Cryptocurrency, the Blockchain, and Estate Planning

On 3 January 2009, the bitcoin network came into existence. Since then bitcoin, and other internet currencies have grown in popularity and credibility. Cryptocurrencies can provide a secure and universal form of payment. They can be stored digitally and can operate without the use of a middleman or bank. This article will cover the basics of cryptocurrency, how the blockchain works, and how cryptocurrencies can fit into your estate plan.

What is the Blockchain?

The blockchain is a decentralized ledger of transactions across a peer-to-peer network that uses algorithms to record and store transactions.

All transactions made on the blockchain are stored digitally with reliability and anonymity. Each transaction, or “block,” verifies every transaction before it and is verified by every transaction that comes after it. Once this nearly instantaneous verification process happens, the transaction is authorized, and the assets can change ownership. This provides users with an immutable and permanent audit trail of all transactions. The verification process also makes the blockchain nearly impenetrable to hackers, identity theft, and fraudulent transactions. In order for a transaction to be reversed, all blocks that came after the subject transaction must agree to reverse it. Although this creates an extremely secure system, it also creates a system that is essentially permanent and irreversible.

The blockchain is not just for monetary transactions though. It can be used for contracts, transfers of real property, automotive sales, voting, healthcare records, and more. The blockchain provides an encrypted network that would keep users’ information private and anonymous, making it an ideal system for sensitive information. Blockchain users are given a pseudonym for all transactions on the blockchain. This pseudonym can only be removed to reveal a person’s true identity if that person chooses to do so. Otherwise, there is no method of accessing a user’s personal information.

The technology that empowers the blockchain gives users access to a global-wide system. This allows transactions all across the world at a nearly instantaneous speed. It is more secure than wiring and allows users to quickly and easily perform transactions from the convenience of anywhere internet access is available.

What is Cryptocurrency?

Cryptocurrency is an internet based digital token designed as a medium of exchange. Some cryptocurrencies are generated via a process known as “mining,” where computers solve complex digital puzzles to verify transactions. During this process they are rewarded in a type of cryptocurrency. Many cryptocurrencies have a cap on the amount of each tokens in the market at any given time, creating it a deflationary pressure and increasing the value of the tokens.

Advantages of Cryptocurrency

Some of the benefits of Cryptocurrency include:

• It is decentralized, making it theoretically immune from government entanglement
• No third-party involvement: transactions are direct from peer-to-peer, eliminating the need for a bank or middleman
• Cryptocurrency are often designed to be resistant to inflation – a potentially serious concern when dealing with fiat money
• Maintains a log of all transactions, including accounts, balances, and assets
• Minimal processing fees, if any at all
• There are currently thousands of types of cryptocurrency to transact with, with some of the leaders being Bitcoin, Litecoin, Ethereum, and Ripple.

The Unknowns of Cryptocurrency

Although Cryptocurrency has been around for over ten years, there are still some unknowns:

• Regulations – as a global currency, different countries will likely take different approaches to the regulation of cryptocurrency.
• Global adoption – cryptocurrency’s popularity is on the rise; it can already be used as a payment method at hundreds of different companies, including PayPal, AT&T, Microsoft, and Subway.
• Will it completely replace fiat currency – the current usage of fiat currency has led to inflation, large value gaps between the dollar exchange rate, and mass production expenses. Cryptocurrency is solely digital, not subject to inflation, and global.
• Irreversible transactions – although this provides for a strong security system, it can lead to accidents that are difficult to fix. If the receiver is unwilling to send back an accidental transaction, it likely cannot be undone.

Cryptocurrency in Your Estate Plan

Adding your cryptocurrency investments into your estate plan is simple. It’s as convenient as opening your phone or computer, downloading the free software, and making a transfer. Your estate plan can include cryptocurrency, contracts, property, and important records.

Taxation of Cryptocurrency

Currently, the IRS is treating cryptocurrency as property for tax purposes, this means:

• It is not treated as a type of currency
• It does not pay dividends or accrue interest
• It may require an appraisal for estate tax purposes
• The value may fluctuate in the same way as real estate

Benefits of Having Cryptocurrency in Your Estate Plan

Cryptocurrency’s versatility makes it an essential part of your estate plan. Since it is universal, it can easily be transferred to offshore accounts, combined with other international assets and properties, and is inherently mobile. The blockchain itself is hypothetically impossible to break or hack into, providing an unbeatable level of protection for your assets. Further, the anonymity and pseudonyms give users a confidential experience that protects your identity from anyone lacking access to your blockchain wallet.

The ease of use associated with cryptocurrency makes it accessible to any user who has access to the internet. The software used to make transactions is free to download and use. It can be downloaded to mobile phones, computers, tablets, USB drives, and other forms of digital storage. This valuable intangible asset is at the tip of your fingers anytime you need it. There are hundreds of cryptocurrencies accessible to users, with the most popular being Bitcoin, Litecoin, Ethereum, and Ripple.

