Cryptocurrency, which includes Bitcoin, has become more prevalent in recent years. When these were developed, many wondered what they were and how they were used. Although the public has become more educated about cryptocurrency, many unanswered questions still remain. An emerging issue is how the existence of cryptocurrency affects one’s estate plan.
First, what is cryptocurrency? Bitcoin, blockchain, etc.? Last year, the Merriam-Webster Dictionary officially defined some of these terms. Cryptocurrency is “any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.” This decentralized system is the blockchain, which is defined as “a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralized, publicly accessible network; also the technology used to create such a database.”
While many articles have discussed the pros and cons of holding cryptocurrency, the focus of this discussion is how to manage cryptocurrency as part of one’s estate plan. As a starting point, it is always prudent to examine federal and state laws. In 2014, the IRS issued Notice 2014-21 in which it announced it will treat Bitcoin and other cryptocurrencies as personal property rather than a form of currency for federal estate and income tax purposes. As such, cryptocurrencies are treated like other personal property such as a car, furniture, and other personal property. As personal property, cryptocurrency may be subject to probate or held in trust, depending on how it is owned. However, the following special considerations need to be taken into account when doing an estate plan for a client that owns Bitcoins.
First, make sure you have provided your Personal Representative or Trustee with the tools needed to access your Bitcoin account. Bitcoin can be only be accessed by private key or some similar type of login and password information. A traditional approach to identify its existence is to write down the access information and store it in a secure place, such as a safe deposit box. If the access information cannot be found, the Bitcoin account may be lost forever.
Alternatively, you could store your access information with your estate planning documents, which are frequently kept by attorneys and banks in a fireproof, waterproof vault.
A more modern, readily accessible solution may be through using an online third-party secure storage service similar to the password manager services that have increasingly been used for other digital assets.
In any case, you need to tell your estate planning attorney about the existence of these assets so he or she can address them in your estate plan as well as assist you in finding a secure place to keep your access information.
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