A growing number of Washington, D.C. and Maryland residents are gifting or bequeathing virtual currencies such as bitcoin to their heirs. If the current trends hold, it will soon be common for people to inherit login credentials alongside hard assets such as real estate.
Planning for the disposition of virtual currencies presents unique legal challenges. You will want to get advice from somebody who is deeply familiar with the underlying blockchain technology that makes bitcoin possible, as well as the governing legal frameworks.
As a lawyer, I have been dealing with new technologies for most of my career. I presently advise a council in Washington, D.C. with Fortune 500 tech companies. When my private clients ask me to plan estates that include virtual currencies, here is some of the advice I give them:
1. Keep physical records of virtual currency transactions.
If you cannot access your bitcoins or other virtual currency, they may be gone forever! In fact, a whole industry has sprung in the wake of bitcoin's success to help people recover lost currency. But even the experts need some good records to have a chance. Some experts have estimated that about 20% of all bitcoins (worth about $25 billion) are lost permanently. You don not want your bitcoins among the 20%.
Because paper and ink never malfunction, I recommend keeping a physical written record of all virtual currencies you own, where and when they were purchased, the amounts in which they were purchased, and information how to access your virtual currency. You should keep all your records in a safe place. Depending on the value of your currencies, you may want to invest in secure storage such as a bank safety deposit box.
2. Make sure your representative/trustee can access your virtual currency.
Because it is often helpful for the person handling your virtual currency to be tech savvy, some people appoint a special representative or trustee specifically for digital assets. The person handling the disposition or maintenance of your digital assets will need access to your accounts. This may include login information, private keys, passwords, backups of your information such bitcoin wallets, etc.
3. Arrange for Power of Attorney over virtual currencies.
Suppose you are incapacitated and unable to handle your own finances. Virtual currencies are incredibly volatile and failure to manage them quickly can have very big consequences. You may therefore want to consider giving somebody you trust power of attorney over your virtual currencies, and perhaps other assets as well. The legal document should specifically grant access to necessary information systems and documentation necessary to faithfully implement your investment priorities.
4. Understand the Prudent Investor Rule.
Both Maryland and Washington, D.C. have adopted versions of the prudent investor rule, which may require your personal representative or trustee to get rid of highly volatile assets such as bitcoin in cases where holding onto the assets would generally perceived as too risky. Even though anyone reading this article has probably read many true stories about people who made millions of dollars thanks to bitcoin, a liability-conscious representative or trustee may feel a need to play it safe.
A solution is to indemnify your representative or trustee against liability when he or she acts in accordance with your wishes by express provisions in your will or trust agreement. In granting indemnity, you can ensure the person you trust feels confident implanting your investment strategies consistent with your own personal risk tolerance and opinions about the virtual currency market.
5. Hire a professional to help you save taxes.
Because bitcoin is often used in the same way as money, many people imagine it gets treated the same for tax purposes. However, the IRS classifies virtual currency as property when doing your taxes. The classification of bitcoin as property has important legal implications. An experienced attorney or tax professional can help you understand many issues involving taxes on virtual currency assets, such as the following:
· Income taxation
· Capital gains taxation
· Gift/Estate taxation
· Step-up in Basis and Step-down in Basis issues
· State of Maryland inheritance taxation