Bitcoin and other forms of cryptocurrency have become increasingly popular forms of investment. But what are the benefits, and drawbacks, of these virtual investments in terms of estate planning? Can cryptocurrency even be passed to beneficiaries like other assets? The short answer is yes, but the process is much different than more traditional assets.
One of the benefits of cryptocurrency is that it does not require a death certificate of letters testamentary in order to take control of the accounts. However, there are fewer checks on a fiduciary who is handling cryptocurrency due to its non-affiliation with a traditional bank. Because of this, it is imperative to carefully choose the executor. If the fiduciary makes a transfer of cryptocurrency that is not authorized by the estate plan, the transfer could likely be traced but it would be practically impossible to recover.
Another possible benefits of cryptocurrency is that it is not actually currency. The IRS stated in IRS Notice 2014-21 their current position is that cryptocurrency is not currency, but rather property. For tax purposes, this could be significant to the overall estate plan.
As far as actually drafting the estate planning documents, it is crucial to give the trustee the proper authority to legally access the accounts. The trustee would simply need the passcode to access and manage the account, but without legal authority to access the decedent’s digital assets, such as laptop(s) and/or cell phone(s), the trustee could potentially be violating other laws like state and federal privacy laws, terms of service agreements, computer fraud and/or data protection laws. Additionally, it would be wise to release the trustee from the duty to diversify a trust that is funded exclusively with cryptocurrency.
Although still relatively new and unregulated in a lot of aspects, cryptocurrency does not look like its going away and any estate planning that includes cryptocurrency requires special attention in order to ensure it is managed without violating other areas of law.
