Make an Estate Plan for Your Bitcoins

Make an Estate Plan for Your Bitcoins
By: James L. Nelson and Heather Rooney McBride

A cryptocurrency is a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation.
Most financial advisors say they would advise their clients not to invest in cryptocurrencies, such as Bitcoin and Ethereum. The markets for these and other digital currencies are extremely volatile and create substantial risk. Assuming you plan to “hodl”, it is important to think about how your cryptocurrency will transfer on your death.
A large problem for these new assets is proving ownership of cryptocurrency. The way the blockchain technology works, each currency holder has a unique key. Possession of that key grants access to the wallet and assets, and there is no other proof of ownership. Consequently, estate plans must be written so that the estate of a decedent account holder has access to the digital key, but without inadvertently revealing the key to anyone else who could use it to gain unauthorized access to the account. Simply writing your “wallet” into your will could expose all your funds to the world because in probate the will becomes a public record. Further, without the proper authorization after your death, accessing your “wallet” or key could be a violation of state and federal law.
If not properly accounted for, cryptocurrencies pose another major headache; the IRS recently sent out a warning letter regarding cryptocurrencies reminding everyone that any income stemming from cryptocurrencies must be reported on tax returns. The IRS searched the roughly 126 million electronically filed tax returns that were filed for 2013-2015 and found that only approximately 800 individuals reported transactions related to Bitcoin, the most popular of the cryptocurrencies. Those figures mean it is very likely that taxpayers are not reporting their cryptocurrency transactions, and the IRS has now taken steps to remedy the issue. In November 2017, the IRS secured an order from a federal district court directing the enforcement of a summons against Coinbase, one of the major cryptocurrency exchanges. This order has provided the IRS with the identities and transaction histories of 14,000 Coinbase customers, each of whom had over $20,000 of cryptocurrency trades between 2013 and 2015.
Another potential problem with cryptocurrencies that arises from their volatile nature is that it can be difficult to equalize inheritances between beneficiaries. Without having an idea what the assets might be worth at the time of death, one beneficiary could potentially have a much greater, albeit unintentionally greater, bequest than others.
The attorneys at RMS are knowledgeable in estate planning. We understand that cryptocurrency is an asset unlike any other that needs to be handled in your estate planning documents with care. Consider creating or reviewing your estate plan with an experienced attorney to ensure your objectives are achieved. If you have questions about estate planning, or how to create an effective and enforceable estate plan, please call and schedule an appointment with one of Rooney McBride & Smith, LLC’s estate planning attorneys.

[1] Read more: Cryptocurrency Definition | Investopedia https://www.investopedia.com/terms/c/cryptocurrency.asp#ixzz5QKUZKF1H

[1] United States v. Coinbase, Inc., 17-CV-01431-JSC, 2017 WL 5890052 (N.D. Cal. Nov. 28, 2017).