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Cryptocurrency and Estate Planning: What Executors Need to Know

Millennials are not the only ones investing in cryptocurrency. In a recent article titled “Help! My dad is investing in cryptocurrency” from Monterey Herald, a woman is worried about her elderly father investing in this new type of money. She is concerned for both his financial well-being and for what she may have to address when it is time to distribute his estate to her siblings.

Crypto, or cryptocurrency, is more than a passing fad. It has become an alternative purchasing and investment tool, with more than 8,000 different types of crypto available, representing billions in assets. You can use crypto to buy a Tesla automobile, an airplane or real estate. Regulations have recently been issued to permit banks to take custody of digital currency. One credit card company is even developing a card to allow consumers to spend digital cash using a credit or debit card.

Perhaps the ultimate recognition of this new currency comes from the IRS, which now requires owners to report income and capital gains earned on the sale of crypto and assess taxes on it, the same as other traditional types of investments.

As the executor of her father’s will, the woman mentioned above will be responsible for distributing her father’s entire estate, including the cryptocurrency. As a fiduciary, she will have to learn what it is and how to manage it.

When people buy crypto, they receive a digital key. This is usually a string of numbers, symbols and letters representing the asset on a secure ledger. The key cannot be replaced, and if it is lost, so are the crypto holdings. There are many different ways to store this key, so the daughter needs to know where the key is stored and how to access it.

The best way forward would be for the daughter to spend time with her father learning about cryptocurrency, what types he owns and how they are secured. Their conversation should also address his wishes for the investment. Does he want his grandchildren to receive it as crypto, or would he prefer to liquidate it before he dies and place it in a trust? Does he want her to liquidate it after he dies, and have it become part of his estate?

When it is time to settle the estate, if the crypto has not been liquidated into cash, she will need to value the assets at his date of death, like any other investment and may either sell the currency or distribute it to his beneficiaries. If the estate is valued at more than $12.06 million, federal estate taxes will need to be paid on all assets, including the cryptocurrency. There may also be state estate taxes due.

She should also speak with an estate planning attorney about cryptocurrency, and also read his will to learn if the cryptocurrency is included. If he does not have a will or an estate plan, now is the time to make an appointment with an estate planning attorney and get that in order.

Being an executor used to require learning about possessions like art or jewelry collections or fine rugs. Today, the executor needs to add a cryptocurrency education to their task list.

Reference: Monterey Herald (Feb. 19, 2022) “Help! My dad is investing in cryptocurrency”

What are the Negatives of Investing in Cryptocurrency?

When Matthew Mellon died suddenly in 2018, he was worth almost $200 million. He owned nine sports cars, a watch worth more than most American’s annual income and left one daughter the priceless collection of Mellon family silver. However, he also left an estate mess for heirs, according to a recent article “How a cryptocurrency fortune crippled a deceased billionaire’s estate” from the daily dot.

Aside from the sports cars, watch and the family silver, most of Mellon’s assets, estimated at more than $193 million, were in a cryptocurrency known as XRP, managed by the company Ripple. One court document noted the cryptocurrency made up 97% of the entire estate. Mellon’s estate disaster was unlike most situations when assets can’t be accounted for. His multi-million cryptocurrency assets were secured by digital keys in a digital wallet. No one in the family knew where any of this was.

The online community and attorneys assumed the XRP assets were lost forever. However, there were a few twists to the story.

Matthew Mellon was a member of two powerful banking families, the Mellons and the Drexels. He reportedly inherited $25 million as a young man and served as chair of the New York Republican Party Finance Committee, to which he’d made a six-figure donation. He was married to Tamara Mellon, founder of the Jimmy Choo shoe brand. The marriage was one of two, both ending in divorce.

His investment in cryptocurrency began with a $2 million investment in XRP in late 2017, after testing the cryptocurrency concept with Bitcoin. He became a global “ambassador” for XRP. According to Forbes, at one point his investment was worth nearly $1 billion, but the rally ended, and the currency depreciated rapidly during 2018.

The family was doubtful about his involvement in XRP because Mellon struggled with substance abuse. The day he died of a heart attack, was the day he was scheduled to check into a drug rehabilitation facility to treat an OxyContin addition.

