Written by Jacob D. Crawley
Jacob D. Crawley is an associate at Solomon Dwiggins Freer & Steadman, Ltd. and assists clients with their Trust and Estates planning, probate, and litigation needs.
1. Your clients own cryptocurrency
Approximately 21.2 million U.S. citizens, or 14% of the entire population, are estimated to own some form of cryptocurrency. See 2021 State of U.S. Crypto Report, Gemini, https://www.gemini.com/state-of-us-crypto. Further estimates reveal that about 58% of crypto owners are between the ages of 35 and 65, with 69% of polled investors expecting to hold their crypto as a “long-term investment.” Id. Cryptocurrencies are here and are here to stay.
2. Tax treatment of crypto(property)
Pursuant to IRS Notice 2014-21, “[f]or federal tax purposes, virtual currency is treated as property,” subjecting the sale of crypto asset to a capital gain/loss. See I.R.S. Notice 2014-21, 2014-16 I.R.B. (Apr. 14, 2014) (emphasis added). Taxpayers need beware, as the Treasury Department has substantially increased their scrutiny of crypto asset sales to preclude tax evasion. See The American Families Plan Tax Compliance Agenda, U.S. Dept. of the Treasury, May 2021, at p. 20-21. In Nevada, however, cryptocurrencies are exempt from taxation as intangible personal property. See NRS 361.228(1)(a).
3. Storage and fiduciary access
Cryptocurrencies are generally stored in one of three ways: (1) on an online exchange, such as Coinbase, Kraken, or Binance; (2) in a “non-custodial wallet”; or (3) in a “hardware wallet.” A non-custodial wallet is software downloaded onto a mobile, laptop, desktop, or USB device, accessible only through that device. Hardware wallets are physical devices that store private keys to cryptocurrencies offline and may be accessed through a computer. All forms of storage are generally protected by either a password or a PIN but only the investor has access to the password/PIN for non-custodial and hardware wallets.
If your client retains their cryptocurrency on a non-custodial or hardware wallet, proper planning requires: (a) knowledge of the device(s) upon which the wallet(s) are located; and (b) knowledge of their passwords/PINs. The planner should keep adequate records of this information, either for dissemination to the fiduciary now or upon the client’s death. Moreover, planners should incorporate Nevada’s Revised Uniform Fiduciary Access to Digital Assets Act of 2015 (NRS 722.010 et seq.) into the terms of their planning documents to ensure the fiduciary may access the relevant exchange account(s) or device(s).
4. Probate avoidance
Crypto-assets constitute a decedent’s personal property and, therefore, require probate administration absent proper planning. See NRS 144.040(2)(a). Appropriate planning techniques to avoid probate depend upon how the client stores the crypto-assets. If the client uses a hardware or non-custodial wallet, one planning method is to: (a) assign the crypto-assets to a trust/LLC; (b) append a personal property schedule to the trust; and (c) execute a non-probate transfer on death agreement to designate the trust/LLC as the crypto-asset owner (see NRS 111.751 et seq.).
Unlike bank or brokerage accounts, cryptocurrency exchanges do not currently allow pay-on-death designations and have strict “know-your-client” policies that preclude designating an LLC or trust as the account owner. Direct assignment is therefore not feasible. To avoid probate on exchange held crypto-assets, the client should execute: (a) a formal declaration that they hold the account assets in trust (see NRS 163.002(1)(a)); and (b) a non-probate transfer on death agreement (see NRS 111.751 et seq.).
As a last resort, probate attorneys can employ NRS 146.070 to avoid probate. Effective October 1, 2021, a court may set aside without probate administration all assets that are transferred into a trust via the decedent’s will. See NRS 146.070(1)(b). Pour-over wills, therefore, are recommended to ensure the trustee can take advantage of NRS 146.070(1)(b).
5. Creditor protection and crypto
Cryptocurrency creditor protection largely follows techniques to avoid probate. Creditor protection options for hardware and non-custodial wallets include assignment to a dedicated LLC or irrevocable spendthrift trust (see NRS 166.010 et seq.). Due to the exchanges’ reluctance to allow LLC or trust designation on accounts, exchange assets might only avoid creditor access following a client declaration of trust in accordance with NRS 163.002(1)(a). Even after such a declaration, however, a creditor may attempt to preclude the transfer of exchange assets because the account is in the investor’s individual name. If creditor protection is paramount, therefore, the client should consider transferring the exchange assets to a hardware or non-custodial wallet to ensure proper and effectual titling.
“This article was originally published in the “Estate Planning” issue of Communiqué, the official publication of the Clark County Bar Association, (November 2021). See https://clarkcountybar.org/about/member-benefits/communique-2021/communique-november-2021/.”