Estate Planning for Crytpocurrencies and NFTs

This Week's Quote:

“Live Life to the fullest and focus on the positive.”

                                  -Matt Cameron, Musician

Am I missing out on investments in crypto and NFTs?  To answer that question, I decided to do a deep dive into these types of investments.  My deep dive was in vain.  I simply do not understand the mechanics behind them or just what gives them value.  But that is just me.  Obviously, a lot of really, really bright people think otherwise and have invested huge amounts of funds into crypto and NFTs, including the money moguls, Peter Thiel and Marc Andreessen. But what if you die and no one knows your access codes and the location of your bitcoins?  It is my limited understanding but it seems to me, that P O O F – they simply disappear into cyberspace for ever and ever.  Not to mention while I am alive someone could hack my computer and confiscate my crypto or NFTs.  Warranted or not, I have a lot of fear surrounding holding these types of investments.
 
On November 17, 2022, the below WSJ article written by Cheryl Winour Munk further discusses steps in safeguarding and passing onto your heirs crypto and NFTs.

 -Mark Bradstreet

Crypto assets like cryptocurrency and NFTs are adding a whole new layer to estate planning.

Many crypto-asset owners tend not to trust third-party services, and prefer to be responsible for holding the sensitive information they need to access their assets. But that could make it hard—or impossible—for heirs to access if they don’t have the necessary information. Or, conversely, if the information, is too available, the assets could fall into the wrong hands.

What follows are tips from experts on how to safely leave crypto assets to your heirs.

Keep good records

Since heirs may not even be aware that you own crypto assets, make sure to leave detailed instructions. This includes what assets you hold, which third-party custodians you use, if any, which devices you are using if you’re self-storing, when the assets were purchased and the approximate value of the assets, says Niklas Schmidt, a tax partner with Wolf Theiss in Austria, who has written books on crypto. 

Crypto assets are different from most tangible financial assets, which typically produce physical signs of their existence along with names and addresses that one needs to access them. Even a distant piece of real estate will tend to spin off bills or insurance payments made. But with crypto assets, “It’s a different world. There might not be any interconnection,” Mr. Schmidt says. 

For estate-planning purposes, be aware that the IRS treats cryptocurrency like any other type of intangible personal property asset, such as copyrights, software or patents. These assets drive up the total value of your inherited estate, says Jennifer L. Zegel, a partner with the Philadelphia-based law firm Kleinbard LLC. State inheritance and/or estate taxes also need to be considered, she says.

New federal or state crypto regulations are likely to be enacted in the coming months and years, which could also affect tax treatment in various scenarios, Ms. Zegel says, so it is important to revisit the plan.

Under existing IRS rules, for instance, inheritors of cryptocurrency receive a step-up in the asset’s cost basis if the crypto has increased in value, so no taxes will be owed on capital gains achieved by the asset during the original owner’s lifetime. This benefit, however, could be lost if the Biden administration’s proposal to eliminate the step-up basis becomes law. 

Be careful who has access to your sensitive information

It is essential for heirs to know how to access crypto assets that are part of an estate. If you use a custodial service or services, you’ll want to leave heirs that information. If you store your private keys—strings of letters and numbers that allow access to your assets—on an old, offline computer, those assets will be lost if the device is thrown out because your heirs don’t realize its significance, Mr. Schmidt says. Similarly, if you use a hardware device to manage your crypto assets, heirs will need your seed phrase, which is similar to a master password, to gain access.

Consider leaving instructions with a trusted attorney or friend about how to access your crypto assets when you die. It’s also good to test these plans and have a backup in case something goes awry, says Sharon Hartung, founder of Your Digital Undertaker, a consultant on digital assets in estate planning.

“You need to build in other redundancies,” she says. “I wouldn’t rely on one method.”

State your intentions

Make sure your will is precise about how you want your crypto assets to be handled. Do you want the assets to be sold after your death, or passed on, for example?

There are also privacy considerations. Wills become public documents through most state probate processes, so don’t spell out private keys in the will or say how much is going to each heir. Instead, consider stating that crypto assets be put into trust for a particular heir’s benefit. That trust is a private document, which can have the more specific designations on who gets what and how things can be managed, Ms. Zegel says.

Credit goes to Cheryl Winour Munk. Published November 17, 2022 in the Wall Street Journal.
 
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This Week’s Author, Mark Bradstreet

-until next week