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Cryptocurrencies and NFTs (non-fungible tokens) have become hot topics in the media and amongst our estate planning clients. Even young individuals with no prior investing experience are getting involved in these new forms of digital currencies.
In simple terms, a cryptocurrency is a digital token that is gradually becoming an accepted way to purchase and sell products and services. Cryptocurrencies exist on a blockchain, which is a distributed online ledger that is aimed at decentralizing financial systems. To learn more about cryptocurrencies, please visit here.
NFTs are essentially a different form of cryptocurrency. Except instead of a token or a coin, an NFT is a unique piece of code that gives someone ownership over it. People can now purchase the rights to NFTs like photos, videos, art, audio—the sky is the limit. For example, someone purchased the first tweet ever published for $2.9 million. Other individuals are more focused on owning digital artwork, much like an art collector would purchase a famous painting. To learn more about NFTs, please visit here.
Some financial analysts see decentralized digital currency as the first step toward a mainstream virtual economy, while others still view it as a risky investment. Regardless, due to the relatively short period of time since cryptocurrencies like Bitcoin became a household name, many are unsure on how exactly to include their cryptocurrencies and NFTs as assets in their estate plan.
Here is how to include cryptocurrencies and NFTs into your estate plan.
Since digital currency does not occupy physical space, your cryptocurrency inventory is going to look different from the other assets in your estate plan. Unlike traditional bank accounts, your executor is not required to produce a death certificate for your beneficiaries to gain access to your funds. All that is needed to pass along your cryptocurrency to your loved ones are passcodes.
However, because your cryptocurrency is not tied to a traditional bank, you must be extra thorough when creating your inventory. Be sure to include any devices which may hold your passcode and log-in information needed to access your crypto accounts. These devices include all computers, laptops, hard drives, and mobile phones which you use to store your crypto information.
Secure Your Accounts
Most financial advisors will advise that you should periodically change the passcodes to your crypto accounts. Next time you do so, do not forget to inform your executor or beneficiaries. In addition, be sure to keep your passcodes, as well as your previous passcodes written down and stored in multiple locations. Obviously, this needs to be balanced with keeping such information secure. Access to these passcodes equals access to the assets.
To access your crypto accounts, your estate plan may need to include language granting the power of your executor and beneficiaries to do so. Without the proper permissions, your loved ones could be violating state and federal laws by using your passcodes to access your cryptocurrency after you pass.
Know the Risk
If you have reason to believe that your cryptocurrency investments will significantly increase in value years down the line, you may be interested in including your cryptocurrencies within an irrevocable trust. We recommend exploring this option only if your cryptocurrencies are a part of a larger investment portfolio with a trusted financial institution.
In recent years, a lot of hype surrounding cryptocurrency has resulted in an explosion of options for virtual finance. As of 2021, over 7,000 forms of cryptocurrency exist, with only very few seeming to show a potential for growth. The reality remains that the value of many of these forms of crypto can rise and fall based on a single tweet from an influencer.
Consider Using a Digital Bank
Keeping track of your cryptocurrencies can feel like a huge responsibility. However, you do not need to carry the burden alone. Digital asset platforms are available for investors who are looking for a secure network to handle the custody, trading, and staking of their cryptocurrencies. Not only do these platforms help with keeping track of inventory and value, but they also provide insurance for your digital assets. It is important to thoroughly vet any such organization before trusting your information to them.
As cybercrime and attacks continue to rise, and crypto remains an easy target for many hackers, we thoroughly recommend treading carefully and taking all necessary steps to protect your virtual investments.
Discuss Crypto with Your Financial Planner
Misinformation spreads fast on the internet, particularly when it comes to cryptocurrency. Before you make an investment, be sure you have discussed the option with a qualified investment advisor or accountant.
The two most important takeaways for investors to consider when including cryptocurrency in their
estate plan are:
- Executors and beneficiaries need to have the legal right to access the passcodes associated with their crypto accounts.
- Their chosen financial institutions can be trusted to manage their crypto accounts as needed.
As cryptocurrency is still a new concept to many, it is normal to have questions as to how it will fit into your estate plan. Speak with an experienced estate planning attorney at Sessa & Dorsey today to learn more.
If you have questions about estate planning related to cryptocurrencies, please contact us at (443) 589-5600. At Sessa & Dorsey, we consider the bigger picture at hand and advise our clients on the best estate planning tools for their specific needs and desires.
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When to Consider Using a Qualified Charitable Distribution (QCD) to Reduce Taxes
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Understanding the Ins and Outs of Charitable Giving
The Top 5 Benefits of a Trust