How to Include Cryptocurrency in Your Estate Planning

If you own cryptocurrency, you have a sophisticated technical understanding of the unique characteristics that make virtual currency appealing to a growing number of people. Those same characteristics create significant estate planning concerns that are essential to address. If you have not yet included your cryptocurrency in your estate plan, this discussion by our BRMM estate planning attorneys explains why this singular asset requires special attention in your estate plan.

Estate Planning Challenges of Cryptocurrency

Cryptocurrency is a digital or virtual asset, encrypted using a technology called blockchain. The advantage of the technology is the level of security and encryption it provides. These assets exist solely in digital space and have no physical existence. They also are not connected to the owner’s name or personal information in any way.

Storage of cryptocurrency involves a digital wallet, paper wallet, online exchange, or a combination of wallets and exchanges. Complex digital encryption protects the assets, which can only be accessed with a 64-digit private key or PIN number. If a digital wallet is damaged or hacked, or the owner loses the private key, little can be done to recover the cryptocurrency. Cryptocurrency is a bearer asset to anyone who has the key (just like traditional money).

On account of the vulnerability and accessibility issues of cryptocurrency, it requires special treatment in your estate plan. If you do not include your cryptocurrency in your estate plan and provide the means for accessing it, your fiduciaries and beneficiaries may be totally unaware of its existence or be unable to access it. In addition, anyone who finds your cryptocurrency and keys among your belongings can take the asset without leaving a trace.

While Michigan adopted the Uniform Fiduciary Access to Digital Assets Act in 2016, which provides a process for a fiduciary to request access to digital assets from a custodian, the provisions of the law are insufficient to address estate planning issues relating to cryptocurrency. If you own cryptocurrency, addressing distribution and access in your estate plan is the only way to ensure that your beneficiaries ultimately receive your cryptocurrency. If you don’t have an estate plan, you need to create one. If you do have an estate plan, but it doesn’t cover your cryptocurrency, it’s time to update your plan.

Cryptocurrency in Your Estate Plan

Traditional estate planning documents used to transfer property are not well-suited to accomplishing transfers of cryptocurrency. You should not put your cryptocurrency keys into your Last Will and Testament, because it becomes a public document when probated. You should not list your keys in any other estate planning documents either. Providing access (keys) to cryptocurrency is an issue that should be addressed separately from your estate planning documents.

You do need to include the basic information relating to your cryptocurrency in your estate plan and distribute it according to your wishes. If your cryptocurrency is not specifically included in your will or trust, it becomes part of the residuary estate. However, if your fiduciaries are not aware of the assets, they may not even locate them. Your fiduciaries also need specific authority to access and manage your digital assets, to avoid potential violations of cybersecurity laws.

The starting point for including cryptocurrency in your estate plan is to work with an experienced estate planning lawyer who understands cryptocurrency and the unique planning challenges it poses. It’s important to make certain that your designated fiduciaries (personal representative,successor trustee, agent under a durable power of attorney) know about your virtual currency and, in appropriate circumstances, can access it. Finally, there are your beneficiaries. Assuming the cryptocurrency reaches them safely, do they understand and know how to use what they receive?

Fiduciary and Beneficiary Access

One approach for addressing the details about your cryptocurrency is to prepare a memorandum to store with your estate plan in a secure place. The memorandum can include an inventory of your cryptocurrency, along with instructions to your fiduciaries about where to locate it. You may also wish to include an explanation about the assets for your beneficiaries, in case they are not familiar with cryptocurrency. Since your cryptocurrency holdings may change frequently, updating the memorandum regularly will be essential. Remember, if your fiduciaries don’t know where to find your cryptocurrency, it may be lost forever.

You also need to provide a mechanism for your fiduciaries and beneficiaries to access your cryptocurrency. You may include that information in your first memorandum, or prepare a separate memorandum that includes it. Your estate planning attorney will help you determine the best way to give your cryptocurrency access information to your fiduciaries and assist in preparing memoranda to store securely with your estate plan, if that’s the right approach for you. The best solution depends entirely on the structure of your estate plan and your personal and financial circumstances.

Taxation of Cryptocurrency

IRS guidance from 2014 and 2019 provides for treatment of cryptocurrency as property (not currency), which affects taxation and tax returns, as well as gift planning and estate planning and administration. The IRS website provides answers to frequently asked questions about virtual currency transactions.

For your estate plan, it’s crucial to ensure that your fiduciaries have access to your records relating to cryptocurrency acquisitions and divestments. Given the dated character of the IRS guidance, and the fact that federal legislative proposals relating to cryptocurrency have been introduced in recent years, you must be attentive to changes in IRS guidance and federal laws. When you include your cryptocurrency in your estate plan, your lawyer will make certain that you learn of regulatory and legislative changes that affect your estate planning decisions and provisions concerning your cryptocurrency.

Talk With Our Trusted Michigan Estate Planning Attorneys

Our attorneys at the law firm of Barron, Rosenberg, Mayoras & Mayoras, P.C., provide a full range of services relating to estate planning. We work with clients who own cryptocurrency to develop a sound strategy for safeguarding and transferring those assets as part of their estate. Whether you wish to create a new estate plan or update an existing plan to address your cryptocurrency, we welcome the opportunity to address your needs.