Hi, I’m Suzy Walsh. I’m an ACTEC Fellow in Hartford, Connecticut and I’m here today with Karin Prangley, who’s ACTEC Fellow from Chicago, Illinois and today we’re here to talk about understanding cryptocurrency in estate planning, which we both find really fun but I’m afraid a lot of people don’t. So, the first thing we’re going to do is ask Karin why people bother, why they have to make special plans and provisions for their cryptocurrency in their estate plans.
Estate Planning with Cryptocurrency
Karin: Well, remember when cryptocurrency was introduced to the big world. It was in an era in our country where banks were “too big to fail,” but yet failing. Government regulation of financial institutions was at an all-time high. And then, Satoshi Nakamoto, the founder of Bitcoin, launched the first cryptocurrency on a cryptography listserv and described it as a currency “without regulation”. And how great did that sound? There’s no help desk. There’re no government rules. It’s decentralized. That’s why many people love cryptocurrency. But that's hard for succession, right? If somebody passes away or becomes disabled, there's no help desk to call. There's no customer service department to transition the cryptocurrency of a deceased or disabled person to the license representatives. So, that makes it tough.
The adage “not my key, not my coin” is really relevant here. If you don’t have the keys to the cryptocurrency- if you don't have those private keys- if you have not set up a succession plan to get access to those private keys, the cryptocurrency may be lost upon death or disability. I’m going to pause for a second there because that’s such an important point. “Not my key, not my coin.” Without a succession plan, a crypto could be lost forever.
And Suzy and I often get calls from grieving family members of those who say “I know my brother used to mine bitcoin. And I know he stakes Ether (Ethereum) for all of this.” But they can’t find it. They don’t know what to do. We would recommend please, don’t do that to your family. Suzy, tell us about some generally effective ways to make a succession plan so that you won’t be one of these tragic stories and your valuable cryptocurrency can be preserved for those causes or people that you care about.
Cryptocurrency and Estate Succession Plan
Suzy: Right, so the important part of that question is making a succession plan; thinking through, “Someday I may become incapable and I won’t remember. Someday, I’m going to die.” And you don’t want to die holding the key to your cryptocurrency in your brain or being the only person who knows where you printed them on a piece of metal, stored them on a piece of paper or hid your thumb drive or your laptop with all those encryption keys so that you have to make a plan. But by the same token, you want to provide for a secure plan.
So, in the old days, we used to talk about “probate by truck,” right? We all witnessed this where a family member would pull up to the house and sort of fill the truck with all of mom’s possessions before anybody had a chance to think about who was actually going to handle and be appointed as fiduciary. Everybody was grieving. And what we don’t want to see now is a probate by computer, be it intentional or inadvertent. When is it inadvertent? Well, “I just left my laptop lying around and somebody picked it up and gave it to somebody else and nobody ever knew there were encryption keys on it.” And maybe they never looked for them and maybe they're now lost, right?
So, we don’t want that to happen. So, when folks come into my office or Karin’s office we come up with a plan. And often that’s driven by the client’s planning. Some clients prefer technology-based plans, and we may talk to them about the pros and cons of those. And security is a bigger concern there. We, I think, as planners prefer a solution where there’s third party custody of the encryption keys. And keep in mind, cryptocurrency is decentralized, so there’s not a custodian unless we have one available. But the custodians are very limited in the types of cryptocurrency they're willing to custody or able to custody for technology purposes.
So, we work that through with each client, and we also talk to the client about not only succession planning at death but succession planning during life and how we might plan for incapacity, plan for giving, plan for inter vivos gifts. We sometimes will use a corporate entity and transfer the holdings and the encryption keys securely into a corporate entity, which involves obviously someone to manage the entity who can manage those custody and security concerns.
But then, subsequent transfers of small pieces or large percentages or small percentages of that holding can be accomplished using- wait for it- a piece of paper; an assignment, right, which is easier than figuring out how to transfer the keys themselves. So, that brings us to the next sort of topic Karin and I wanted to talk about, and that is when you, or someone, is named as a fiduciary, a trustee, an executor, an agent under Power of Attorney and they're acting for someone who has cryptocurrency, or they're holding it, what they need to worry about.
And two big issues are: the volatility of the value of the cryptocurrency itself and how that affects their ability to hold it under the rules that apply to fiduciaries. Fiduciaries are supposed to keep things safe and manage them, and volatility isn't typically on their dance card. They're not supposed to be holding volatile assets. And security-- many fiduciaries are not equipped to handle and retain cryptocurrency securely. So, we need to pick our fiduciaries carefully, and at the very least, we need to pick fiduciaries who can bring somebody in with the technology expertise to address this.
And finally, I’m going to ask Karin to talk to us about the basic income tax rules and some of the transfer tax considerations that apply to cryptocurrency, which is super interesting.
Cryptocurrency and Capital Gains Tax
Karin: Thank you. Well, Suzy, you mentioned the volatility and all the complexities surrounding what a fiduciary has to do if they have to administer an estate or trust with cryptocurrency in it. And I’m happy to say that the tax treatment isn't one of those complexities. The IRS came out many years ago and said that cryptocurrency is taxed like property. It is not taxed like currency. So, it’s taxed very similar to a stock. If you buy a stock for $2 and you sell it for $4, there's $2 of capital gains tax. It’s long-term capital gains tax rate, if held for more than a year. If it’s not held for more than a year, short-term capital gains tax rate.
And so, when you buy a Tesla or a cup of coffee or what-have-you with cryptocurrency, know that that sale, that purchase is going to trigger the unrealized capital gains on your cryptocurrency. I once in Seattle saw a bitcoin scanner at a coffee shop and I wanted to write a dorky little note next to it saying, “Do you realize that buying your daily coffee with cryptocurrency is going to trigger a daily tax reporting event?” But of course, I didn’t do that.
Gifting Cryptocurrency and Transfer Tax
And as far as the transfer tax issues, the estate planning and gifting issues that you mentioned, Suzy. If somebody has substantial cryptocurrencies such that they're ready to share it with their beneficiaries, be it family or charitably, there's a number of techniques that estate planners have used forever to get valuable property out of your estate, so that when it passes to your loved ones at your death, the transfer taxes, estate and gift taxes are reduced. The key there is the timing of when you make that transfer out of your estate.
With an asset like cryptocurrency that is so volatile, you can take advantage of the volatility in this instance, gift the asset in a crypto winter when the value is low; and then when we have a crypto summer and the asset goes back up in value, how magical, transfer taxes then are no longer relevant. The asset is out of your estate and can pass to your beneficiaries at your desired time. Gifting to your favorite charity with cryptocurrency is also on the rise; even more popular when cryptocurrency is a high value. But point being, you gift your cryptocurrency to your favorite charity or a donor-advised fund and you get a full fair market value tax deduction for the donation.
The charity or donor-advised fund can sell the cryptocurrency with no taxes, and then can use those cash proceeds to benefit your favorite causes. So, really a win-win. There is a little bit of paperwork. We do have some additional reporting with gifts of cryptocurrency because they're not publicly traded, so your CPA and evaluation analyst will get involved. But if you're charitably inclined, well worth the effort.
Suzy: Well, thank you, Karin. And thank you all for listening. We appreciate your time. Thank you.
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