What’s in Your (Digital) Wallet? Estate Planning for Crypto and NFT Assets
Some early investors in cryptocurrency and non-fungible tokens, or NFTs, have accumulated significant wealth.
But the extreme volatility and evolving tax treatment of these assets are good reasons to think long and hard about managing them in the context of estate planning. Generational gifting strategies and charitable planning may save on estate taxes and allow for further appreciation of these assets outside of the estate.
But first, how can such volatile and often illiquid assets even be valued for estate planning purposes? It’s an essential step in proper planning, as the inclusion of crypto and NFTs may potentially cause an otherwise non-taxable estate to become taxable. Even with a step-up in basis, there may be income tax considerations. Only a qualified appraiser should make that call, and IRS guidance is still a bit murky as it relates to a qualified appraisal, so please take extra care when dealing with this issue.
It’s worth stressing here that getting tax planning right is critical, and failure to comply even as regulations evolve can have extremely serious consequences, including forcing the use of an additional and unintended gift tax exemption, or even causing there to be tax owed if the IRS determines that the value of the gift exceeds the available exemption.
The custody and security of cryptocurrencies and NFTs present another planning challenge. Striking the right balance between preserving the security of private blockchain keys and other access points now, and providing access for a third-party fiduciary later, isn’t easy. But at the very least, the executor of an estate that includes crypto and/or NFTs will need a road map to help identify, locate, and eventually access these digital assets.
Making gifts during the grantor’s lifetime can generate significant benefits, including the appreciation of the gifts outside of the grantor’s estate. For example, a grantor could gift the assets into an LLC. The manager of the LLC would then have general management and investment responsibilities over the underlying assets. The issue of custody and security cannot be emphasized enough, and the grantor or a very close and trusted third party could serve in that LLC manager role.
The interests in the LLC can in turn be gifted into one or more trusts for the benefit of future generations and/or possibly charities. These trusts can be created as directed trusts in Delaware (or another jurisdiction that allows for directed trusts), utilizing a corporate administrative trustee. In this scenario, the manager of the LLC can also serve as the investment direction advisor to the administrative trustee, directing the administrative trustee to hold the shares of the LLC. While the grantor could be the LLC manager and the investment advisor with responsibility for managing the cryptocurrency or NFTs, the estate tax rules would prevent the grantor from retaining full control as trustee over distributions to trust beneficiaries. In that case, an independent trustee – such as a corporate trustee – could be responsible for following the terms of the trust agreement to determine when and how much to distribute to the ultimate trust beneficiaries.
In essence, in this scenario, the underlying assets have now been transferred to future generations and/or charities, appreciation of those assets will occur outside of the grantor’s estate, and the manager of the LLC and investment direction advisor to the trust retain general management responsibilities and investment control over the underlying assets in the LLC.
The laws and rules governing crypto and NFTs are still evolving, unevenly, across jurisdictions, but as more people hold these assets, it is important that they are considered in estate plans.
Tom Olchon is a Managing Director and Wealth & Fiduciary Advisor at Evercore Wealth Management and Evercore Trust Company, N.A. He can be contacted at email@example.com.
Got Crypto? An Estate Planning Checklist
Many investors in digital assets are passionate about their prospects. It is important to keep a cool head in planning for their eventual transfer.
- Inventory and catalog all digital assets for current as well as future fiduciaries. This includes keeping a list of important passwords, passkeys (such as the new passkeys by Apple), account numbers, keys, and access points. The information must be stored safely, perhaps in a safe deposit box. The safe deposit box might not contain passwords, but rather instructions to access passwords that have already been stored on a reliable password management app such as LastPass.
- Obtain valuations for all digital assets from a qualified appraiser in compliance with current IRS guidance. While not all digital assets are traded on an exchange or are readily marketable, valuations are necessary for tax planning, and it’s important to track the cost basis for each asset.
- Secure private blockchain keys and other access points while still providing enough information for a third-party fiduciary to be able to fulfill their roles.
- Consider appointing a corporate executor and/or administrative trustee. While appointing a corporate fiduciary may feel less personal, the fiduciary may have the ability to dedicate more resources and experience to the administration of the estate than an individual, which may lead to a more efficient process.
- Revisit the estate plan frequently, as the legal and jurisdictional issues surrounding digital assets continue to evolve.
IRS Circular 230 Disclosure:
Pursuant to IRS Regulations, we inform you that any U.S. Federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for (i) the purpose of avoiding IRS imposed penalties or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein. This information is provided for information purposes only and does not constitute financial, investment, tax or legal advice.
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