Estate Planning Guide for Crypto Holders
Since Bitcoin’s creation over a decade ago, cryptocurrencies have been on a wild ride, morphing from a fringe idea to a mainstream asset class. With the first spot Bitcoin and Ether ETFs listed on U.S. stock exchanges this year, there are more ways than ever to invest in crypto, which means even more people need to consider how to handle their cryptocurrencies in their estate plans. This article will cover what every crypto holder (hodler) needs to think about when creating and updating your estate plan.
Key Considerations:
Take Stock of What You Own
Consider How You Store It
How Much Do Your Heirs Understand?
Do Not Try to Cheat the Government
What Happens If You Do Not Plan
Take Stock of What You Own
The first thing every crypto holder needs to do is take stock of what you own and how you own it. This includes ensuring that you have appropriate documentation for each of your transactions that shows at least the following:
What and how much you received, purchased, sold, or exchanged/converted
When you received, purchased, sold, or exchanged/converted the asset
How much you paid or received in the transaction
Your basis (what you originally paid) for any crypto sold or converted (more on why this information is important below).
While best estate planning practices may look the same for those who own actual tokens, regardless of whether you own 0.01 BTC or 100 BTC, planning considerations are very different than for those whose only holdings are shares of a spot Bitcoin ETF. Additionally, if you hold only a minimal amount of crypto, it may not make financial sense to establish a trust for your holdings, while someone with even moderate holdings will likely want to spend the time and money to establish a comprehensive estate plan that ensures their cryptocurrency holdings pass easily to their intended beneficiaries when they die. No matter your situation, reviewing what you own and making sure you have appropriate documentation is very important for your crypto estate planning.
Consider How You Store It
Once you have taken stock of what you have, consider how you hold it. Is everything sitting on an exchange so it can be easily sold or transferred (not advisable, but that is another conversation)? In a hot wallet? In a hardware wallet buried in your backyard? Who else has access to your holdings? Where do you store your private key and/or seed phrase? If you cannot readily account for all of these, you should not expect your heirs to either, which means your holdings may be lost.
How Much Do Your Heirs Understand?
An often overlooked area of crypto estate planning is who is going to receive your crypto after you die. You may have been one of the first people to buy into Bitcoin and now carefully self custody your holdings in hardware wallets scattered around the globe, but if you leave it all to someone who does not understand anything about crypto and throws out your hardware wallets after mistaking them for old USB drives, you have not planned well. Here are some things to consider when making your estate plan:
Do any of your beneficiaries or your personal representative know you own crypto?
How much do your beneficiaries and personal representative/executor/trustee understand crypto?
Would any/all of the above recognize a hardware wallet?
Would they understand how to access a wallet–do they understand what a private key and seed phrase are?
If needed, do they understand how to safely transfer crypto?
Do they understand the importance of documenting transactions that may otherwise be difficult to trace?
How can you safely pass on your private keys?
If you are unsure of whether your intended beneficiaries or personal representative/trustee can safely navigate the crypto world but you trust someone else who does, you may consider naming a personal representative/trustee who specifically handles your crypto. And passing on your keys will always be an issue since you need to ensure no one steals your holdings. There are currently some companies working on setting up a dead man’s switch that can be used to pass private keys after your death, but until then, creative problem-solving can overcome trust issues, like splitting private keys into smaller parts and giving one part each to several personal representatives or trustees.
Do Not Try to Cheat the Government
As crypto has gained mainstream appeal and the number of investors has drastically increased, so, too, has the government’s attention to crypto transactions. While there is a tendency among some crypto investors to try to hide and lie about their transactions, this is especially problematic when it comes to estate planning. This deserves a more thorough analysis and explanation. Learn more about the risks of hiding your cryptocurrencies.
What Happens If You Do Not Plan
If you own cryptocurrency and do not bother to make any estate plan, the worst case scenario is none of your heirs/beneficiaries or personal representative/executor knows to look for it and it is potentially lost forever. If they know to look for it–and even know where it is–but it is stored in a wallet and they do not know how to find your private key or seed phrase, it is still as good as gone. If your crypto was left on one or more exchanges or brokers, your heirs/beneficiaries will have to open probate to have the assets legally transferred to them. For those who do not plan, this may be your best-case scenario, but dealing with exchanges can take time and money.
If you need help transferring crypto from a deceased owner or making sure your estate plan appropriately incorporates your cryptocurrency holdings, contact a Florida crypto wills, trusts, and estates lawyer.