Around 59.1 million Americans owned cryptocurrency in 2021, and this number will naturally rise as this digital asset continues to gain popularity. Big companies are investing in cryptocurrency and starting NFTs, which will continue to bring in more people to the space. In New Jersey, it’s possible for you to pass on your crypto after your death.
Seed Phrase
The seed phrase is the most challenging aspect of passing on your crypto. Because this type of currency is decentralized, each person is responsible for its security. If someone gets your seed phrase and steals it from you, then there isn’t a way to recover it, unless you can catch them trying to withdraw it from an exchange. You could contact the exchange to report your stolen crypto, along with a copy of the police report and proof that it was stolen.
Many people recommend never telling anyone your seed phrase, but you’ll need to find a way to pass the phrase on to your intended beneficiary. There are different ways you could go about it, depending on which route you feel comfortable with. You could leave behind instructions for the beneficiary on how to find your seed phrase in your estate plan. Some people store the information in a bank safety deposit box.
Not everyone understands how crypto works, so you should include directions on how they can access the assets. They may have to download Metamask, or they may need to plug in your hardware wallet. If you use a PIN and password for your hardware wallet, remember to provide this information as well. You may also want to include guidelines for keeping the assets safe from hackers.
Executor of Estate
State law holds executors accountable for distributing assets in line with a testator’s wishes. Thus, it’s unlikely that they would steal your cryptocurrency because they may face legal repercussions for doing so. You could discuss your concerns with an estate administration lawyer to clearly understand the risks with different methods of distributing your estate.
Cryptocurrency Exchange
If you hold cryptocurrency on an exchange, then it might be possible to arrange for your beneficiary to obtain your seed phrase through the exchange. Coinbase offers a “vault” feature that stores your seed phrase in the vault for a beneficiary. They would be able to access it after your death if you state in your will that you’re giving them the assets in your Coinbase account.
Taxes
The government taxes cryptocurrency, so you may want to consider the tax implications of passing on your crypto. IRS charges capital gains taxes when you sell cryptocurrency at a profit. On the other hand, you might be able to write off losses. Taxes are usually higher when you sell after holding for less than a year. The higher your personal income tax bracket, then the higher your capital gains taxes are as well.
Incapacity Planning
Another aspect of your estate plan to consider is incapacity planning. You might want to appoint a trusted person under a power of attorney to manage your investments if you were to lose mental capacity. However, with the risk of cryptocurrency assets being stolen without the ability to recover them, you may decide it’s best to not give anyone control over your crypto if you become incapacitated.
You could, however, still have your appointed attorney-in-fact manage your bank accounts to continue paying your bills. There’s no obligation to give them full control over all of your investments and finances. An estate administration lawyer can help you draft a power of attorney which only gives your appointed agent the control you’d want them to have.
Because legislation is still in its early stages regarding cryptocurrency, you may want to check the law on an annual basis to ensure your estate plan still makes sense for your needs. Consulting with a New Jersey estate planning lawyer is an easy way of structuring your distribution in a way that comes with the smallest tax burden. Contact The Knee Law Firm at 201-996-1200 to set up an appointment with one of our attorneys at our Hackensack office.