Cryptocurrency as an Investment Opportunity

With the world shifting towards the use of cryptocurrency, coins such as Bitcoin, Ethereum, and Ripple are seeing their prices steadily rise.

Quick Facts:

• The price of bitcoin peaked in December 2017 at nearly $20,000 per share
• Despite periods of increased volatility, the price of bitcoin has remained relatively stable during the year of 2020, and it is expected to continue to appreciate
• Other types of cryptocurrencies are seeing steady rises in adoption and price

Structure of Cryptocurrency in Your Estate Plan

When cryptocurrency is added to your estate plan, there are specific steps you must take to ensure your beneficiaries are able to inherit from your blockchain wallet:

• Provide your fiduciary or trustee with your password/”key” to take control of your account upon your death or store your digital key in a vault or safety deposit box. This ensures immediate access to transfer and distribute.
• No need to provide a death certificate: with your key, your fiduciary can immediately access your wallet.
• Estate planning documents must grant the fiduciary power to access, retain, and manage your digital assets to avoid liability under privacy laws.

Step-by-step:

1. List your specific cryptocurrency types in your will, and update as needed;
2. Include information about your digital wallets and grant your fiduciary access;
3. Create a separate contemporaneous memorandum to your will with passwords, keys, and PINs to your digital wallet;
4. Include a step-by-step guide to explain how your beneficiaries can access your cryptocurrency;
5. Store in a secure area – if you lose your password or it gets out to the public, your cryptocurrency is no longer accessible or protected;
6. Be sure to update regularly, at least once a year, or anytime you change your password.

Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA)

RUFADAA governs access to a decedent’s digital accounts after death. It allows a fiduciary access to manage digital property but does not inherently allow access to electronic communications – although a decedent can consent to this in their estate planning documents. A majority of states, including Colorado, have adopted a version of this act, so it is important to be sure your estate planning documents comply with it.

Cryptocurrency and Offshore Trust Accounts

Since cryptocurrencies are universal, it is the ideal asset to be used in conjuncture with an offshore trust account. To transfer your digital wallet to a trust, give the trustee the password to your account along with a contemporaneous memorandum explaining what your wallet contains and how to access it. These documents must be updated regularly to ensure they remain current, as a lost or out of date password can mean your cryptocurrency is inaccessible forever after death.

Increased value of cryptocurrency may be free of additional estate tax or gift tax if it is held in an offshore irrevocable trust – giving your beneficiaries the full value of your assets. Further, transactions are nearly free of tax charges, have a lower international transaction fee, and can almost always be immediately converted to cash.

Cons of International Cryptocurrency

• Cryptocurrency is not currently legal in all countries
• Unlike fiat currency, cryptocurrency is not currently backed by the Federal Reserve System
• Different countries will likely enforce different regulations; however, it is currently unregulated in the United States
• If your digital key is lost, the cryptocurrencies are not recoverable

The Cook Islands Trust

The Cook Islands provides the ideal location for an offshore trust to protect your assets, including cryptocurrency. For a full description of the benefits of using the Cook Islands for an asset protection trust, click here.

Quick Facts:

• S. verdicts are not recognized on the Cook Islands
• Higher standard of proof
• Psychological barriers
• No contingency fees
• Short Statute of Limitations: 2 years for fraudulent conveyances
• Loser pays
• Use of trust protector (responsible for supervising and directing the acting trustee)

NEVIS LLC:

• Excellent alternative for Offshore Asset Protection
• Potentially lower costs than a Cook Island Trust
• S. verdicts not recognized
• Favorable jurisdiction for defendants
• Psychological barriers

Opening an offshore bank account:

In order to escape U.S. jurisdictions and court orders, funds, including cryptocurrencies, held in offshore entities must be held in banks outside the United States. Switzerland or Lichtenstein banks are excellent options, which generally have an account minimum of $250,000 or more. Cook Islands Banks will typically open an account with only $50,000.

However, there are cons to opening an offshore account. FACTA and other tax disclosures require grantors to comply with all applicable laws. There can be trustee fees, international bank fees, and maintenance fees. Further, trustees are typically in control of these accounts.

When transferring cryptocurrency into an offshore account, it is crucial to use a trustee whom you fully trust, or to store your password in a safety deposit box or other secure location. Since transactions are essentially irreversible, if a password falls into the wrong hands it could have disastrous consequences. Maintaining your cryptocurrency in an international trust is a great long-term solution to ensure your beneficiaries receive the full value of your estate.

Contact Mile High Estate Planning to Learn More

If you would like to learn more about how you could secure your assets and keep your hard-earned wealth out of reach from potential creditors or lawsuits, contact us today for a no-obligation consultation. Mile High Estate Planning can help you protect and pass your cryptocurrency to the next generation in the most efficient way possible.