Asset Protection and Estate Planing Issues For Crypto Investors
Cryptocurrency is all the rage and continues to make some coin investors small fortunes even as prices swing widely and scams emerge. These are some basic defensive measures to keep your digital wallet safe.
Crypto Fact vs. FictionOne common bundle of myths about cryptocurrency is, “My coin is creditor proof because it’s secret and no can find it and only I have the key”. Here’s why that’s false and why you shouldn’t hold crypto currency, (or for that matter, any significant amount of non-qualified investment, savings, or other assets) in your own name:
1. Any strategy that relies on “secrecy” also relies on your willingness to commit “perjury” and lie about the existence or value of your holdings in a debtor’s exam, deposition, or similar sworn testimony
2. Any U.S. court that has jurisdiction over you and your assets can order you to tender the assets to satisfy a judgment, this includes access to your crypto wallet.
3. Your crypto assets are discoverable through a variety of methods including your tax returns, where you have a legal duty to report crypto profits to the IRS.
4. Failure to report crypto gains is criminal tax evasion and that includes holdings you may be holding through an offshore trust, LLC or similar device. It has come to my attention that physicians have been targeted by marketing that pitches such schemes as being secret, tax free and creditor remote, they aren’t.
One easy place I’d look for evidence that a debtor had crypto holdings: Their social media accounts. Most investors can’t stop talking about it, hyping their coin of choice up and being triggered by any negative news or comments about their magic beans.
Think about how you hold titleCrypto assets held in your own name are subject to all your personal and professional liabilities, just like all your other liquid assets. As such, holding your coin through a properly structured legal entity that is legally distinct from your unrelated risks is best practice. Some commonly used holding structures include LLCs, Limited Partnerships, and irrevocable trust structures. Long term investors can also consider making their crypto holdings an “exempt’ asset by investing in them through qualified, and legally protected retirement plans including self-directed IRAs.
Are your crypto assets included in your estate plan?Your estate plan should include your valuable digital assets including your crypto holdings. At a minimum, it should allow the trustee of your estate to identify, take control of, and manage those assets. Some of the basics your crypto estate plan should include are:
- Access to your private key and passwords. If you die without providing access to this asset, it dies with you
- What coin you bought, when you bought it, and the purchase price
- How you are holding it, (i.e., in your own name in an LLC, etc.)
- Details on the platform you are using to hold it, (i.e., using an exchange like Coinbase vs. holding it in an online wallet or offline, in physical device like a removable hard drive)
- Any specific instructions or wishes on the management and distribution of the assets
Think about physical and digital security issuesYou may have seen horror stories about wallets ranging from thousands to millions of dollars in value being lost when a password is lost or physical device is lost, stolen or destroyed. If you are using a physical device, it should be stored in a water and fire-resistant document safe to protect it from basic, recurring risks like flood, fire, hurricane or burglary.
Make sure you understand the security differences in the basic ways you can hold coin. As a recent Tech Radar report explains,
“Despite being a digital currency, there are four different forms of storage for your Bitcoin to choose from: mobile wallets, desktop wallets, web-based wallets, and physical hardware that acts as a wallet”.
The report also advises that Bitcoin.org itself advises that you maintain two separate wallets, one with limited funds for trading and daily access referred to as a “hot” wallet and a secure, physical, offline “hot wallet” that’s stored in a safe and holds the bulk of your coin. The digital nature of purely online wallets means they are always vulnerable to online hacking and malware, so spreading your risk between several holding methods, including keeping the bulk of your holdings offline on a hardware device, is highly recommended.
This article by asset protection attorney Ike Devji originally appeared at www.PhysiciansPractice.com, the Nation’s Leading Practice Management Resource.
Is my cryptocurrency taxed? Can creditors reach my cryptocurrency? Cryptocurrency Estate Plan.