What the Rise of Cryptocurrency Means for Your Estate Plan

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Since the introduction of Bitcoin in 2009, cryptocurrencies have exploded in popularity. In late 2020, many new users entered the crypto market as fears of U.S. dollar inflation grew. The result has been a massive increase in cryptoasset values, leading to some significant estate planning implications. 

Basic Background on Cryptocurrency

Whereas, historically, all currency has had some physical, tangible aspect, cryptocurrency is all digital. There is no tangible feature to cryptocurrency. All cryptoassets are stored electronically on means such as an online exchange, a hardware wallet (a USB-like device), a mobile wallet, or a local software wallet.   

One of the most unique things about these digital currencies is that they are a decentralized, public means of exchange. Using secure blockchain technology, cryptocurrency data is stored in individual blocks, which are then chained together to form a record of information that details the history of ownership of the cryptocurrency.

Rather than being set by a central bank, value is determined by a consensus of users who have directly determined who owns how much of that particular currency. Many of them, like Bitcoin, Litecoin, Cardano, and Ethereum, have a limited supply that can ever be in circulation. One of the purported benefits of decentralization is that these currencies cannot be inflated to decrease their values.

In addition to a means of exchange, certain cryptocurrencies, like Ethereum and Cardano, can include embedded smart contracts that can automatically receive and send assets or information. These digital contracts are stored on the blockchain and can be useful estate planning tools by executing “cryptowills” to automatically transfer assets when certain conditions are met. 

Cryptocurrency is a complicated subject, and its intricacies are not easily understood by the general public. But it is not going anywhere any time soon. While there are potential benefits to holding some of these cryptocurrencies in your portfolio, it is important to consider how these unique assets affect what is needed in your estate plan.

Cryptocurrency and Your Estate Plan

Traditional assets, such as a motor vehicle or a checking account balance, are held either physically, as with keys to a car, or by a financial institution with fiduciary duties. These assets are then transferred as a part of a person’s estate by instructing the administrator of the estate on whom is to inherit the asset.  If a key or password to an asset is lost or unknown, the beneficiary nevertheless gains access to the asset merely by proving he or she is entitled to the asset.

Not so with crypto assets.  Cryptocurrencies are held in myriad places, and accessible only by the pin/password created by the holder of the currency. Like cash, cryptocurrency is a bearer asset, and the holder of the cryptocurrency is presumed to own the cryptocurrency. To lose the security key would be literally throwing your money away because the access to the cryptocurrency would be lost forever.  Because cryptocurrency is completely digital, it is uniquely susceptible to hackers if left unprotected. Therefore, there is substantial security protocol built into accessing cryptoassets. 

Because of the extensive security features involving cryptoassets, your estate plan should include documents that more specifically identify the extent of cryptocurrency held and how to gain access to them.  For example, make sure your durable power of attorney (DPOA) specifically references the agent’s authority to access digital currency and online accounts (including cryptocurrency exchanges).  

Your Will should go further and expressly grant your executor access to the content of electronic communications with any currency exchanges, such as Coinbase, Kraken, or Crypto.com. Under the Virginia Fiduciary Access to Digital Assets Act, Code § 64.2-116 et seq. (VFADA), contents of communications are restricted from the executor’s access unless explicitly permitted under a Will or by Order of a Court.

Along with your estate plan documents, you should have a list that identifies cryptoassets for the executor, instructions on how to access the crypto assets, and where to obtain pin/password login information. Necessary identifying information includes identification of assets, dates of acquisition, and form(s) of storage. Ensure this information is kept in a secure location and is updated if and when this information changes. Any changes to your access or storage of cryptoassets must be noted in your estate plan as quickly as possible.

In addition to considering identification and access to crypto assets, a well-crafted estate plan will incorporate appropriate tax considerations. Given the sparse regulation of transfer of cryptoassets, a creative estate plan can incorporate transfers that minimize tax consequences on both an estate and the transferee. In 2014, the IRS issued guidance on the taxation of “virtual currency.” The IRS considers cryptocurrency to be property, not currency. Therefore, it is subject to short and long-term capital gains taxes for all taxable events. 

Unlike traditional stock exchanges, cryptocurrency exchanges run 24 hours a day, 7 days a week. Valuation can be a challenging task. 

Cryptocurrency and Your Trust

As with your estate planning documents, the trustee of your revocable living trust must be provided access to your cryptoassets. The trust must also provide explicit authority for successor trustees to access the contents of electronic communications with the currency exchange.

If your plan is to keep cryptocurrency in your trust, your trustee will be subject to the prudent investor rule and unless otherwise specified, will have a duty to diversify the assets. Virginia’s version of the Uniform Prudent Investor Act places this duty on the trustee. If you decide to place cryptocurrency into your trust, it is crucial that you provide express instructions to keep your cryptoassets as part of the trust assets.

It is also important to keep in mind the technological savvy of your appointed trustees and their comfort with adding more cryptoassets to the trust or likelihood of converting these assets out of a digital form.

Final Thoughts

Given the increasing popularity and value of cryptocurrencies, financial advisors and planners may eventually recommend having at least some percentage of cryptoassets in a well-balanced and diversified portfolio. Estate plans need to account for the unique access challenges and tax implications such assets currently present.

We strongly advise you speak with an experienced estate planning professional and tax professional to ensure you understand the full implications of transferring your crypto assets as part of your estate plan. To discuss the impact cryptocurrency has on your estate plan, speak with one of our expert estate planning attorneys today. 

Disclaimer: This article is for informational purposes only and does not create an attorney-client relationship with the reader nor is it meant to provide legal advice. Hanger Law does not offer tax advice. 

  1. See Nathaniel Popper, Lost Passwords Lock Millionaires Out of Their Bitcoin Fortunes, N.Y. Times, Jan. 13, 2021, at B1 (accessible at https://www.nytimes.com/2021/01/12/technology/bitcoin-passwords-wallets-fortunes.html) (commenting on how certain cryptocurrency will be forever encrypted after too many incorrect attempts at access).


With additional contribution from Seth Connell.

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