Left behind after his death were two ex-wives, three young children and an outdated will. There was no mention of the estimated $193 million in XRP. The keys to the cryptocurrency were allegedly kept on devices under other people’s names in locations across the country. This secrecy led estate lawyers scrambling to gain control of his XRP, which fluctuated up and down by as much as 30% in the weeks after his death. Every day they did not have the ability to sell, increased the risk of not being able to liquidate his biggest asset.

Based on his relationship with Ripple, his attorneys were able to get in contact with the right people at the company and gain access to his XRP. However, this does not happen for regular people, no matter how much the cryptocurrency is worth.

Gaining access to the digital currency was just the start. Mellon had an agreement with Ripple that he could only sell off a small amount of XRP daily. The attorneys were able to negotiate a slightly higher number but could not move fast enough to generate the cash needed to pay off the estate’s debts. This made sense for Ripple—a big sell-off would have an extremely negative impact on XRP’s value, just as wide-scale dumping of a stock would cut its value.

Mellon was also years behind on income tax returns, and the IRS wanted a piece of his multi-million dollar estate. In addition, two dozen entities, mostly private individuals, claimed he owed them money, ranging from a few hundred to nearly six million. There was a posthumous sexual harassment claim filed against him by a housekeeper. The estate paid $60 million in federal estate tax, and debts were settled in January 2021, almost three years after his death because of the inability to sell the cryptocurrency.

Most people don’t lead such a complicated personal or financial life. However, in this case, an updated will would have spared the family all the drama and stress of a high-stakes estate disaster. Proper estate planning could have protected the estate from a big tax bite and kept the Mellon’s family business private.

Reference: daily dot (Dec. 23, 2021) “How a cryptocurrency fortune crippled a deceased billionaire’s estate”

Can Cryptocurrency Be Inherited?

Cryptocurrency accounts are not like any traditional investment accounts. However, their growing prevalence and value means they need to be considered for more and more estate plans, especially when they take an enormous leap in value. These accounts are more vulnerable, according to the recent article “Millennial Money: What happens to your crypto if you die?” from The Indiana Gazette, and in most cases, there’s no way to name a beneficiary for your crypto accounts.

If you store your cryptocurrency on a physical device at home and a few friends know your key—the crypto password that grants access to a crypto wallet—one of those friends could very easily wander into your home and steal your crypto without you even noticing.

On the flip side, if you don’t share your key with anyone and become incapacitated or die, your crypto assets could be lost forever. Knowing how to store these assets safely and communicate your wishes for loved ones is extremely important, more so than for traditional assets.

How is crypto stored? Crypto “wallets” are digital wallets, managed on an app or a website, or kept on a thumb drive (also known as a memory stick). How you store crypto depends in part on how you intend to use it.

A “Hot Wallet” is used to buy and sell crypto. They are usually free and convenient but may not be as secure as other methods because they are always connected to the internet.

“Cold Wallets” are used to store crypto for a longer period of time, like a deep freezer.

The Hot Wallet is more like a checking account, with money moving in and out. The Cold Wallet is like a savings account, where money is kept for a longer period of time. You can have both, just as you probably have both a checking and savings account.

Whoever holds the “keys” to the wallets—whoever has custody of the password, which is a series of randomly generated numbers and letters—has access to your cryptocurrency. It might be just you, a third-party crypto exchange, or a hybrid of the two. Consider the third-party exchange a temporary and risky solution, as you don’t have control of the keys and exchanges do get hacked.

Naming a beneficiary in your will and adding a document to your estate plan containing an inventory of cryptocurrency and any passwords, PINs, keys and instructions to find your cold wallet is part of an estate plan addressing this new digital asset class.

Do not under any circumstances include any of the crypto information in your will. This document becomes part of the public record when filed in court and giving this information is the same as sharing your checking, saving and investment account information with the general public.

Some platforms, like Coinbase, have a process in place for next of kin, when an owner dies. Others do not, so it’s up to the crypto owner to make plans, if they want assets to be preserved and passed to another family member.

Preparing for cryptocurrency is much the same as preparing for the rest of your estate plan. Keep the plan updated, especially after big life events, like marriage, divorce, birth, or death. Keep instructions up to date, so the executor and beneficiaries know what to do. Bear in mind that crypto wallets need occasional updates, like every other kind of digital platform.

Reference: The Indiana Gazette (Nov. 7, 2021) “Millennial Money: What happens to your crypto if you die?”

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