1 6
1 6
If you tend to be private, your loved ones may never even know that you have bitcoin. Due to the anonymous nature of bitcoin, if they aren’t aware of it, your bitcoin will die with you. To avoid this result, set up some method of informing your loved ones that you’re a bitcoin holder. If you’re uncomfortable telling them now, check out a service, like Deathswitch, which will automatically inform them when you’re gone.
When a bitcoin holder dies, the beneficiaries of his will or living trust receive his bitcoin with tax basis at the fair market value on the date of death. This step-up in basis is a double-edged sword. For highly appreciated bitcoin, it may be a boon. For bitcoin that has depreciated since purchase, on the other hand, it could be a disaster.
If you have appreciated bitcoin, it makes sense to hold onto it as long as you can so that your heirs can take advantage of the step-up. The step up may be able to eliminate all taxation of the gains on your investment.
On the other hand, if you have depreciated bitcoin, it may make sense to spend it as quickly as possible and preserve your cash. Upon spending, you’ll recognize taxable losses (which may possibly result in a reduced overall tax bill) and you’ll avoid your tax basis being stepped down at death.
Most seasoned holders of bitcoin are aware of IRS Notice 2014-21. For those unaware, the notice holds that for US tax purposes, bitcoin is to be treated as property rather than currency. As such, there are some hidden estate planning traps when it comes to the death or incapacity of a bitcoin account holder. To avoid these problems, here are five estate-planning steps you need to take now.
Most states have enacted some version of the Prudent Investor Act, which requires that executors and trustees diversify investments. If someone dies holding a large amount of bitcoin, there is a argument that under the Act the bitcoin would be considered an “investment” rather than cash, and a volatile one at that. Such a classification may mean that an executor or trustee may be required under the Act to sell some bitcoin and diversify into traditional securities. This result may not be what the deceased party intended.
The good news is that the Prudent Investor Act generally allows itself to be explicitly overridden. Should you desire your executor or trustee to have the power to hold your bitcoin long-term, consider a specific provision in your will or trust absolving him from any liability for failure to diversify.
Many of us have a power of attorney document in place. This allows someone to handle our legal and financial affairs if we’re alive, but incapacitated. This person may need to handle your bitcoin. To make sure this happens, make sure that your power of attorney document explicitly allows your agent to access either your bitcoin specifically, or your digital assets broadly. And like your executor, your agent under your power of attorney is going to need access to your private key or login info.
Bitcoin isn’t like a bank account where your loved ones can simply contact the institution once your will has been probated. Without your private key (or in the case of a hosted wallet like Coinbase or Circle, your username/password), your executor will be totally powerless to distribute your bitcoin under the terms of your will.
Since most of us don’t like passing our private keys or login info around, consider using the Deathswitch option. You can always encrypt your bitcoin key or Coinbase/Circle login before uploading to Deathswitch. [Just make sure your recipient is given the decryption key for the message ahead of time!]
![](https://www.wealthmanagement.com/sites/wealthmanagement.com/files/styles/gal_landscape_main_2_standard/public/2_4_4.jpg?itok=Snk14b6Z)