Unless you include your cryptocurrency in your estate plan, it could disappear forever. We explain how to protect this important digital asset.

Cryptocurrency and Your Estate Plan

Cryptocurrency saw a huge surge in popularity a few years ago. Celebrities were promoting it in commercials, and suddenly it seemed like everyone was investing. However, it’s still a fairly new phenomenon, so people naturally have a lot of concerns when it comes to leaving their crypto to someone else. 

Our clients often ask:

  • What happens to cryptocurrency when the owner dies?
  • Does crypto go through probate?
  • How do I include cryptocurrency in my estate plan?

We answer these questions in detail below.

How to Leave Your Cryptocurrency to Someone Else

Unfortunately, you can’t just transfer your crypto accounts by giving someone else your password. It’s not that easy. Because of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), only a named “fiduciary” can access someone’s digital assets if they die or become incapacitated. 

Step 1:

First, you’ll need to name a beneficiary for your cryptocurrency in your will or trust. If you do not specifically list your cryptocurrency in your estate planning documents, it could be lost forever. Since there is no other physical documentation of ownership, there’s no way for your beneficiaries to know that it exists. 

Step 2:

Next, you can use your estate plan to appoint a fiduciary. The fiduciary will be able to manage or distribute your cryptocurrency, according to your wishes. They could be: 

  • The executor of your estate
  • The successor trustee of your living trust
  • Your power of attorney agent 

Step 3:

Finally, you’ll need to leave instructions in your estate planning documents on how to access your cryptocurrency. Although it’s technically a digital asset, cryptocurrency is not always stored in a digital wallet. Some people keep it in “cold storage” devices like phones, USB drives, and external hard drives. Storing it offline keeps it safe from hackers, but it’s easy for a small object like a USB drive to get lost or overlooked after someone dies. 

If you use a digital wallet, you’ll need to provide the address, password, and private key. If you use a physical storage device, it’s a good idea to keep it in a locked safe or in a safety deposit box at the bank. You’ll also need to leave instructions in your estate plan that explain where to find the device and how to access the cryptocurrency stored on it. You can use a physical document, or store your instructions in a digital vault.

Cryptocurrency and Power of Attorney

If you have a durable power of attorney (general or financial) you can give them access to your cryptocurrency accounts. That way, if you are ever physically or mentally incapacitated, they can manage the funds according to your instructions. They will not own the cryptocurrency, but they will be able to sell it or reinvest it on your behalf. 

Does Crypto Go Through Probate?

Yes, cryptocurrency is a probate asset. However, like most assets, you can put your cryptocurrency in a living trust if you want to avoid probate. The account will be managed by your successor trustee, just like all your other financial assets.

Cryptocurrency is also subject to capital gains tax, and is treated the same way as shares. So if your crypto has gained in value and you leave it to someone else in your will, they will have to pay capital gains tax. One way to avoid this is to leave it as a gift to your favorite non-profit organization. They will be able to sell it without having to pay capital gains tax, so your crypto will be more valuable as a charitable gift. 

Expert Estate Planning in the Phoenix Area

Do you have your digital assets in order? If you have questions about how to include cryptocurrency in your estate plan, schedule a consultation at Phelps LaClair. We’ve been helping Arizona residents protect their assets for over 40 years, and that experience adds up. For expert estate planning advice that’s always up-to-date, contact us to make an appointment at a location near you.

Photo by Jievani Weerasinghe on Unsplash  used with permission under the Creative Commons license for commercial use 4/17/2024.

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