Traditional business owners selling their companies upon retirement usually turn to their estate planning attorneys, accountants and wealth advisors to structure the sale and manage assets. However, today’s “cryptocurrency whale,” a person who has amassed wealth in cryptocurrencies, non-fungible tokens (NFTs) and other digital assets, is more likely to take a different approach, which often doesn’t end well.
The relatively young person with great digital wealth usually has gained their wealth relatively quickly through some risk-taking in a new asset class. However, they don’t have the experience or knowledge of protecting wealth over time. The skills needed to create crypto wealth differ significantly from those required to preserve and protect wealth.
A recent article from CPA Practice Advisor, “How to Protect Your Digital Assets From Estate Tax,” explains the unique challenges of preserving digital assets. The regulatory environment is new and still developing, as are tax reporting and tracking rules. The anonymity of digital wealth can make estate planning complicated, not to mention the challenges for asset transfer upon death or incapacity.
There are three key threats to cryptocurrency wealth: estate taxes at death, lawsuits from creditors and predators and loss of access by poor management.
Cryptocurrency holdings could be subject to a 40% estate tax without solid estate planning. If predictions for the future value of Bitcoin hold true, for instance, heirs could potentially owe tens of millions or more in federal estate taxes. This would require the assets to be sold to pay for the taxes, depriving heirs of any future growth of Bitcoin or other cryptocurrencies.
One strategy for 2024 is to use the current lifetime gift tax exemptions to transfer as much as $13.61 million of assets expected to appreciate to a Nevada irrevocable third-party dynasty trust. Once the Bitcoin is in the trust, the value is removed from the taxable estate, and the asset won’t be taxable for hundreds of years. You’ll need to speak with an experienced estate planning attorney familiar with trusts to be sure this is created properly.
If you’re an active trader, it may make more sense to set up an LLC (Limited Liability Corporation) to hold the cryptocurrency. By gifting the LLC interest to an irrevocable trust, you may be able to avoid estate taxes on the appreciated value of the cryptocurrency. If your crypto investment exceeds the federal gift tax exemption, your estate planning attorney may advise you to sell the excess amount to the trust for a long-term promissory note. This will keep the note’s face value in your estate but not the appreciation, giving heirs significant tax savings.
Trusts protect traditional assets from creditors, and digital assets can be protected in a similar fashion. By using an LLC and an asset protection trust and placing your LLC interest in the correct trust, you can shield assets from unforeseen creditors and predators. Note that this needs to be done before litigation or creditor action occurs.
Protecting assets with estate planning may seem like an old-school task for people whose wealth has come from the newest asset class. However, it’s a wise move. Talk with an estate planning attorney about the right strategies to protect wealth.
Reference: CPA Practice Advisor (July 16, 2024) “How to Protect Your Digital Assets From Estate Tax”