In the last several years, cryptocurrencies like bitcoin have seen their public image rise considerably. While the idea of owning cryptocurrency seemed like a distant possibility for laypeople only a few years ago, these financial instruments are gaining popularity more quickly than state or federal laws can often keep up with them.
Many individuals who own significant sums of cryptocurrency must consider how to address these assets in their estate plan, which can present some interesting complications. Unlike a currency with relative stability like the dollar, cryptocurrency values may fluctuate wildly within a matter of days, or even hours in some cases, much like stocks in a single company. This may complicate efforts to use cryptocurrencies to skirt hefty regulations or taxation.
Currently, it is sometimes possible to transfer cryptocurrency to an individual in a another state with lower tax rates before that individual liquidates it to dollars. When effective, this practice may allow an individual to avoid hefty taxation at the state level. However, the fluctuating value of the asset may completely overwhelm any advantages that this offers. While the transfer may allow an individual to dodge significant taxation in probate, for example, it is of little use if the asset itself fluctuates in value by 30 percent in a matter of days. Until these complications are sorted out over time, using cryptocurrency in estate planning remains a very aggressive and risky prospect, however potentially rewarding it may also be.
If you or someone you love is venturing into cryptocurrency ownership, as much of the public is, it is crucial to consider all the financial and legal implications of doing so. An experienced estate planning attorney can help you examine your financial circumstances and determine strong strategies you can use to protect your interests while including exciting new financial instruments like cryptocurrency.
Source: Puget Sound Business Journal, “Beware of these cryptocurrency estate planning pitfalls,” Steven Schindler, March 12, 2018