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What You Need to Know About Cryptocurrencies and Estate Planning?

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The popularity of cryptocurrencies has grown exponentially in recent years, and if you own any, you’re well aware of how they can grow or depreciate in value over the course of only days or weeks. As an heir, this can have an impact on your inheritance and what happens to your assets once you pass away. If you want to ensure that your estate plan is up-to-date with your crypto holdings, here’s what you need to know about cryptocurrencies and estate planning.

Three Reasons to Have an Estate Plan If You Buy Cryptocurrencies

An estate plan is one of the most essential things you can do for your loved ones while you are still living. As a result, your assets will be distributed to the beneficiaries you choose after you pass away. Some people see the purchase of cryptocurrency as a short-term investment. Others don’t give a second thought to how their purchase may affect their long-term financial goals. Knowing that life is finite, it’s important to have an estate plan in place before purchasing cryptocurrencies to prevent them from being locked up in the event of your death. Owning cryptocurrency necessitates an estate plan for three reasons:

You Can Avoid Probate

Probate is a court-supervised process that decides how a dead person’s property will be divided, either according to his or her will or state law. Even if someone doesn’t have a will, probate may still be needed. Taxes and legal fees that come with transferring property from a dead person to a living person are the reason for probate. You need a will and a revocable living trust so that when you die, your cryptocurrency assets can be passed on without going through probate. With a will, you can leave certain things to certain people. With a living trust, you can give more control over how your estate is managed both while you are alive and after you die. Both are important if you have cryptocurrency because they make sure that your heirs will be able to get to it when they need to.

It Ensures Your Heirs Receive What You Intended To Give Them

If there’s one thing we know about life, it’s that it doesn’t last forever. This means that anything can happen at any time, including an accident or illness that leaves us unable to take care of ourselves and our affairs. When you have a will in place, your heirs are able to access your cryptocurrency assets without having to go through a lengthy court process. However, if you don’t have a will in place when you pass away, and your heirs try accessing your cryptocurrency assets, they may find themselves facing legal challenges as well as taxes and fees associated with transferring property from one person (the deceased) to another (the heir).

Minimizing the Cost of Inheritance Taxes

Many people think estate planning is only for rich people, but that isn’t true. Whether you own cryptocurrencies or not, estate planning is essential for everyone because it ensures your loved ones won’t be faced with unnecessary expenses after you die. For example, many people aren’t aware of inheritance taxes which are based on how much money they inherit and where their beneficiaries live. In most cases, the inheritance tax is between 15% and 40%. The good news is that with proper estate planning, these costs can be minimized by ensuring your beneficiaries inherit all of your property instead of just part of it, so they pay less in taxes overall.

It Helps Protect Your Family from Fraud

One of the main reasons why estate planning is important if you own cryptocurrencies is because it helps protect your family from fraud. While some may choose to take advantage of a person’s death, others may simply become confused about what should happen with their assets when someone passes away. Either way, having an estate plan in place helps ensure your family receives what they’re supposed to receive while keeping them safe from scams and other fraudulent activity associated with handling someone else’s assets.

Do your research about estate planning before buying cryptocurrencies.

Before you jump into crypto, it’s important to make sure your estate plan is in order. If you’re not familiar with estate planning, don’t worry; you’re in good company. Most people are surprised when their attorney tells them that trust isn’t just for their very wealthy clients. In fact, even if you’ve saved only $50,000 or $100,000 for retirement or your kids’ college funds, a trust may be right for you because it allows money left behind to be distributed according to your wishes—and it can avoid hefty probate fees too.

Everyone needs a will—even if they don’t think so right now—because no one knows what tomorrow holds. But most of us also need a revocable living trust (or some type of legal entity) to keep our assets out of probate while we’re alive. A living trust lets you control how your assets are managed and passed on after death without having to go through court proceedings. Plus, if you have minor children, a living trust can help ensure that your kids receive their inheritance as quickly as possible after you die. This way, minors won’t have to wait until an executor has gathered up all of their assets and paid off any debts before receiving their inheritance (which could take years).

A living trust makes sense for almost everyone—but it’s especially crucial for anyone who owns cryptocurrency or other digital assets like stocks or bonds. Why? Because these assets may not be easily transferrable once you pass away. If there is no person named in your will or trust documents to manage them, then those assets may never get transferred properly—and might even be lost entirely. There is good news, though: You can avoid these problems by holding cryptocurrencies in a special kind of trust called a grantor retained annuity trust (GRAT).

What is a GRAT?

A GRAT is essentially an irrevocable trust set up with yourself as trustee and beneficiary. The trustee receives income from investments made with money from the GRAT each year but must pay back part of that income each year too. This means that assets in a GRAT will appreciate faster than they would in a typical trust because you’re paying less tax on them—but it also means you have to be willing to give away some of your assets while you’re still alive.

If your goal is simply to transfer wealth without paying hefty estate taxes, then setting up a GRAT can be an effective way to do so—especially if you plan on holding cryptocurrencies for several years before passing them along. By using a GRAT instead of just transferring cryptocurrencies directly into your children’s names (or leaving them in a will), you can save thousands or even hundreds of thousands in estate taxes.

