Bitcoin & Estate Planning

February 24, 2018

 

Bitcoin & Estate Planning

 

Agenda:

1.     Get a will

2.     Make a tax plan

3.     Dig some holes in your backyard (or find an executor you trust)

 

Disclaimer – This is not legal or investment advice.

 

T'is the season to be... morbid. Have you thought about what would happen to your crypto if you die? Could your loved ones access it if you got hit by a bus later today? I know my family would be clueless on how to find mine. After I finish writing this blog, I’m going to take my own advice.

  

Step 1: Make a Will

 

First you need to write your crypto assets into your will.  If you don’t have a will yet, you should get an attorney to draft you one that complies with all the formalities of your state. If that feels like a cumbersome task, there are also several free templates online that you can fill in, just make sure you get it notarized and have two people witness when you sign it.

 

Be careful of the Prudent Investor Rule. Many states have enacted rules where the executor has a fiduciary duty to use reasonable care and caution with your estate assets during the administration  period. This means they might have to sell your Bitcoin and buy some government bonds. If this isn’t what you intended for your hard earned crypto portfolio, you can specifically declare in your that you want the assets to stay in Crypto by adding a line in your will that goes something like "I understand the risk of cryptocurrency, but I want my assets to remain in cryptocurrency until (insert heir's name) chooses to do what he/she wishes with them. My executor is not liable under the prudent investor rule should the value of the portfolio decrease during the administration of my estate." 

 

If you don’t make a will, you will be considered to pass away “intestate” and each state has their own way of distributing your assets. The rules for this are very detailed, but generally it goes like this: 

 

1.     If you’re married and if you have kids with the spouse you’re married to– it all goes to your spouse (the idea is that he or she will safeguard it for the kids).

2.     If you’re married but you have kids from a previous relationship, the surviving spouse gets 1/2 and the other 1/2 is divided between your kids. (Avoids a Cinderella situation)

3.      If you’re not married, but you have kids, the kids get 100%.

4.     If you have no spouse or kids, it goes to your parents equally.

5.     If you have no spouse, kids, or parents, it goes to your siblings or if they are gone too, it will go to their kids.

6.    If none of the above are still alive, it will go 1/2 to your mother, and 1/2 to your father’s brothers and sisters, and trickle down to any of their living heirs.

7.     If nobody at all is still alive, it “escheats” to the state. (My property law professor said to remember this one by thinking “OH SHIT!”).

 

If you are ok with that order, you don’t actually need a will, but you still need to give your heirs a way to access your crypto. Here is an example of a chart you could include in your will, to help them gather your crypto assets. 

 

 

 

 

 

What you need:Location:Password:

Google Auth.Iphone 7+1234

CoinbaseonlineLook in Safe #1

MyetherwalletLaptopLook in Safe #1

Mycelium walletIphone 7+Look in Safe #1

BinanceOnlineLook in Safe #1

Key to Safe #1BackyardLook in Safe #2

TrezorBackyardLook in Safe #1

 

2. Make a Tax Plan

Since Bitcoin is “Property” it is included in estate taxes. In the wonderful country of America, federal estate taxes only apply if your estate is greater than $ $5,340,000. See Revenue Procedure 2013-35, Section 3.32, Internal Revenue Service, U.S. Dep't of the Treasury. This is MUCH better than Canada! Essentially only .2% of Americans will ever pay this tax, so I won’t get into the details of it. There are also State “Estate” or “Inheritance” or “Death” Taxes depending where you live.  Some crypto-millionaires will need to be aware of these.
 

·      District of Columbia: $1,000,000 or greater estate – taxed on a sliding scale up to 16%

·      Oregon - $1,000,000 or greater estate – taxed up to 16%

·      Massachusetts - $1,000,000 or greater estate – taxed up to 16%

·      Rhode Island $1,500,000 or greater estate – taxed up to 16%

·      Minnesota - $1,800,000 or greater estate – taxed up to 16%

·      New Jersey - $2,000,000 or greater estate (and die before Jan 2018) – taxed up to 16%

·      Connecticut - $2,000,000 or greater estate – taxed up to 12%

·      Washington - $2,129,000 or greater estate – taxed up to 20%

·      Vermont - $2,750,000 or greater estate – taxed up to 16%

·      Maryland - $3,000,000 or greater estate – taxed up to 16%

·      Illinois - $4,000,000 or greater estate – taxed up to 16%

·      North Carolina – $5,000,000 or greater estate – taxed up to 16%

·      New York – $5,250,000 or greater estate – taxed up to 16%

·      Maine - $5,490,000 or greater estate – taxed up to 12%

·      All other states – no death tax!

See https://www.thebalance.com/state-estate-tax-and-exemption-chart-3505462

 

Otherwise, when you pass away, a new cost basis is established for your heir on the day you die.  For example, if you bought your Bitcoin for $100/coin, and you die when it’s worth $20,000 per coin, your heir adopts the $20,000 per coin cost basis. If the heir sells your crypto the next week, for $21,000 per coin, they only have to realize the $1,000.00 gain, rather than the actual gain of $20,850 per coin. If the price drops at the time they sell, they can use the new cost basis and  apply any losses against their income.

 

3. Find an Executor you trust with your private keys.

 

I cringed a little just typing that subheading! Without your private keys, how is your family ever going to get your crypto? But if your executor knows where your private keys are, they could steal all your coins without a trace, and your family may be none the wiser. To be safe, you could draft in your Will that you leave "the contents of your safe deposit box" to your heirs. Then you could put a trezor/ledger, or a paper wallet in the safe deposit box, and the executor would never even know what was in it. Keep in mind, at any time the Government can order any Bank to turn over the contents of your safe deposit box, or seize it and force you to pay any back taxes you might owe. To keep with the spirit of Bitcoin, it might be best to just have your own safe deposit box hidden somewhere at home. If you own your land, you could also bury it, and include something in your will to indicate to your heir where it is buried. The world of securing our own assets has some challenges, but many of us think it's worth it for the autonomy.

 

If you keep all of your crypto assets on an exchange, all you have to do is put “I give the contents of my coinbase/binance/bittrex/gdax/kraken account to my heir” and then the executor of your estate will send the exchange your death certificate and the exchange should transfer the ownership of the account appropriately. Just make sure you let your family know what exchanges you are using, so they know where to send your death certificates.

 

If you've got Bitcoin on an old phone or computer, move it to cold storage now, you don't want your coins to contribute to the  4 million  BTC "lost forever" stats.  

See http://uk.businessinsider.com/nearly-4-million-bitcoins-have-been-lost-forever-study-says-2017-11?IR=T
 

Until then, live long and prospurr!

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