Deciding how your assets will be distributed after you are gone is likely a primary function of your estate plan. For your plan to work as intended you must include all of your assets in the plan. That sounds simple enough; however, in the new digital age it might be more complicated than you realize. For example, if you own cryptocurrency, is it considered an asset for purposes of estate planning? To help answer that question, let’s discuss how cryptocurrency fits into your estate plan.
What Is Cryptocurrency?
Cryptocurrency is a digital currency that uses blockchain technology (a distributed ledger enforced by a disparate network of computers) to create a decentralized, immutable, public digital ledger. Think of cryptocurrency as “virtual” money that is not issued by a centralized government or bank. It can be used to buy and sell things but only with a computer or smart phone. Although there are hundreds of versions of cryptocurrency, the most commonly used is Bitcoin. Other well-known type of cryptocurrency include Ripple, Dash, Litecoin, and Zcash. Although the tax treatment of cryptocurrency remains somewhat unclear, the I.R.S. has taken note and does appear to be monitoring cryptocurrency transactions.
Does Cryptocurrency Need to Be Included in My Estate Plan?
Cryptocurrency is kept in a virtual wallet – a wallet that only the owner knows exists in many cases. If you own cryptocurrency, it is important that you include it in your estate plan or it could be lost forever because of the unique nature of the currency.
Unlike cash, stocks, or other types of investments, cryptocurrency is not physically held anywhere. It only exists in digital form. Moreover, because it is kept in the owner’s virtual wallet, it is more than likely that it would be overlooked completely following the owner’s death unless very specific plans are made to ensure that someone else knows it exists. Finally, even if someone knows the cryptocurrency exists, they will never be able to access it unless the owner leaves detailed instructions for doing so. Unlike a bank account, you cannot include a beneficiary designation on your cryptocurrency that automatically transfers ownership to someone upon your death.
How to Include Your Cryptocurrency in Your Estate Plan
If you own cryptocurrency, you must include it in your estate plan or it will almost certainly be lost forever following your death or incapacity. Simply listing it as an asset, however, is not enough. Instead, you need to take the following steps to ensure that your cryptocurrency winds up in the right hands:
- Make a detailed list of all cryptocurrencies that you own. Be very specific and include the type (Bitcoin, Ripple), approximate value at the time you make the list), and location of the wallet where the cryptocurrency can be found.
- Provide access codes. This is where it gets tricky because without all necessary access codes, PINs, and wallet locations, no one will be able to access your cryptocurrency. Once someone has that information, however, they can access and use that cryptocurrency at any time and no one can stop them. Unlike unauthorized usage of your credit card or bank account, if someone uses your cryptocurrency there is basically nothing you can do about it. Therefore, be very careful what you do with the lists you make and be very selective about who you choose to guard the information you create.
- Include your devices in your plan. This is where people often make a fatal mistake when trying to incorporate cryptocurrency into their estate plan. You must include the device on which the virtual wallet exists as well. Giving someone the passwords and location of the virtual wallet doesn’t help if they don’t have the device itself.
- Provide someone you trust with the information. Once you have made sure that all the necessary information is together, you must entrust it to someone. If no one knows the cryptocurrency exists, it will just disappear into the ether and no one will be the wiser.
Please download our FREE estate planning checklist. If you have additional questions or concerns about how your cryptocurrency fits into your estate plan, contact us at the Northern California Center for Estate Planning & Elder Law by calling (916)-437-3500 or by filling out our online contact form.