Estate Planning and Cryptocurrency: 5 Crucial Tips for Your Digital Assets

Estate Planning and Cryptocurrency: 5 Crucial Tips for Your Digital Assets

Cryptocurrency has revolutionized the concept of assets and, in doing so, has introduced new complexities into the realm of estate planning. While the fundamental principles of estate planning remain unchanged – the desire to allocate assets as per your wishes – the rise of digital assets has amplified the importance of careful pre-planning.

Corey Roun, Senior Director of Trading and Derivative Strategies at Lyons Wealth Management, highlights the unique challenges posed by cryptocurrency in estate planning. He underscores the critical nature of pre-planning, given the absence of a central authority to recover passwords, keys, and the whereabouts of digital assets.

Here are five essential tips for cryptocurrency owners as they navigate the intricacies of estate planning:

1. Know Where Your Crypto is Held:

Understanding the location of your cryptocurrency is pivotal in the pre-planning process. If your crypto is held with traditional brokers or crypto exchanges, it can be treated much like other investment assets, with beneficiaries named on the accounts or specified in wills or trust documents. However, if your crypto is self-custodied in an off-chain wallet, it can present significant challenges. The owner must inform family members of its existence and provide a means of access since these assets are not discoverable through conventional means.

2. Acknowledge the Risk of Permanent Loss:

Cryptocurrency held on an encrypted hard drive, especially if self-custodied, can be lost forever if estate pre-planning is inadequate. Without thorough planning, heirs may never benefit from the investment. Proper management of these assets is crucial to avoid making them virtually inaccessible to heirs upon the owner's passing.

3. Provide Access to Crypto Accounts:

It is essential to grant heirs the means and information to access your digital assets upon your passing. Balance the need for access with the security of your accounts. Experts recommend preparing access to your digital asset accounts, including seed phrases, keys, and passphrases, for executors of your estate. The process can be complicated for those unfamiliar with it, so clear and comprehensive guidance is necessary.

4. Exercise Caution in Granting Access:

While providing access is crucial, it is equally vital to follow best practices to keep your accounts secure during this process. This is particularly true for digital assets because once cryptocurrency is sent to someone else, it is typically irrecoverable. Be cautious about revealing sensitive information in public documents like wills, and consider secure digital vaults or third-party services for digital estate planning.

5. Consider Cryptocurrency Taxes:

Don't overlook tax implications when dealing with cryptocurrency in estate planning. Realized capital gains are taxable, as are purchases using crypto when the value of the goods exceeds the cryptocurrency's purchase price. Estate taxes may also apply if the estate's value surpasses certain thresholds. Keeping meticulous records of cost basis, gains, and losses is vital, especially as the regulatory landscape for digital assets evolves.

Estate planning involving cryptocurrency and digital assets requires careful consideration due to their decentralized nature. Proper pre-planning can help mitigate the risks of leaving assets inaccessible or vulnerable to opportunistic family members. As the crypto landscape continues to evolve, staying informed about regulations and employing smart estate planning strategies is crucial for ensuring that your digital assets are handled according to your wishes.

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