Neither death nor taxes are something that crypto traders want to think about. It is crucial to have an estate plan, especially for those who have a lot of digital assets which would be hard for others to get to.
It is important to plan ahead to ensure that your digital currency will go to the right people in the event of your death, without causing them undue hardship or excessive taxes. It’s a good idea to consult a crypto estate planning specialist to figure out a plan that would work well for your individual situation. However, there are six preparations that many people have found to be effective that we can discuss. What is cryptocurrency?
A cryptocurrency is a digital form of currency that acts similar to the US Dollar. You can purchase goods and/or services, or trade them as you would trade shares of a publicly-traded company. Cryptocurrencies are a new addition to the financial world, but some have already become well established. These digital currencies are demonstrating their staying power and proving to be a force to be reckoned with.
What Is Cryptocurrency?
It is important to understand what cryptocurrency is to start. Since cryptocurrency is a relatively new form of currency, it’s important to understand that it’s digital. It does not have the same value as the US Dollar. Once you purchase cryptocurrency with money, your dollar becomes a digital code. Although the value of this code can increase or decrease, it is not affected by inflation in the same way that the US Dollar is. Inflation for cryptocurrencies is predictable and even consistent with deflation , a feature that exists because the supply of coins is fixed.
Types Of Cryptocurrency
Different types of cryptocurrency exist and they each have their own characteristics. It is crucial to understand the difference between them. The most common type of cryptocurrency is Bitcoin. Bitcoin is the first form of blockchain. In 2009, an unknown person going by the alias Satoshi Nakamoto proposed a peer-to-peer electronic cash system, which is now known as Bitcoin. Bitcoin is public so that everyone can see where a Bitcoin was created and where it has gone. This allows anyone to verify that a specific transaction took place without the risk of counterfeit Bitcoins or outside interference. It eliminates the need for traditional institutions such as banks.
The second most common form of cryptocurrency is Altcoin. Altcoins are basically the same as Bitcoins, but with some small changes to make them different from Bitcoin. One great example of an Altcoin is Ethereum. Ethereum is a decentralized platform that can be used to build different applications on blockchains. This means that cryptocurrency exchanges can happen more quickly, and certain actions can take place only when certain conditions are met. Currently, Ethereum is considered the second most popular cryptocurrency.
Tokens are another form of cryptocurrency. A token is a digital asset that is used on a decentralized application, or dApp. Unlike Bitcoin and Altcoin, tokens are not used as a form of currency. Discount tokens can be used to lower the costs of fees associated with making a purchase or sale. They can also be used to raise money for crowd sales. While tokens offer some advantages, one downside is that you can only use them if you have an Altcoin that is compatible with the token. If you want to use a Token that requires you to buy or sell something using Ethereum, you will need to own some Ethereum first. This enables you to initiate or finalize the transaction, while also potentially reducing the fees that may be associated with it.
How Are Cryptos Made?
To make cryptocurrency coins available, they have to be “mined.” Mining is an electronic process that can take a great deal of time, especially as the amount of coins left to mine becomes less and less. The person who mines a coin can choose to keep it or sell it to someone else at a higher price. As there are fewer coins available to be mined, the process has become more challenging, meaning that newly mined coins are being sold at a higher price. However, this also has the effect of potentially decreasing the value of each coin. Bitcoin miners are now trying to get the remaining 2.5 million Bitcoin before it runs out.
What Type Of Property Is Cryptocurrency?
What are the implications of it being property? We need to understand what type of property cryptocurrency is before we can move on to discussing the implications of it being property. Cryptocurrency is an intangible asset. This means that for the IRS and taxation, they can be recorded at acquisition costs and once an impairment test is performed, but cannot be returned due to impairment loss. ” In 2014, the IRS explained that, for tax purposes, virtual currency behaves like other property. The same tax principles that apply to regular property transactions also apply to transactions using virtual currency.
The classification of cryptocurrency depends on how it is held. It could be personal property, investment property, or business property. This means that the user has to specify what asset the cryptocurrency is being held as. If you use Bitcoin to make sales transactions as a Grocery Store owner, it would be classified as business property.
Is There A Way To Add Cryptocurrency in an Estate Plan?
When planning to include cryptocurrency in your estate, it is important to take security and safety precautions. The best way to protect your passwords is to never leave them in places where they could be compromised or found easily. Its important to share the passcode to your financial assets with the person you’ve chosen to manage them (a fiduciary) so they can carry out your wishes after you die.
The fiduciary would be responsible for holding the passcode needed to access the estate’s cryptocurrency assets and distributing them to the beneficiaries as needed and permitted by the estate planning document. Those who own cryptocurrency should be very careful when choosing an executor or trustee. If the person managing the account (the fiduciary) uses the passcode to access and manage the cryptocurrency account without anyone knowing, and they make a transfer of cryptocurrency that is not authorized by the relevant estate planning document, the transfer, while still able to be followed, would be very difficult to get back.
