Can Crypto Digital Assets Be Inherited? Yes, Here’s How
The growing value of crypto has owners asking some serious questions — like what will happen to my money if I die? How can I guarantee my beneficiaries will inherit my cryptocurrency?
Crypto digital assets can be inherited — but owners may face technical, financial and legal challenges when trying to pass them down. Being prepared will help owners keep the process of inheriting crypto assets as simple as possible.
The Challenges Crypto Beneficiaries Often Face
According to one 2017 study, around 4 million bitcoin had been lost forever at the time — and that number is likely to be much higher today. Many of these coins may be still around, locked in wallets on old hard drives owned by people who no longer have access to the private key.
They may also have been lost to hard drive or exchange failures. Quadriga CX lost more than $190 million of bitcoin when the owner, the only person with access to the exchange’s cold wallet key, died on a trip to India. Bitcoin wallets are very secure — secure enough that if an owner doesn’t provide the private key to their inheritor, the contents could be inaccessible.
Legally, establishing the ownership of cryptocurrency wallets is intentionally difficult. An anonymous currency wouldn’t offer much utility if there were some centralized authority that knows who owns a particular wallet file or address.
Crypto doesn’t leave a paper trail. If you never talked about your wallet and didn’t mention it in your will, your beneficiaries may not even know it exists. As a result, it may never fall into your estate’s remainder.
Crypto stored on an exchange can present additional problems. In 2017, an unidentified crypto investor in Colorado unexpectedly passed away, leaving behind a small fortune in bitcoin. The coins were stored on an exchange, and while the family knew they existed, could prove the ownership of the account and their relationship to him, releasing the assets required a lengthy legal process.
As bitcoin increases in value, processes like these could become even more difficult. Leaving instructions on how to access the stored funds can ensure your inheritors will have access to your funds, even if you’re not there to provide guidance.
How to Make Inheriting Cryptocurrency as Simple as Possible
In an article for legal publisher Nolo, estate planning lawyer and writer Erin de Cespedes lays out the steps crypto owners should take to ensure their investments will be available to inheritors. In addition to listing cryptocurrency in your will, you should also include information about your digital wallets, a memorandum including details like passwords, keys and PINs, and a guide on how your inheritors can access your assets.
This information should help you avoid some of the most common challenges inheritors face when trying to access inherited crypto.
How you pass on your crypto assets will also matter. When you die, the law requires your will to go through a process called probate. Some financial firms and other businesses offer advances on probated wills, providing inheritors money in advance while court proceedings are ongoing. The cost of these services can be paid out when probate ends and your beneficiaries gain access to your crypto assets.
You can also avoid probate, to an extent, with legal vehicles like crypto trusts. Avoiding probate isn’t necessarily the best option, and trusts won’t allow your beneficiaries to sidestep tax law and filing requirements. However, if you want your inheritors to have access to your crypto assets as soon as possible, it may be the right choice for you.
In any case, speaking to an estate planning attorney will help you understand the options you have available and the legal process your beneficiaries will go through.
You should also consider taxes and prepare your beneficiaries for the financial and legal challenges they may face as new crypto owners. Inherited cryptocurrency is treated as property and taxed like any other asset — valued on the date of death and subject to capital gains tax. As of 2020, property in excess of $11.7 million will also be subject to the 40% estate tax.
Preparing Crypto Assets for Inheritance
Your beneficiaries can inherit cryptocurrency, but you’ll want to take certain steps to make the process as simple as possible. A will that includes information on your crypto assets will help ensure inheritors know about your investment and have the resources they need to access it.
You may also want to consider a crypto trust or similar legal vehicle that will provide your beneficiaries with access to your assets without probate proceedings. A bit of planning will go a long way in making this financial transition go smoothly.
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