A Crypto Review of the CFP® Curriculum: Estate Planning (Part 7 of 8)
Inheritance planning ensures that client wealth can be securely and efficiently passed on in accordance with their well-wishes to promote intergenerational wealth preservation. Cryptoasset estate planning presents a unique set of challenges and opportunities for financial advisors due to the self-sovereign and decentralized nature of the asset class. Advisors and estate planners will need to create an asset transfer plan that is both highly secure and also specific and easy enough to understand for someone without cryptoasset knowledge.
Property titling and beneficiary designations
Clients and their financial advisors should be well aware of how the “titling” of an asset can impact the distribution of the asset to heirs. On the traditional side, non-qualified and non-beneficiary accounts owned solely by an individual are generally subject to probate. Probate can be a lengthy and expensive process, while also increasing the chances that assets will not be distributed as the owner would have otherwise chosen. For traditional investments it is common to title an account as Joint with Rights of Survivorship, Joint Tenants in Common, Transfer on Death, etc. As it stands today, the vast majority of cryptoasset accounts do not offer titling options or beneficiaries to be named, making it incredibly important for clients to include their cryptoassets in various other parts of the estate plan.
Strategies to transfer property
An explicit plan for transferring cryptoassets upon death is critical due to the role played by private keys within the crypto ecosystem. clients who fail to prepare for their imminent departure put their cryptoassets at risk of being inaccessible upon their death.
Considerations for transfer of cryptoassets upon death:
- Will – Cryptoassets listed specifically in a will become part of the estate plan. Given that it is difficult to title assets or elect beneficiaries for cryptoassets as previously mentioned, advisors and their clients will likely need to work with an estate planning professional to make sure these assets are included in the client’s will.
- Trust – Coinbase has rolled out the ability to open an account in the name of a trust through their business platforms Coinbase Prime, Coinbase Custody, and Coinbase Exchange. We anticipate additional CeFi custodians to allow this option in the future, potentially including this as an option for individual investors as well. Advisors may want to consider placing cryptoassets in a trust where applicable in order to potentially avoid the probate process. Placing cryptoassets in a trust would also allow for the management of these assets by a trustee should the client pass away or become incapacitated. For high net-worth individuals, there has been discussion around placing cryptoassets in a Grantor Retained Annuity Trust to potentially reduce estate taxes. This is another consideration when speaking with an estate planning attorney.
- Letter of Instructions – Private keys and additional details for accessing the cryptoassets should be written down in detail and held for safekeeping until passed on to heirs. While a letter of instructions doesn’t carry the legal weight of a will, it can provide clarity to heirs on how to access essential financial information.
- DeFi Solutions – Hapi Finance, Safe Haven, Trust Verse, Posterity, Casa Covenant, and a handful of other platforms are creating solutions that would allow for smart contracts on the blockchain to automatically execute estate plan cryptoasset transfers upon death. This is a space for advisors to keep an eye on as a potential estate planning solution for cryptoassets.
Due to the potential for cryptoassets to be stored across various wallets, exchanges, and protocols, clients should keep a track record of the location and position data of their cryptoassets. Since estate planning documents tend to only be updated every few years, maintaining an up-to-date cryptoasset inventory is crucial for both advisors and their clients.
Incapacity planning documents
Advisors and their clients should plan ahead to prepare for an unfortunate event in which the client becomes incapacitated. Durable powers of attorney for property should typically be included as a part of the overall estate plan to account for this scenario. This document allows for a client to select an individual, while they are at full capacity, to make financial decisions on their behalf if they were to become incapacitated.
As our financial lives shift online in a digital first world, having a plan in place for the eventual transition of digital assets (including cryptoassets) is becoming increasingly important. In 2015, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) was put in place to assist in resolving some of the challenges related to digital asset transfer upon death or incapacitation.
RUFADAA allows the executor of an estate, a fiduciary, or other key individuals to access and manage a person’s digital assets following their death or incapacitation. This is typically completed through an “online tool” that web providers can offer to users/customers. The online tool allows key persons, such as an executor, to potentially bypass the terms and service of the online service and gain access to the account and/or assets. The RUFADAA law has been adopted by 40+ states. It is also worth considering that a fiduciary for traditional assets may be separate from a cryptoasset fiduciary.
Taxation of Cryptoassets in an Estate
Cryptoassets are included in a gross estate similar to other forms of property. While states have varying estate tax laws, the federal limit in 2022 is $12.06 million per individual. For a married couple, the combined exemption is $24.12 million. In the event that an estate exceeds this threshold, a large portion of the estate could be taxed at a 40% rate (all assets exceeding $1 million over the exemption amount). The Tax Cuts and Jobs Act of 2017 doubled the estate tax exemption and the total has increased gradually over the last few years. However, this limit is set to revert on December 31, 2025 as it stands today. Advisors will need to consider cryptoassets when evaluating a client’s overall estate.
Planning for divorce, unmarried couples, and other special circumstances
As ownership of cryptoassets increase like we have seen in recent years, it is inevitable that these assets will find their way into divorce settlements. How can clients ensure that they are protecting themselves in the event of a divorce? Let’s take a look at a few items to consider.
To start, while a marriage or relationship is on solid ground, clients should consider maintaining accurate records that document their cryptoasset holdings and the location of these assets. This should include the percentage share of the property that each person owns.
If a client is in the process of getting a divorce and cryptoassets are involved, consider discussing with an attorney how these could be included in the divorce decree. Keep in mind that since cryptoassets can be volatile, the date that assets are divided may be crucial. It could be worth considering a volatility clause in the decree in case there is a significant increase/decrease in price of the cryptoasset portfolio.
If a client is suspicious that their spouse is hiding cryptoassets from them, consider discussing this with an attorney as well. A divorce attorney who has prior cryptoasset expertise and/or knowledge may be able to provide additional advice to clients in this area.
Nine states in the U.S. have community property laws that would play a role in how cryptoassets are separated in a divorce. In most cases, all property acquired during a marriage is split 50-50 in community property states. However if a client brings separate property into a marriage, such as cryptoassets, a judge may rule that these assets should not be split.
Similar to other forms of property, cryptoassets generally receive a step-up in cost basis when transferred to heirs upon death if they are held independently or in a non-qualified account. Given the appreciation of cryptoassets over the last decade, this could potentially save clients and their heirs from a sizable capital gains tax bill. If clients have highly appreciated cryptoassets, consider discussing tax and estate planning advantages of this rule prior to liquidating the assets.
Access the Full Report
Our full report is available for all Onramp Academy users. The intent of the report is to provide financial advisors with a resource to compare their current credentials with the potential credential curriculum of the future. The report is 55 pages in length and includes cryptoasset commentary on each of the eight sections of the CFP® exam (including the newly minted Psychology of Financial Planning section). In our opinion, it’s a must-read for every financial professional as the space evolves in the digital realm!
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As always, educate before you allocate!
With gratitude, Your Onramp family