Crypto Estate Planning Techniques
1. Keep detailed and accessible records about your crypto
Since blockchain technology is anonymous and decentralized, it is difficult or impossible to identify all of a decedent’s crypto wallets. Without the correct credentials, it would be even more difficult to gain access to them.
It is important to have a record of all your crypto assets in a place where your executor or trustee knows how to access it. People need to be aware of the different digital wallets that are available as well as the various addresses, user names, passwords, private keys, and seed phrases that are associated with them.
Keep your records in a safe place like a fire-proof safe or a bank’s safe deposit box. Some people go as far as engraving seed phrases on metal plates to make sure they will not be destroyed. There are other security measures you can take, like using Shamir’s secret sharing or multisig wallets from companies like Casa or Unchained Capital.
Your successor trustee/beneficiaries will need your transaction details in order to properly report any capital gains taxes that may be owed. If a person’s wallet is lost, it can be difficult for the person’s heir or beneficiary to report taxes, since the wallet may not have all the necessary information. Pertinent information such as cost basis, ETH gas, or transaction fees can be lost when transferring assets between wallets, especially from hot storage to cold storage.
In addition to wallet credentials, you should leave instructions on how to access trading and tax information. This include:
- Name and contact information of crypto tax advisors
- Username and password for any crypto tax software accounts
- Information about the exchanges used for trading, including username and password
- A summary of all traditional and digital assets, including how each is titled, regardless of whether it is held individually or in an entity or trust
2. Make sure your will is valid in your state
There are two types of estates. When someone dies with a valid will in place, it is called testate succession. The best-case scenario is when your wishes are stated clearly and you indicate who you want to leave your assets to.
Intestate succession is what happens when someone dies without having a will in place. Your assets will be passed along to your chosen heirs according to the state’s probate laws. Probate is the court-supervised legal process of distributing a person’s property after their death. It can put a lot of pressure on your loved ones.
This means that the probate process will vary depending on the state in which you live. This means that if you move from one state to another, you will need to create a new will that is valid in the new state. It is advisable to contact an estate attorney in your new state of residence to ensure that any necessary changes are made to your estate documents.
3. Set up a revocable living trust
When planning for what will happen to your cryptocurrencies after your death, you can choose to set up a last will and testament alone, or you can create a last will and a revocable living trust, with the two documents working together. The difference between a will and a trust is how they transfer assets to designated beneficiaries.
A last will is a legal document that outlines your wishes and gives instructions to your executor, who is the person you have named to carry out your wishes. It does not, however, let your heirs avoid probate. Your last will and testament must still be filed with a county probate court, which will oversee the estate administration process and adjudicate any disputes. A last will only becomes active upon your death.
A living trust is legal arrangement that prevents your loved ones from having to go through probate for the assets placed in the trust. When you are alive, you control your trust. Once you die, another person takes over control of the trust.
The person who is in charge of your digital assets after you die can distribute them according to your wishes. The trust is able to be changed by the person who created it while they are still alive.
You will need to name your trust and title any future transactions and accounts in the name of the trust. . The following assets will need to be transferred to the trust by quitclaim deed: ____________________. Other assets will be included in a signed statement of transfer.
4. Create a pour-over will
If you have a revocable living trust, you will still need a pour-over last will that instructs your executor to transfer any of your assets that were not part of your trust to your revocable living trust upon your death.
If you forget to place one of your Polygon wallets into the trust when setting up your estate, it will work like this: After you die, it is revealed that your Polygon wallet contains an NFT worth $5,000. If you don’t have a pour-over will, the NFT may have to go through probate. However, if you have a pour-over will, it will automatically be transferred into the trust at the time of your death, letting your beneficiaries avoid the probate process.
5. Consider an LLC or corporation for your crypto assets
Forming a limited liability company (LLC) or corporation—known as a business entity—can help you protect your personal assets in the event your crypto business is sued. A business entity can also help you save on taxes and may provide other benefits as well. An LLC provides many benefits, but one particular benefit from an estate planning perspective is that it means your assets don’t need to be sold immediately after your death.
An LLC may be eligible for a minority interest discount or lack of marketability discount when valuing a member’s interest in the LLC. This means that the taxes your heirs would have to pay would be lower, because they would only own a part of the LLC or because the company isn’t worth as much as one that is traded publicly.
If your LLC is making a significant profit from cryptocurrency, you may want to set it up as an S-corporation or C-corporation. We recommend speaking to your accountant about this decision.
6. Support your executor/trustee
Serving as an executor or trustee can be tricky. Taking on the role of caretaker may not be something that gets people excited. It is beneficial to provide your executor with as many instructions and as much support as possible.
It is advisable to work with a professional to create a clear and comprehensive estate plan. It might be a good idea to involve your executor/trustee in your planning so that they can talk about it with you while you’re still alive.
It may also be beneficial to connect your executor with individuals who can help manage your digital assets after your death, such as estate planning attorneys or accountants who are familiar with this type of property.
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