6 Must-Know Estate Planning Steps for Crypto Owners
Estate planning is important for everyone. However, cryptocurrency introduces a challenge many traditional assets don't have. Even if your loved ones legally inherit your crypto, they may never be able to access it without the right information.
Fortunately, MoneyLion consulted the experts, who suggested a few planning steps to put in motion now that can help prevent digital assets from disappearing forever.
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1. Tell Your Estate Planner You Own Crypto
Many investors keep cryptocurrency relatively private, but that can become a major problem during estate planning. Digital assets should be discussed just like any other significant investment so your estate documents can properly account for them.
Barry E. Janay, Esq., founder and CEO of The Law Office of Barry E. Janay, P.C., pointed out that cryptocurrency is “unique” because heirs need both “legal authority and practical access.” Traditional assets typically only need the legal authority. However, heirs can’t open a cold crypto wallet without a private key, he stressed.
Janay said somewhere between 11% and 18% of bitcoin gets lost permanently “due to lost keys or owners dying without providing heirs instructions on how to access it." Even worse, he noted, “there's no password reset option and a court order would have no consequence because there's no person to obey it."
2. Create a Complete Inventory of Your Digital Assets
Your heirs can't inherit assets they don't know exist. Scott Rahn, founding partner at RMO Lawyers LLP, said one of the most important steps is to “make sure the people who will administer your estate know what you own and have a way to access it."
Janay advises his clients to create an inventory of their crypto assets, whether it’s hardware, software or a combination. Next, he recommended creating “an access map where the hardware or any backups live, [and] how the two-factor authentication and password manager work."
That includes documenting what digital assets you have, where they're held and how an authorized executor or trustee can locate the information needed to access them.
3. Keep Private Keys Separate From Your Estate Documents
In the process of crypto estate planning, people should be careful that in providing access, they’re not also accidentally exposing their crypto. Janay warned against putting passwords or seed phrases directly into wills or trusts, saying, "These documents can easily be copied and reproduced, or worse, become part of a public court record. Once the keys are public, that crypto is as good as gone."
Also, Rahn stressed, "Back up your backup." Whether that's secure physical storage, a safety deposit box or another secure solution, you don't want to rely on a single location.
4. Choose and Prepare the Right Fiduciary
Crypto often requires more technical knowledge than traditional investments. Rahn said that estate planning documents should clearly define a fiduciary's authority when managing digital assets.
In some cases, the crypto holder may need to walk their executor or trustee through the instructions, such as how to locate assets and make time-sensitive decisions, Janay said.
"Having a trusted and knowledgeable person hold the keys is essential, but it's also important to educate the beneficiaries before something happens,” he added.
5. Update Your Crypto Estate Plan as Your Holdings Change
Crypto portfolios can evolve quickly through new purchases, wallet changes and different storage methods. Experts recommend reviewing your estate plan annually unless something has changed.
Key times to review, Rahn said, are “If you've acquired new cryptocurrency, moved assets to different wallets or changed how those assets are stored."
6. Don't Forget Taxes and Incapacity Planning
Death isn't the only situation that requires planning. Powers of attorney, tax reporting and evolving digital asset laws all need attention before an emergency occurs.
Janay reminded that "crypto is treated as personal property for IRS purposes, so they are subject to capital gains [and] estate tax.”
However, he said, a disability or incapacitation is much more likely, and that’s where the power of attorney (POA) comes in. Clear estate planning documents can help avoid uncertainty and disputes.
Crypto requires additional preparation in estate planning. Rahn stressed the importance of having a close relationship with your estate planner “where you're comfortable candidly discussing your holdings, [allowing] them to maximize the value of the planning process."
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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