One of the major selling points for purchasing bitcoins is its anonymity. There is no paper trail, and there are no physical assets to touch. However, this becomes a major problem when your client dies. How does his family access the bitcoins? Do they even know that he owns bitcoins? Transparency and disclosure are key! Your client needs to inform his advisors and his family that he owns bitcoins so they can act appropriately. More important, he needs to make sure that his bitcoins can be accessed in the event of his disability or death.
Bitcoins are accessed through the use of a “private key”—effectively a password. Bitcoin users store the private keys in “wallets.” Wallets are generally stored online. Once someone has access to the wallet, the bitcoins can be purchased, sold or transferred. Thus, it is important that your client’s personal representative (executor), trustee or trusted family member has access to the private key. Don’t lose track of the private key or the hard drive that contains it. There are numerous stories (probably some of them apocryphal) of people losing millions of dollars by selling their computers only to later remember that the hard drives had their private keys.
It is our suggestion that you encourage clients to prepare a detailed letter to be kept in a safe deposit box or other secure location indicating any private keys and bitcoin transactions. This letter needs to be updated periodically. The letter should also provide detailed instructions on how to access the bitcoins, including any passwords or codes needed to take custody of the bitcoins.It is also our suggestion that your client’s bitcoin holdings be transferred to a revocable living trust. This will avoid the necessity for having to go to probate court to transfer the bitcoins on his death. While we generally refer to bitcoins as “currency,” the Internal Revenue Service held in Notice 2014-21 that bitcoins are property, not currency. The tax implications of this ruling are that you have gain or loss on the sale or transfer of bitcoins and must maintain records to show your tax basis in bitcoins. For example, if your client used $2,000 of bitcoins to purchase a television and the bitcoins cost you $500, you have a gain of $1,500 that needs to be reported on your income tax return, While bitcoins may be the currency of the future, it is imperative that your clients take the necessary steps today to ensure their families can access the bitcoins on the clients’
Estate Planning Options to Bitcoin
Due to its anonymity and risk, traditional estate planning documents, including a Last Will and Testament and Trust Agreement are not well-suited to effect a transfer of cryptocurrency. Not only must a practitioner examine where digital assets exist online and how the Bitcoin will be accessed/transferred to the beneficiaries, but they must also ensure that there are limited delays in carrying out the administration. Specific language must also be included in the client’s estate planning documents which permit fiduciaries to access, retain, and manage Bitcoin. As part of the planning process, it is critical that the fiduciary be provided with information pertaining to the existence of Bitcoin and the manner in which to access it for transfer. To effectuate the actual transfer, a fiduciary must identify the beneficiary of the asset, and quite possibly, where the asset is located. If an owner invests in Bitcoin but fails to discuss the investment with their family, or fails to include the information in their estate planning documents, the account will likely remain lost upon death. Likewise, if a decedent fails to leave their private key, or leaves their private key without an explanation of how to use it, the Bitcoin will likely stay lost. In order to prevent these situations from happening, it is important to develop a plan for passing details of ownership. Practitioners must carefully consider a client’s estate planning needs today to ensure that they are carried out after death. As part of the planning process, the practitioner should also ensure that a Power of Attorney is updated and permits an agent to access digital assets and Bitcoin in the event of incapacity.
Some owners may have significant holdings that are beyond the scope of a typical fiduciary’s knowledge. When planning an estate that includes Bitcoin and other cryptocurrency, practitioners should advise their clients to appoint a fiduciary who has the sophistication required to deal with Bitcoin and the likes. When drafting the documents, language should be included that would not only enable the fiduciary to convert the Bitcoin to cash, but also permit fiduciaries to access digital assets, including computers, cell phones and other devices that may contain information about Bitcoin. It is also important to provide specific powers to fiduciaries during life and after death, because even if the client shares the key during their life, the fiduciary must have permission to use the information after death.
Please contact any of our estate planning attorneys today. If you would like to learn more about estate planning with Bitcoin.