Discuss with an attorney about your cryptocurrencies and estate plan

An estate plan covers all of your final wishes, including how your assets will be divided up after you die. These days that might include some cryptocurrencies, whether they’re stored in an online wallet or a physical one. If you don’t yet have an estate plan in place, you need to speak with an attorney immediately—as in today. And if you do have an estate plan, it’s time to make sure it includes provisions for cryptocurrency holdings. Here are some steps you can take right now:

Make Sure Your Will Covers Digital Assets

A will is one piece of an estate plan; another is trust. If you own any digital assets (such as Bitcoin), they should also be included in your trust. The reason? Because digital assets may not transfer properly through probate court, which means there could be legal implications down the road if someone other than you inherits them through your will or living trust.

Consider Adding a Special Needs Trust

This type of trust is used for special needs beneficiaries who don’t have access to their inheritance immediately upon death. For example, let’s say that you have two children—one who has special needs and another who doesn’t—and both are named beneficiaries in your will. In such cases, it can make sense to set up a special needs trust for your disabled child that allows him or her to receive funds over time rather than all at once.

Find Out if Your Digital Assets Are Protected by Insurance

Some cryptocurrencies are insured by third parties like Coinbase; others aren’t protected at all. If your cryptocurrency holdings aren’t insured, then you need to look into how they’ll be passed on after your death (whether through an estate plan or otherwise).

Consider Hiring a Lawyer Who Specializes in Cryptocurrency Law

There is still a lot of confusion about digital assets, especially since cryptocurrencies are so new. A lawyer who specializes in cryptocurrency law can help ensure that your digital assets are properly accounted for in your estate plan and that everything is properly executed upon your death.

Understand the tax implications

Uncle Sam will want his share in most situations, so be sure you understand how cryptocurrency is taxed. There are two scenarios that may apply. If you’re trading a cryptocurrency for another cryptocurrency (or vice versa), any gains are treated as capital gains, and they’re subject to your regular income tax rate. In contrast, if you used either fiat or cryptocurrency to buy a tangible good or service—like a pair of shoes—then it’s not taxable because it falls under something called Section 1031 like-kind exchange rules. However, if you received anything other than cash for your virtual currency, it counts as ordinary income on your taxes.

For example, if you traded one type of cryptocurrency for another and then used those coins to purchase goods or services, then you have an ordinary gain equal to the difference between what you paid for them and their fair market value at the time of receipt. Similarly, if someone gave you some Bitcoin as payment for a product or service rendered, then that would count as ordinary income. So think twice before accepting cryptocurrencies in lieu of cash payments! On top of that, keep in mind there may be state-level taxation implications, too, depending on where you live. Talk to a CPA or estate planning attorney about how these assets should be handled with regard to estate planning documents. It’s not just about your own taxes—it’s also important to make sure your heirs don’t pay any unnecessary taxes when they inherit your assets.

Decide if you will pass on ownership or control.

In some cases, you will pass on ownership of cryptocurrency; in others, you’ll just be passing on access. If you decide to give someone control over your assets, you should make sure they are trustworthy. Just like a bank account or other valuable property asset, a cryptocurrency needs proper protection if you are handing it over to an heir. That means setting up accounts with two-factor authentication (2FA) and creating recovery information that can be used if a password is forgotten. 2FA is simply using the second form of security (the second factor) for logging into a site or service—usually by providing a code sent via text message or generated by an authenticator app like Google Authenticator. It adds another layer of security beyond just a username and password. When done right, there’s no way someone could steal your cryptocurrency without also having access to your phone. But don’t stop at 2FA.

 Make sure any documents related to cryptocurrencies (like passwords, recovery questions, etc.) are stored securely offline in case something happens to your computer or smartphone. Also, note that laws around inheritance and crypto vary from country to country, so check out the laws before deciding how much access you want heirs to have after you’re gone. It’s a good idea to let them know about it, too—some people may even be interested in learning more about cryptocurrency and may be willing to help with its management if they inherit it. It’s also worth noting that estate planning doesn’t just apply when someone dies; you can make a plan for what will happen if you become incapacitated as well. If your assets aren’t controlled by a trust or corporation, then an heir might be able to gain control of them through legal means if there is no will specifying otherwise.

Bottom Line

Investing in cryptocurrencies is not like any other investment, but it’s a whole new world. A lot of people don’t even realize that cryptocurrencies exist, much less understand how they work or what they could mean for estate planning. If you want your loved ones to have control over their money, it’s probably time to start researching how cryptocurrency could impact your will or trust. If you have more questions about it all, don’t hesitate to reach out to an estate lawyer that is well versed with cryptocurrency laws because only they can help you figure out what you need to know about setting up a solid estate plan.

Comments (2)

This website is really hard to read because of how long the lines of text are.

Kasia Wardzyńska

Thanks for your notice, we have just corrected it 🙂

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