Estate Planning Strategies for Bitcoin Inheritance
In this week’s edition of crypto insights for advisors, Zac Townsend from Bitcoin life insurance provider Meanwhile discusses various estate planning methods to effectively manage bitcoin inheritance. Additionally, Peter Dunworth from The Bitcoin Adviser addresses common queries regarding these strategies from an advisor’s perspective in our segment, Ask an Expert.
Special thanks to our newsletter sponsor, Grayscale. Financial advisors in the Houston area are invited to attend the exclusive Crypto Connect event on Thursday, April 17.
Understanding Bitcoin’s Estate Planning Context
The bitcoin market cap recently soared to $2.1 trillion, signifying substantial wealth for bitcoin investors. With favorable regulatory conditions and rising institutional acceptance, individuals along with their financial advisors are encouraged to explore strategies that can potentially reduce estate taxes linked to bitcoin wealth.
Many tax advisors anticipate that Congress may prolong the increased lifetime gift exemption limit established by the 2017 Tax Cuts and Jobs Act, which currently stands at approximately $14 million per individual. This allows Americans to transfer up to $14 million without incurring taxes, but any amount above this threshold invokes a 40% estate tax. For those convinced that bitcoin will appreciate significantly, gifting it at the current value could be an advantageous strategy, permitting future gains to occur outside the estate.
Options for Transferring Bitcoin to Evade Estate Tax
There are various techniques for transferring bitcoin out of an estate, each presenting distinct tax and control implications. Some of these methods include:
- Direct gifting of bitcoin to a family member’s digital asset wallet.
- Establishing an irrevocable trust funded with bitcoin for the benefit of loved ones.
- Acquiring a life insurance policy denominated in bitcoin that provides payouts in the event of death.
These strategies are not isolated and can be utilized together to effectively maximize tax benefits and protect wealth. Below, we will delve into the intricacies of each option.
Combining Strategies for Optimal Results
The combination of using an irrevocable trust and bitcoin-denominated life insurance addresses key concerns — estate tax, cost basis, and control. The process is as follows:
- The irrevocable trust acquires a BTC-denominated life insurance policy for the individual.
- The trust is responsible for covering the policy premiums.
- Upon the individual’s death, the irrevocable trust will receive an amount of bitcoin greater than the premiums paid, along with a stepped-up cost basis.
- Finally, the bitcoin is distributed based on the trust’s directives, maintaining control over the timing and manner of access for beneficiaries.
Bitcoin is often regarded as a long-term asset (HODL), making it essential to plan ahead for potential estate taxes given its recent surge and expected future price spikes. Both individuals and advisors should strongly consider utilizing one or several of these strategies to enhance bitcoin-related tax planning.
