Estate Planning and Cryptocurrency

By: Elliott Stapleton

Do you own Bitcoin or another cryptocurrency? If so, there might be extra steps you can take to update your plan to ensure all cryptocurrency is transferred adequately upon death.

There are three critical concerns related to the transfer of cryptocurrency upon death:

  1. Will it be transferred?
  2. Will it be transferred through Probate?
  3. Will it generate Estate Tax?

Will it be transferred?

Determining whether or not your Bitcoin or cryptocurrency will be transferred is a question of how you currently hold your property and what protocols are in place if you are deceased.

If you maintain your cryptocurrency in an online account, your ownership interest can likely be conveyed just like any other asset. The good news is, if your family can track down your account, your investment will likely be transferred. The bad news, not all institutions allow you to transfer without Probate (See below: Will it be transferred through Probate).

If your cryptocurrency is held in “cold storage” or offline, the transfer could only occur with proper instruction. When this type of property is held in cold storage, there is greater protection from theft by a hacker but less of a chance your family will gain access. The two methods typically used are a paper wallet or hardware wallet.

A paper wallet is a printed copy of your private key to be reconnected to the public key; this might be a QR code. A hardware wallet is another option that uses a USB drive to store the private key to be reconnected to the public key.

If your family can locate your offline storage, they might be able to reconnect the key then and gain access to the cryptocurrency. If not, the currency will likely be lost upon your death.

Will it be transferred through Probate?

First, why would someone want to avoid Probate? It takes time (in some cases more than a year) to complete the Probate process. In addition, you typically must hire an attorney and pay legal costs and court costs (which could be significant), creditors can make a claim against the assets, and all of the information is in the public domain.

Will your cryptocurrency have to pass through Probate? The process of distribution depends on your estate plan and how your Bitcoin or cryptocurrency is held. If your interest is controlled with an online account, you are likely able to designate a beneficiary. As long as the beneficiary you have named is alive and over the age of 18, the asset will avoid Probate.

If you have created a Trust, typically the Trust would be the beneficiary. After that, the Trust would control the manner of distribution (which could include distributions for your children’s health, education, support, and maintenance and outright at a more mature age than 18).

Unfortunately, as of August 2021, companies like Robinhood do not allow you to designate a beneficiary upon death. That means if you die owning Bitcoin or Cryptocurrency with Robinhood (or any other investment for that matter), it will go through the probate process.

When choosing companies to trade your cryptocurrency, you might want first to identify if they allow accounts to either be owned by a trust or transfer on death to a beneficiary. If the company does not allow either option, your crypto account will go through Probate upon death.

In Ohio, if you want to transfer tangible property, the only way to avoid Probate is to use a Trust. This potentially creates another wrinkle for Bitcoin and cryptocurrency for those who use either a paper wallet or hardware wallet specifically, whether the device or the crypto is tangible or intangible, respectively, personal property.

The IRS has taken the position, in Notice 2014-21, that Bitcoin and other cryptocurrencies are “property,” but it is not yet well settled as to the type of property. This decision would ultimately rely on state law where you are located. If, for example, a Will or Trust gave all tangible property to one beneficiary or all “investments” to another beneficiary, which beneficiary would get the Bitcoin which can only be accessed through a flash drive?

That means, if your family can recover the crypto from your flash drive key, all of that value will go through Probate unless you have created and properly funded a Trust by transferring all tangible personal property.

Will it generate Estate Tax?

Yes, unless your total estate is worth less than the estate tax exemption amount. This is a tricky question.

As of August 2021, if your assets are less than $11.7 million at the time of death, it is unlikely you would own Estate Tax on your crypto. The current law is scheduled to sunset in 2025, likely reverting to $5 – $7 million.

The current administration has proposed reducing the lifetime exemption to $3.5 million. This would pull in considerably more people who would owe Estate Tax at death. If you have a significant amount of Bitcoin or any other cryptocurrency, it is best to consult with an attorney to assist with Estate Tax Planning. Here is a link to some other articles on this topic related to Estate Tax Planning.

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