ESTATE PLANNING WITH CRYPTOASSETS
Cryptoassets include cryptocurrencies, digital tokens that hold value, and non-currency blockchain tokens, which are used as a collectible or for transactional purposes. Cryptoasset transactions are verified and maintained by blockchain technology, rather than by a centralized authority. The popularity of cryptocurrency has risen dramatically in recent years, with the current cryptoasset market worth over $1 trillion dollars. Cryptoassets have monetary value for estate and tax purposes; however, many do not realize that they need to be carefully considered in estate planning. Because cryptoassets are a new and unique class of assets, it takes skilled guidance to effectively account for them in the estate planning process.
Cryptoassets are protected by digital or hidden keys, and they cannot be accessed without the key. The benefit to this is that cryptoassets are nearly impossible to hack, although the downside is that, if you forget or misplace the key, you lose the cryptoassets. Because there is no central authority in the world of crypto, there is no way to access cryptocurrencies without the hidden key.
Because the key is the only way to access the cryptoassets, it is extremely important to ensure that beneficiaries can gain access in necessary situations. Accordingly, owners must carefully document the location and the necessary passwords associated with cryptoassets. The best way to do this depends on the nature and value of the cryptoassets, but popular methods include custodial wallets and local software wallets. The owner needs to ensure that only their intended beneficiary has the digital keys to access the cryptoassets and that they are familiar with how to manage them. This takes extremely careful consideration and is vital to the continuation of the assets.
Many individuals with significant cryptoassets elect to use a professional cryptoassets custodian to protect them. This process allows crypto owners to develop a custodial structure where they have control, as the assets cannot be altered or transferred without their approval. Owners can, therefore, distribute limited control to multiple individuals, similar to a trust with designated successor trustees. However, the concern with custodial arrangements is that they are more prone to security breaches and the like. As a result, many choose to maintain sole control over their cryptoassets. This presents a huge risk, as others will not have access to the cryptoassets if an unexpected situation arises, such as the owner’s disability or death. In this event, there would be no way to access the cryptoassets, and they would be lost indefinitely.
It is important to note that the Internal Revenue Service considers cryptocurrency to be an asset for tax purposes. These assets are, therefore, subject to capital gains and estate taxes. To avoid any unnecessary costs and taxes, it is crucial to prepare a cryptoasset tax and estate plan with a creative and detailed approach.
At Lara Sass & Associates, PLLC, we have the experience and expertise to protect your cryptoassets for generations to come. Whether your objective is to transition cryptoassets to future generations or to avoid substantial taxes, we can create an estate plan perfectly suited to your needs to ensure that your successors will be able to properly access and manage your cryptoassets and the wealth that accompanies them.