Estate Planning for Bitcoin – What Happens to Your Digital Assets After You Die?

by Eugene Ohotnikov

Unlike stocks, real estate or other assets accompanied by a certificate or a title, crypto assets do not have a document identifying the owner. In this situation, your Bitcoin and other crypto can be irreversibly lost if you fail to instruct someone how to access your digital assets before you pass away.

Besides, the IRS considers Bitcoin as taxable property, which creates tax implications for beneficiaries and heirs and requires careful estate tax planning. Keep reading to find more about why you need estate planning for Bitcoin, learn about the tax consequences and check your available options.

Why You Need Estate Planning for Bitcoin

The pseudo-anonymity of crypto poses a unique challenge for its owners who consider the transfer of wealth to the next generations. You need to share your password with heirs or a person handling your estate, known as a fiduciary, to enable them to access your Bitcoin and other crypto assets after your death.

Meanwhile, simply passing the seed phrase and private keys to access your crypto wallet may not be enough. A fiduciary or other persons shall have written permission to access your laptop, cell phone or crypto wallets without violating federal laws, state privacy laws or other applicable regulations.

 

Tax and Other Implications of Including Bitcoin in Your Estate Plan

When planning to transfer your Bitcoin to heirs, you also need to account for possible tax implications. Since IRS views Bitcoin as property, it may need a formal appraisal of your crypto, as suggested by a report on the website of the American Bar Association.

Also, transferring your cryptocurrency to the next generations can result in losses or gains due to changes in the value of your digital assets. Failing to report such gains can lead to severe penalties and sanctions. You may need to consult your lawyer or tax advisor on the best way to structure your crypto assets to minimize tax consequences, for example, by creating an irrevocable family trust.

 

What Are the Practical Considerations for Including Bitcoin in Your Estate?

There are several options for your estate planning for Bitcoin, including making a will or moving your Bitcoin ownership to a trust. In both these situations, you will need to account for the pseudo-anonymous nature of the cryptocurrencies to ensure that your digital assets fall into the right hands.

 

Including Your Digital Assets in Your Will

Including your Bitcoin and other crypto in your last will and testament can be the most straightforward way to ensure the transfer of digital assets to heirs. However, since your will becomes public, you cannot simply write your seed phrase and private keys in your last testament.

You will want to ensure that your crypto wallet’s login credentials get to the right person. So, you will need to create a cryptocurrency access guide, including the list of wallets, private keys and seed phrases and keep them in a safe place. For example, you can write this information on a piece of paper and keep it in a bank safe deposit box or store it on an encrypted cloud drive.

 

Transferring Your Bitcoin Ownership to a Trust

Transferring the crypto assets to a trust is another way to manage your digital estate. Just be aware that, for the moment, most crypto exchanges, like Coinbase and Binance, do not allow opening an account in the name of a beneficiary or an irrevocable trust.

If you plan to keep your crypto assets in a trust, you may consider transferring your digital assets from the exchange to another wallet. Meanwhile, you may want to use a so-called cold storage solution, like a USB drive, to store your crypto wallet login data without disclosing them to a person overseeing your trust.

Summing It Up

The semi-anonymity of Bitcoin and other crypto is often viewed as an advantage while making your digital assets vulnerable to irretrievable loss. You will need the assistance of professional advisors in creating an estate plan for cryptocurrency, which would ensure seamless transfer of your digital assets to the next generations and lenient tax treatment.

The regulations for estate planning for Bitcoin and other crypto, as well as their technical aspects, are still in the making and constantly evolving. For more updates on practical applications and transactions with Bitcoin, crypto and NFT, stay tuned to more blogs from Web3 Comms, subscribe to our newsletter and follow us on LinkedIn.

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