Cryptocurrency: Your Florida Estate Plan and Wallet Terminology
When transferring your cryptocurrency to other people, either during life or at your death, it is important to be educated on the fact that it could have an estate and gift tax consequence.
Potential Federal Estate and Gift Tax Implications
The IRS currently considers cryptocurrency to be “property.” Since it is considered “property,” federal gift and estate tax laws apply. Therefore, it is crucial to stay updated and be aware of the annual estate and gift tax exemptions, especially since cryptocurrency is so volatile.
Currently, the federal estate and gift tax exemption amounts for 2022 are $12.06 million for individuals and $24.12 million for married couples. It is crucial to make sure that your estate planning provisions are designed to minimize any gift and estate tax consequences.
If you own cryptocurrency that has greatly increased in value, or which you anticipate will greatly increase in value, it is wise to discuss with your estate planning attorney ways you can minimize estate and gift tax consequences while you are alive and have full capacity.
Cryptocurrency and Estate Planning
It is hard to believe that laws change slower than technology advances. However, this is a reality we must contend with, especially with the advanced technologies and concepts underlying the crypto-world and cryptocurrencies. Therefore, if you hold crypto assets of any kind, your estate planning attorney should be someone familiar with cryptocurrency, NFTs and similar assets, as well as the rapidly evolving law in this field.
In the crypto-world, cryptocurrencies are generally stored in such a way that little personally identifying information is tied to them. Usually, only the owner knows the codes needed to access and transfer crypto assets. Crypto owners must plan accordingly lest they be lost forever at the owner’s death. Therefore, crypto owners (and their estate planning attorneys) should document specific instructions for accessing crypto assets so that these assets can be transferred to others.
These factors create unique challenges when it comes to dealing with cryptocurrency when planning your estate. A well-thought-out and comprehensive estate plan ensures that you, your selected fiduciaries and your beneficiaries know about and control what happens to your cryptocurrency upon your death, instead of letting it disappear into the abyss of lost accounts.
Cryptocurrency Wallet Terminology
The way you store cryptocurrency adds an additional layer of complexity to estate planning. Therefore, it is probably a good idea for you, your fiduciary and beneficiaries to become aware of the different types of ways you can hold cryptocurrency and the basic terminology (plus, it makes good conversation for the golf course or dinners).
- Custodial Wallet. A “Custodial Wallet” generally means that a third party, such as a crypto exchange, holds the cryptocurrency. This is similar to how a bank keeps your money in a savings account. While this is viewed by a lot as the most convenient option and there is less concern about “losing your keys,” the potential downside of having the cryptocurrency in another party’s possession is that they could freeze your funds or be subject to an attack.
- Cold Wallet. A “Cold Wallet” generally means that a physical storage device (i.e., a USB drive) stores your cryptocurrency offline. The potential downsides of this option are the cost of the hardware and that the device may be a small object that is easy to misplace or easily stolen. However, many people view this as the most secure option for storing cryptocurrency because it’s not as prone to hackers when it’s offline.
- Hot Wallet. A “Hot Wallet” generally means that it is a desktop, web-based, or mobile application that stores your cryptocurrency online (also sometimes referred to as a “Software Wallet”). While a hot wallet is convenient, the largest drawback is that cryptocurrency is stored online and is subject to the risk of being hacked and/or stolen.
No matter how you store your cryptocurrency, it is imperative that your trusted decision-maker knows how/where it is stored, as well as how to access it. It’s important to educate them on how to access all security keys, seed phrases, usernames, passwords, and associated emails and phone number information.
Those needing assistance with estate planning may contact me at firstname.lastname@example.org.