As the investment world has seen the rise – and, sometimes, the fall – of bitcoin value or other crypto currencies, estate planning attorneys are also working with these unique digital assets in estate planning and in post-death estate administration.
The following are estate planning considerations in handling bitcoin.
Estate Planning With Crypto-Currency
While bitcoin is used in a virtual world like a currency, the IRS has defined these kinds of digital currencies as property for federal tax purposes, not currency. For heirs and beneficiaries, this means that they receive a step-up in tax basis to the fair market value of the asset on the investor's death.
Investors in bitcoin should apply these four planning factors to ensure that the digital property is effectively passed to their heirs and beneficiaries.
- Grant authority to access or manage the asset: Execute a Durable Power of Attorney that specifically addresses the agent’s authority to manage crypto-currency. This legal document will ensure that someone can access and use the bitcoin for the principal’s needs when the principal can no longer access or manage those assets by himself. Under North Carolina’s 2016 Digital Assets Act, an agent under a Power of Attorney, as well as other fiduciaries, has the legal authority to access and manage digital assets.
- Identify the location of the asset: Make a list of all the hardware wallets – and locations of the wallets – used by the investor. Provide for the custody of these wallets in a will.
- Provide access to the asset: Create a physical copy of your private key and store it in a safe place to prevent hackers from accessing it or encrypt it and provide decryption information to a fiduciary. Record the log-on information and answers to security questions for wallets in a safe place for easy accessibility in case of your incapacity or death. If using two-factor authentication, record that log-on information, as well. If this information is not shared with a trusted person before death or recorded in a secure place, the assets could be lost forever.
- Consider tax consequences: Consult an attorney or tax adviser to maximize tax advantages of passing bitcoin through an LLC or a trust on the investor’s death.
Post-Death Estate Administration With Crypto-Currency
After death, and without implementing the factors above, crypto-currency can pose challenges to a personal representative trying to administer a decedent’s estate and conduct an inventory of the estate assets.
First, crypto-assets can be difficult to locate and access without the decedent’s private keys and access to online wallets. Further, in many cases, the digital currencies are held offline in “cold storage” to protect the assets from hackers. Sometimes, the assets are held anonymously, which make it difficult for a personal representative to discover, access and manage.
When taking an inventory of the estate assets, a personal representative should check the decedent’s smart phone, tablets and computer history for online wallets that may contain digital assets. The personal presentative should also review flash drives, hardware wallets or other devices that could have been used to store private keys and back up information necessary to retrieve bitcoins and other virtual currency.
The personal representative may need to maneuver within these accounts under North Carolina’s 2016 Digital Assets Act. However, even obtaining a court order to allow access to bitcoin can be futile if the personal representative has no means to access these assets. Further, there is often no specific entity or individual to order compliance with any court order.
Once (or if) a personal representative finds and locates this digital currency, it may be inadvisable to retain it without a court approval or the consent of the beneficiaries because the markets for this digital currency are incredibly volatile.
A personal representative should determine how and when to sell this currency as soon as reasonably feasible by consulting an experienced adviser. Consulting with an estate-planning attorney who is well-versed in crypto-currency will ensure that the investor’s heirs receive these digital assets.
Kara Gansmann is an attorney in the Wilmington office of Cranfill Sumner & Hartzog LLP, where her practice encompasses elder law and estate planning. Kara advises individuals and families with estate planning needs and asset protection tactics. In this role, she strategizes with clients to preserve assets for long-term care and to leave legacy gifts to family members. Kara works with elderly clients in need of Medicaid crisis planning and Medicaid applications. As part of her practice, Kara drafts wills, trusts and powers of attorney. In the courtroom, Kara represents clients in the administration of estates, guardianship/incompetency proceedings, and guardianship administration. Kara also litigates estate and trust matters, including will caveats, the modification or termination of trusts, and litigation arising from estate documents or fiduciary roles. She is a member of the North Carolina Bar Association Elder Law and Special Needs Section and serves as co-chair of the CLE Committee for that section. Kara also serves as a liaison between the North Carolina Bar Association Elder Law and Special Needs Section and the North Carolina Bar Association Estate Planning and Fiduciary Law Section.