Cryptocurrency is finally becoming accepted in the estate planning world. It just received another big boost in Texas with the enactment of HB 4474, the Virtual Currency Bill. You certainly cannot ignore cryptocurrency, with its $2 trillion valuation, but you probably want to be cautious for now.
What is Cryptocurrency
Here is an abbreviated explanation. Cryptocurrency is digital cash. It is transacted through a blockchain, which is the name for the basic technology. A blockchain is a distributed ledger that is verified by a peer-to-peer network.
There are many types of crypto, including Bitcoin, Litecoin, Ethereum, Ripple, Stellar and NEO. The owner holds the crypto in a “wallet,” held either offline or online, that is accessed via a blockchain address and a private key.
An owner can conduct a transaction with his crypto through the blockchain. Once a transaction has been added to the blockchain, it cannot be altered. Because the blockchain is held through the network, there is no one central participant.
To access the crypto held in an owner’s wallet, you need to have the blockchain address and the private key. An owner can have numerous blockchain addresses to help preserve privacy.
Cryptocurrency and Estate Planning
Which brings us to estate planning. Crypto is a digital asset. You cannot hold it in the palm of your hand, bury it in the backyard, or stash it in your safety deposit box. Your fiduciary (power of attorney agent or executor) will likely not know you own crypto unless you tell him. Otherwise, your crypto investment may go to the grave with you.
Your fiduciary may not be able to legally access your crypto if you, and he, do not follow the Revised Uniform Fiduciary Access to Digital Assets Act. You must give your fiduciary written access to your digital assets. Even then, to access the assets your fiduciary will have to provide, at a minimum, a written request, a copy of your will, trust or power of attorney, and information that links the digital account to you.
If you have a trust-based estate plan, you may run into additional problems. Most trustees and traditional asset custodians have not been willing to accept virtual currency into a trust. On the other side of the transaction, most commercial online exchange companies have not supported trust accounts.
Virtual Currency Bill
All of that may change in Texas with the new law, which allows the 216 Texas state-chartered banks to provide safekeeping services for virtual currencies.
There remains the question of how to fund an account or trust with cryptocurrency. There is not a universally accepted method, but suggestions range from sending the crypto to your trustee’s online wallet account to transferring your private key to a secure physical device and giving that device to the trustee. The new Texas law will probably lead to a few new methods.
That is not to say that cryptocurrency is a good investment for a retiree. The value of crypto fluctuates wildly, making it a risky investment for many portfolios.
So far, the Treasury and IRS are treating virtual currency as property and applying existing laws to it. Notice 2014-21 is the most recent guidance and it is downright unhelpful. It does not, for example, explicitly address the gift, estate, and generation-skipping transfer tax consequences of a crypto transaction. The SEC, meanwhile, is still trying to decide if cryptocurrencies are unregistered securities.
So, should you dive into the crypto waters? It is up to you, but from an estate planner’s perspective the water still looks pretty murky.
Virginia Hammerle is president of Hammerle Finley Law Firm. She is an Accredited Estate Planner, has been Board Certified in Civil Trial Law for 25 years, and recognized as a Super Lawyer for the past 10 years. She blogs regularly on senior issues and the law and has a monthly newsletter. Contact at firstname.lastname@example.org.