You have probably heard the horror stories about massive and devastating personal cryptocurrency losses.
A story in recent years that caught international attention centered on the untimely death of Matthew Mellon, the banking heir and one-time chair of the New York Republican State Committee’s finance committee. In the early years of cryptocurrency Mellon purchased $2 million worth of XRP, an American-founded cryptocurrency. Mellon died unexpectedly in 2018 after a long struggle with bipolar disorder and drug abuse. At the time of his death the cryptocurrency he purchased was valued at $500 million. Mellon distributed the private keys to access this cryptocurrency into vaults at several banks, unfortunately, none of which were documented. As of present day, this fortune remains inaccessible.
Although this story serves as an extreme example, scenarios like this are becoming more and more commonplace as the popularity of cryptocurrency increases exponentially. A new study indicates that 46 million Americans own the most popular of cryptocurrencies, Bitcoin. And to be frank, folks are becoming rich from these investments. Last year alone Bitcoin’s value increased astronomically by 440%. As a result, developing an estate plan to include cryptoassets is absolutely imperative.
What are the key elements for developing an estate plan for your cryptoassets?
The most obvious and important piece of establishing cryptoassets for an estate plan is documentation of the cryptoasset’ s location and passwords or “private keys.” Cryptoassets are typically stored in one of four ways: (1) an online exchange (custodial wallet), (2) a hardware wallet, (3) a mobile wallet, (4) on a local software wallet.
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Regardless of choice of storage, access to the cryptoassets is controlled by the private key. The great benefit of the private key is it is almost impossible to hack. The downside is if you lose, misplace, or forget your personal private key your cryptoassets are completely inaccessible; not even the cryptoasset exchange can recover your key.
Next, it is crucial you communicate with your estate planner to understand where cryptoassets are held and how to access them. Your fiduciary (i.e., executor or trustee) should be granted specific power to access digital assets and online accounts pursuant to the Florida Fiduciary Access to Digital Assets Act (“FFADAA”). The estate planning documents should outline to whom the asset shall pass and possibly select a special trustee who is familiar with this type of asset to manage these assets. Due to the nature of informing the fiduciary the private key information, very careful consideration is needed when choosing a trustworthy fiduciary. This is also extremely important when choosing a power of attorney in case of disability.
Finally, the IRS considers cryptocurrency to be an asset. Therefore, careful consideration needs to be given in tracking the basis of such property as capital gains tax will be due on its sale. Under current law, if beneficiaries receive these assets as part of an inheritance, then the cryptocurrency may receive a “step up” in basis, erasing any lifetime capital gain appreciation.
The world is changing fast. Cryptocurrencies are another example of this. Cryptocurrency, like any other asset, requires protection. Without careful planning and routine updates with your estate planning attorney, immeasurable wealth can be lost.
Stephen J. Lacey, J.D., LL.M-Tax, managing member, is with the law firm of Lacey Lyons Rezanka.