Wisconsin Statute defines digital property as “an electronic record in which a person has a right or interest”. Digital property can include email, financial assets, social media, smartphones, websites, photos, video, and software just to name a few. More individuals are relaying on digital property in their daily life but are forgetting to make arrangements in their estate plan.
If you become incapacitated you need to have your financial power of attorney document give your agent the power to access, modify, delete, control and transfer all of your digital property. It is also just as important for you to have some sort of list (paper or on USB) of your digital property that contains the website, user name, passwords, and any other information so that they can access the digital property. Keep this list in a safe place either in a home safe or a safety deposit box so that hackers can’t get it and it won’t be destroyed by fire. If you keep it in a home safe, let someone know it is there and how to get the safe opened. If you keep it in a safety deposit box make sure the power of attorney gives your agent authority to get in the safety deposit box. Remember once you pass away so does your power of attorney so you need to make additional arrangements for when you pass away for your safety deposit box.
If you pass away there are several things you can do to help your heirs get to your digital property. The easiest way, is if the company that holds the digital property allows you to put a beneficiary on the account. The company might use the same method to your agent to have access during your life time. If the company does not allow for a beneficiary (or agent) then you will need to make sure your Last Will and Testament or Trust address who is the heir of your digital property. The documents should also give authority to access, modify, delete, control and transfer all of your digital property. Again it is important to keep a list of the website, user name, passwords, and any other information so that the personal representative, trustee, or beneficiary can access the digital property.
The one thing you DO NOT want to do is list the website, user name, passwords, and any other information to access the digital property in your Last Will and Testament. Remember Last Will and Testament become public records that anyone can access. Also, many powers of attorneys are copied or scanned into company’s computer systems where 100s or 1000s of employees can access.
Cryptocurrency uses a digital or virtual currency that uses cryptography for security which is hard to counterfeit. Most people know cryptocurrency by their names: bitcoin, ethereum, coinbase, bitstamp and some newer ones – Ripple, Dash, Litecoin, Zcash.
Most investors love this type of investment because it is private, anonymous, and you can make lots of money. The problem with this type of investment is that it is anonymous, no personal information is needed and it is not issued by a central authority or registry. There are no statements sent out and there are no password recovery options. Unlike most investments, cryptocurrency does not ask for beneficiaries. Your agents, personal representative, trustee, or beneficiaries can’t just contact the company to get access or regain a password. If you do not keep accurate information and let someone know it exists and information to get access to the cryptocurrency it could be lost forever.
For cryptocurrency you need to document you own it, where you bought it, and the private digital key to get access to it. You will need to create a digital wallet that is either a paper wallet “cold storage” which is public and private key printed together and is offline or a hardware wallet that could be a thumb drive that securely stores information offline and secured from hackers.
IRS treat cryptocurrency as personal property and should be included in your estate upon your death. In your Trust or Last Will and Testament you should address how and when your beneficiaries receive the cryptocurrency. Your beneficiaries might need to pay capital gains or loss and maybe income tax on cryptocurrency.
Cryptocurrency owned by IRA and 401(k)
Many people would like to own cryptocurrency by an IRA or 401(k) but are told that they can’t because it would violate the Internal Revenue Code. The Internal Revenue Code requires IRAs to have a custodian. The custodian would then need to hold the private keys for the cryptocurrency which most investors do not want to allow and will not give over the private key to a custodian The private key is what allows the investor to access the cryptocurrency and keep it from hackers. There are some custodian companies that will allow cryptocurrency as part of the investment, but they charge very large fees which drains a person’s assets pretty quickly and to some extent defeats the purpose of investing.
Some individuals have found creative ways around the large fees charged by companies to be custodians of your IRAs. These individuals have started a single member LLC which is solely owned by an IRA. Then you as the manager of the LLC chooses what the LLC invest in or owns. Since the IRS considers cryptocurrency as personal property, the LLC can purchase cryptocurrency. This is not listed as prohibited transaction under the rules of IRC 4975. It is important that the LLC purchase the cryptocurrency from its own checkbook and not from your personal bank account. Some cryptocurrency companies will not let LLC open an exchange account; however, many decentralized exchanges will allow an LLC to open an account.
It is still important to make arrangements for your agent, trustee, or personal representative to have authority over your IRA and LLC. Remember to create a digital wallet that is owned by the LLC, not you personally. You still need to do proper estate planning in case you are incapacitated or you pass away, as discussed above.
Since, 401(k) are self-directed and doesn’t need a custodian as IRA do. However, you will need to get a preapproved prototype by IRS. You can then create a trust or a LLC to invest in cryptocurrency.
As more people invest in cryptocurrency, more companies are willing to be the custodians for IRA without charging large fees. Before you decide to add cryptocurrency to your IRAs keep in mind the market is very erratic and you are counting on this money for your golden years.
Just remember that getting access to the money that an IRA holds, you must still follow the laws of distribution for IRAs. You will have a 10% penalty if you take money out before the age of 59 ½. You must take distribution after the year you turn 70 ½. Also, any interest earned you will pay taxes on it when you turn the cryptocurrency to US currency.