Estate planning considerations for cryptocurrency and cryptographic tokens

As investors flock to crypto assets, especially the 67% of millennials who see Bitcoin as a “safe haven asset,” there are several important estate planning considerations for investors with cryptocurrency and Non-Fungible Tokens (NFTs).

Cryptocurrency and NFTs: A quick overview

Cryptocurrency (think Bitcoin or Ethereum) is a digital currency in which transactions are verified and records are maintained using cryptography, rather than by a centralized authority. Cryptocurrencies are held in a “digital wallet,” the structure of which can vary depending on the online platform.

NFTs are cryptographic assets on a blockchain with a unique identification code and metadata. Unlike cryptocurrency, NFTs are often types of unique digital art (like a numbered art print) that cannot be traded or exchanged easily. A popular example of an NFT is Jack Dorsey’s first tweet, which was auctioned for more than $2.9 million.

Estate planning considerations

It is important to make your estate planning attorney aware of cryptocurrency and NFT holdings.  

Fiduciary access: Who will be named as a fiduciary to handle your digital assets, and is this person technologically savvy enough to access and transfer the assets? Most states have now adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which governs access to a person’s online accounts when the account owner dies or cannot manage the account. Additionally, many estate planners routinely include specific language in wills, powers of attorney and trusts that specifically grant fiduciaries access to digital assets. Naming fiduciaries who are trustworthy and capable of understanding the nature of cryptocurrency and NFTs is essential.

Recordkeeping: Keeping a record of cryptocurrency holdings, including purchase date, your basis or purchase amount, location, and the passwords and access codes is essential for security purposes during the owner’s lifetime but also for estate and trust administration purposes at the owner’s death. Individuals holding cryptocurrency and/or NFTs should consider keeping a detailed guide explaining how to access every digital wallet. If the individual tasked with gathering and distributing your digital assets cannot access your digital wallet, those assets may be deemed lost.

Titling: The most popular holding mechanism for cryptocurrency is an online platform; Coinbase and Robinhood are two popular options. Titling and transfer of the crypto assets will depend on the specific platform. For example, Coinbase does not give users the ability to add a beneficiary designation but gives a vague statement that “naming a beneficiary on your Coinbase account would be done with your estate planning attorney… the ownership of your Coinbase account would be transferred according to your will or other arrangements….” For estate planning purposes, a user may title a Coinbase account directly in a revocable trust; however, the Coinbase account must be linked to a traditional checking or savings account with the same titling. Clients using the Robinhood platform can add a beneficiary designation with the limitation that it must be to an individual and not to an entity or trust.

Gifts and valuations: Some online platforms allow users to gift cryptocurrency. Robinhood’s terms of service detail that it does not track gifts, which opens the door to potential underreporting. Estate planners with clients wanting to gift cryptocurrency or NFTs will likely be required to have crypto assets valued for estate and gift tax purposes. However, the cryptocurrency market’s volatility makes it difficult to calculate a traditional value, and few appraisers can handle such work, adding to the difficulty.

Smart contracts: Ownership and titling of NFTs are much more complicated as only one person may own the actual token. Still, others may own the intellectual property rights to the content behind the token, and additional individuals may own digital copies. Some NFTs include a smart contract feature allowing the NFT creator to earn a percentage each time the NFT is sold or transferred. Holding NFTs in a limited liability company (LLC) may facilitate more efficient ownership transfers by allowing LLC membership interests to be transferred rather than going back to the blockchain for each transaction.

Cryptocurrency self-directed IRAs: Many individuals want to invest their retirement assets in cryptocurrency. While traditional IRA rules would be at play, individuals holding such assets should be aware of the associated income tax implications. Due to the cryptocurrency market’s volatility, the required minimum distribution calculation could lead to a large income tax bill or could hinder a distribution if the market is particularly low.

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2022-11-05 02:00:00

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