

Cryptocurrencies present an interesting problem for estate planners because the ownership of cryptocurrencies is individualized instead of institutionalized. As an example, if someone holds cash in a bank account and they die, the bank will limit access to that account until someone presents them with the proper documentation of the death and accompanying legal documents. The legal documents need to either be a small estate affidavit, Letters of Administration from the appropriate Probate Court, or Trust Certification- if the account was titled in the name of a Trust. Owning a cryptocurrency does not offer these institutional protections. Cryptocurrency is much more like keeping the money in a safe in your house. Cryptocurrency is held in an online wallet that only requires a key to open. Much like a safe, if you have the key, you have full access to the funds.

There are benefits and dangers to this type of ownership. A benefit is that the funds can be released almost immediately if a fiduciary has access to the key, which can provide cash to pay for a decedent’s final expenses. However, if the fiduciary trusted with the key turns out to be a wrongdoer, there is little to no recourse to recover the funds. 

Another way that institutionalized funds can transfer upon death is to establish a death beneficiary on the account. Beneficiary designations like this are also common with life insurance policies and retirement accounts. There are no such provisions for cryptocurrency accounts.

Because cryptocurrency accounts are unique to the individual, it is crucial the fiduciary (whether executor or trustee) have access to the necessary information to access the account. It is also crucial that the will or trust for the owner of the cryptocurrency includes language that allows the fiduciary to access the digital and/or online accounts for the decedent.

Although cryptocurrency is like cash in some ways, once a fiduciary knows it exists, it must be accounted for and could affect your taxable estate. It is important to consult with your attorney about what type of cryptocurrency you have and how much it is worth so that they can properly advise you when strategizing the best way to minimize estate taxes.

Lastly, if your estate requires complex planning such as offshore or domestic asset protection, it is wise to inform your attorney of your full estate, including your cryptocurrency, because, like any other asset, it could be subject to litigation and creditors.