Despite its inherent volatility, cryptocurrency remains popular with people all over the world. NBC News reported that at least 22% of Americans have owned cryptocurrency assets. Cryptocurrency is so new that the laws in most states have yet to catch up with how people are using it. Since its traders tend to be younger than other investors, not many people have incorporated their digital assets into their estate plans.
FastWill makes it easy to include digital assets in your will. Here’s what you need to know to ensure that your loved ones can access your digital money.
What is Cryptocurrency
Cryptocurrency is a digital asset that is used as a form of exchange, similar to traditional hard currencies like the US dollar or the euro. However, unlike traditional currencies, cryptocurrency operates independently of a central bank. Instead, crypto uses encryption techniques to regulate the generation of units of currency and verify the transfer of funds. Cryptocurrency units are recorded on a decentralized ledger.
This can be a confusing concept. So, just think of cryptocurrency as digital money. Instead of using physical bills or coins, cryptocurrency is often stored in digital wallets and can be sent and received electronically, much like email or text messages. Each cryptocurrency has its own unique code or algorithm, which determines how it is created, how transactions are verified, and how it can be exchanged in the future. The most common cryptocurrencies are Bitcoin, Ethereum, and Tether.
One of the key features of cryptocurrency is that it operates on a decentralized network, meaning there is no central authority or institution that controls or regulates it. This is referred to as “the blockchain.” In theory, the blockchain makes cryptocurrency resistant to fraud or manipulation and could ideally give people more privacy and security than they have with central bank accounts.
Who Owns Cryptocurrency?
Studies have shown that cryptocurrency traders tend to be younger than traditional stock market investors. According to JG Wentworth, 94% of all cryptocurrency buyers are Gen Z or Millennials (people between 18 and 40 years old). One study concluded that the average age of cryptocurrency investors was 35, with 71% of investors being under the age of 44.
Why are younger people flocking to crypto? There are a few factors at play. Cryptocurrency is a relatively new and emerging asset class, so it may be more appealing to younger people who are more tech-savvy and open to new investment opportunities. Traditionally, there were more barriers to entry for people who wanted to invest in the stock market. In contrast, cryptocurrency exchanges and trading platforms are generally more accessible and easier to use.
All that being said, the people who invented cryptocurrency exchanges have been slow to adopt the kind of beneficiary designations that investment firms and banks with cash-on-demand accounts use, which can leave people’s loved ones in the lurch when there is an unexpected death.
Cryptocurrency Exchanges and Beneficiary Designations
In traditional finance, brokerage accounts can be transferred through beneficiary designations, which means that the assets in the account can be passed directly to the designated beneficiary outside of the probate process. Usually that means the named beneficiary gets immediate access to the person’s account. However, the process of transferring cryptocurrency after someone's death is a bit different, and it can vary depending on the exchange that holds the cryptocurrency.
Coinbase, for example, allows users to designate a beneficiary for their account but only if they work with an attorney to make an estate plan. According to Coinbase, “It's not currently possible to name a beneficiary directly within your Coinbase account, rather, in the event of your death, we would follow our standard ownership transfer procedures described above.”
Here’s the ownership transfer process when someone dies. The beneficiary must provide a death certificate, a copy of the will or trust document, and proof of the beneficiary's identity. All of this is sent to Coinbase and once the documentation is verified, the beneficiary can access the account and transfer the cryptocurrency to another wallet. This could take some time and it doesn’t give anyone quick access to the account. It would be much simpler if Coinbase simply allowed the beneficiary designation directly within the account. Instead, there is a lot of red tape.
Other cryptocurrency exchanges may have different procedures in place for transferring cryptocurrency after someone's death. Some exchanges may not allow for beneficiary designations at all. For example, Bitstamp’s user terms and conditions don’t clearly address beneficiary designations at all. A representative from Bitstamp says “In case of the death of a customer, the remaining assets are transferred to the notary in charge of the execution of the will or the relevant governmental agency in charge of this.” That response is not reassuring.
What can we learn from Coinbase and Bitstamp? That it’s really important to understand how your chosen cryptocurrency exchange handles account beneficiaries and to plan accordingly.
What Happens to Cryptocurrency if You Die Without a Will?
If a person dies without a will and leaves behind cryptocurrency, the cryptocurrency will go through the probate process, just like any other assets that person owned. Probate is the legal process that determines how a deceased person's assets will be distributed, including any debts and taxes they owed at the time of death.
When an estate goes through probate, the court will appoint an executor or administrator to manage the deceased person's assets, including digital assets. The executor or administrator will be responsible for identifying and valuing the cryptocurrency and distributing the remaining assets to the deceased person's heirs or beneficiaries. These decisions are mandated by the state’s law, which means that the government ultimately decides which family members receive the assets. The only way to avoid this is to have an estate plan.
Cryptocurrency can present unique challenges in the probate process, especially if the person who passed away didn’t leave clear instructions on how to access or manage their cryptocurrency. Cryptocurrency is typically stored in digital wallets, and if the executor or administrator does not have access to the wallet's private key, the cryptocurrency may be inaccessible or lost.
If you have cryptocurrency assets, FastWill recommends that you create a will or trust that specifically addresses how your cryptocurrency should be managed and distributed after your death.
How to Include Cryptocurrency in Your Estate Plan and Will
Cryptocurrency can be inherited through a will, so it’s important to understand the specific steps you need to take in order to properly include these assets in your estate plan.
Here are some key points to keep in mind:
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Always inventory your digital assets! The first step in planning for digital assets is to create an inventory of all your digital assets, including cryptocurrencies, digital bank accounts, social media accounts, and any other online accounts that hold monetary or even sentimental value.
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Specify how you want your digital assets to be distributed. In your will, you should say how you want your digital assets to be distributed. You can designate specific people to receive your digital assets or you can leave instructions for your executor to distribute your digital assets as part of your overall estate plan.
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Consider the legal and tax implications of cryptocurrency. Generally, the IRS still treats cryptocurrency as property subject to capital gains taxes when it is sold. This means that if you sell cryptocurrency, you may be subject to capital gains tax on any profit you make from the sale. The amount of tax you owe will depend on how long you held the cryptocurrency, your tax bracket, and other factors. If you're involved in cryptocurrency, it's wise to consult with a tax professional to make sure you're properly reporting your transactions.
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Utilize a digital wallet. To simplify the transfer of cryptocurrency, you may want to consider using a digital wallet. A digital wallet is a secure online storage location for your cryptocurrency that can be accessed by your designated beneficiaries.
Use beneficiary designations if your exchange permits it. In some cases, cryptocurrency can be transferred through beneficiary designations, similar to a 401(k).
