Every Bit Counts – Estate Planning and Your Bitcoin Assets

Our firm has written extensively about the shifting dynamics of estate planning and ensuring that digital assets are properly accounted and managed. Bitcoin certainly falls under that category. Why? Because the IRS announced in 2014 that Bitcoin will be treated as property for U.S. tax purposes. That means if you buy or sell bitcoin currency, you will need to report either gains or losses on the transactions, and if you received bitcoin as payment for goods and services, you will have to report those receipts as gross income. Also, if you have a substantial amount of bitcoin currency, who receives that asset when you pass on?

But first, let’s do a quick overview of bitcoin.

Bitcoin is a form of “cryptocurrrency,” meaning that you can exchange value anonymously, quickly, and without the intervention of a third-party intermediary (e.g., a bank) meaning there are no transactions costs. A bitcoin owner is issued a “wallet” that functions much like a bank account. The wallet contains the authentication information needed for each bitcoin owner to send and receive the currency. A bitcoin wallet has a public address and a private authentication key (i.e. important information you need to ensure is transferred to the executor of your estate).

Estate Planning Challenges with Bitcoin

Bitcoin assets cannot be owned and managed by a trust and there is no way to make pay-on-death designations. Furthermore, there is no mechanism for joint ownership since the persons with access to a wallet and the associated private key are the only ones with access to the bitcoin assets.

This means that, without a plan in place to transfer bitcoins after your death, there is a risk of you losing the bitcoins forever.

As you can see, the structure and mechanisms associated with bitcoins create unique challenges for proper estate planning purposes, according to a fantastic article written by the Morris Law Group.

Nevertheless, multiple options exist for you to effectively transfer bitcoin assets. First, you can easily incorporate detailed instructions for beneficiaries or trustees on how to access your wallet in a letter of instruction. Second, you could make copies of your wallet and either give those copies to trusted beneficiaries and/or store them in a safe location that can be accessed upon your death (e.g. a safety deposit box). Third, you can create a multiple-signature wallet that requires at least two authentication keys in order for bitcoins to be transferred. This would allow you to create three authentication keys and give one to a beneficiary and another to a trustee. When you pass on, the beneficiary and trustee would be able to access and distribute the bitcoin assets in accordance with your directives.

Sit Down with Your Estate Planning Lawyer

If you own an intangible asset like bitcoin, you need to ensure an effective plan is in place on how to make those assets part of your estate plan. You do not want hundreds or thousands of dollars worth of bitcoin currency to suddenly be lost simply because you failed to write down the authentication key is as a simple directive that can be included in your estate plan. Additionally, at InSight Law, we are partnering with companies like Directive Communication Systems to ensure we are providing our clients with a way to handle all of their digital assets (including Bitcoins). Contact an experienced estate planning lawyer in your area today todiscuss these issues and other estate planning issues.