What are the implications of cryptocurrency for estate planning?
Cryptocurrency and decentralised finance (DeFi) are relatively new financial planning tools. Available data indicates that cryptocurrency investors are fairly young. For example, a global study by Gemini, conducted by the Harris Poll in 2021, suggested the average age of cryptocurrency investors worldwide was 38 years old. In the US, a survey conducted by Finder in 2020 found that the majority of cryptocurrency investors were between 25 and 34. In the UK, the average age of cryptocurrency investors was 37 years old, according to a study by CryptoCompare in 2020. Barring the unexpected, these investors are still among the living, and may or may not have made wills yet. Therefore, there is limited data on cryptocurrency and inheritance. But crypto is an asset and, like all assets, needs to be accounted for in estate planning. What are the factors to consider if you hold cryptocurrency?
Inheritance taxation in South Africa
Before we consider crypto in the context of estate planning, let’s look briefly at the tax regime for inheritance in South Africa. In this country, inheritance tax is known as Estate Duty. According to the South African Revenue Service (SARS), “Estate Duty is levied on the worldwide property and deemed property of a natural person who is ordinarily resident in South Africa and on South African property of non-residents.” Estate Duty is payable on the “dutiable value” of an estate at a rate of 20% on the first R30 million and 25% above R30 million. Dutiable value means the net value of the estate (i.e., the value after allowable deductions) minus the sum of R3.5 million, known as an “abatement”. The abatement applies in every case.
Deductions and exemptions, as provided for in the Estate Duty Act, can result in a reduction or elimination of estate duty payable by the estate. The spousal exemption is the most significant. When a person dies, any assets bequeathed to a surviving spouse or to a registered civil partner are generally exempt from estate duty. The exemption applies regardless of the value of the assets inherited by the surviving spouse. Furthermore, a deduction contained in Section 4(q) of the Act allows for a portion of the net value of the estate to be deducted before calculating estate duty. The deduction amount depends on the relationship between the deceased and the beneficiary. For a surviving spouse, the Section 4(q) deduction is unlimited, meaning the entire net value of the estate can be deducted from estate duty calculation. For children, the Section 4(q) deduction is limited to a specific amount per child.
SARS has issued guidance on the tax treatment of cryptocurrency for income tax purposes, but crypto receives no special treatment (at time of writing) in valuing a deceased estate, although valuing the cryptocurrency itself may present some challenges due to its volatility.
If your spouse is your sole inheritor, then, as explained above, they won’t have to pay Estate Duty on their inheritance, so the value of any cryptocurrency in your portfolio won’t matter from a tax perspective. However, it will matter to their overall wealth, particularly if the holding is substantial. When a holder of cryptocurrency dies, the valuation of the cryptocurrency assets can be determined based on the fair market value at the time of the holder’s death. But crypto is notoriously volatile, that is, its value fluctuates frequently and sometimes by considerable amounts. Valuing cryptocurrency is not as simple as valuing other assets like property or stocks and shares, whose prices are published daily. There are several ways to approach a crypto valuation.
- Obtain a professional valuation from a qualified appraiser or tax expert experienced in cryptocurrency valuation. They can help determine the fair market value of the cryptocurrency holdings at the time of the holder’s death. The valuation may take into account factors such as trading volume, exchange rates, and other relevant market indicators.
- Consider market data from reputable cryptocurrency exchanges. The valuation can be based on the trading prices of the specific cryptocurrencies held by the deceased at the time of death.
- Consult professional crypto services, such as specialised platforms that offer valuation tools. They can provide historical price data and help determine the fair market value of the cryptocurrency assets.
Whichever method your estate executor chooses, they must document the valuation methodology used and retain any supporting documentation, such as exchange statements or transaction history, to substantiate the determined value of the cryptocurrency assets. This is especially important if Estate Duty may be payable, i.e., if the crypto is not left exclusively to the surviving spouse.
Important considerations for crypto in estate planning
As digital assets, the ownership and transfer of cryptocurrencies must be properly addressed in estate plans, i.e., wills and trusts. In traditional estate planning, physical assets like bank accounts and properties are relatively easy to identify and transfer. However, cryptocurrencies can be easily overlooked or inaccessible if not properly accounted for. There are some key considerations that are unique to the handling of cryptocurrencies.
Inventory and document cryptocurrency holdings
There is no paper trail with crypto, as there is with shares or bank accounts. If it is not listed comprehensively and accurately, it may be difficult to identify and distribute when the time comes. Make a comprehensive inventory of your cryptocurrency holdings, including the type of cryptocurrency, the amount, and any relevant account information. Document this information in a secure location and provide instructions on how to access it in your estate planning documents.
Designate a digital asset executor
Appoint a trusted individual as your digital asset executor or include specific provisions regarding the handling of your cryptocurrency in your will or trust. This person should be familiar with cryptocurrency and capable of managing and transferring digital assets according to your wishes. This may not be the same person as your overall estate executor. It is not uncommon for an estate to have more than one executor, and you need a specialist to ensure your crypto assets are passed on correctly to your heirs.
Provide clear instructions regarding distribution
Clearly state your intentions for your cryptocurrency holdings in your will or trust documents. Specify who should receive the cryptocurrency, how it should be distributed or managed (e.g., sold, transferred, or held), and any specific conditions or restrictions you want to impose.
Provide access instructions
Ensure your digital assets can be accessed by your designated executor or heirs. Provide the necessary login credentials, private keys, wallet information, including type of wallet (hot or cold), and any encryption or security measures required to access and transfer the cryptocurrency. Because of the sensitivity of this information, it’s also important that the will or other document containing these access instructions is stored securely. Don’t leave a copy of your will in a desk drawer for an intruder to find!
You may want to consider creating a memorandum to your will that covers this sensitive information. This will prevent the access instructions falling into the wrong hands as the will goes through probate, which is a matter of public record. The memorandum can be referenced in the will but is not part of the will itself, and therefore not part of the public record.
Communicate with your heirs
Whether your foray into cryptocurrency is a solo activity or a joint effort, when it comes to your will it’s important to communicate your intentions and the existence of your cryptocurrency holdings to your spouse and other heirs. Inform them about your estate plan, provide them with relevant instructions, and make sure they understand the nature and value of the cryptocurrency assets. Crypto and DeFi are still very new concepts, and you want to be sure your loved ones fully understand the estate they will inherit and are able to make the most of it.
Seek professional advice
Given the unique nature of cryptocurrency and potential legal and tax implications, which are under constant review and therefore subject to change, it is advisable to consult with professionals experienced in estate planning and cryptocurrency to ensure compliance with relevant laws, taxes, and regulations. They can provide guidance on the most appropriate strategies for your specific situation.
Regularly review and update
Your will should be treated as a living document and updated whenever there is a major change in your circumstances. Divorce is an obvious trigger to update a will. But children reaching the age of majority or the death of a beneficiary are other reasons to review your will. Cryptocurrency holdings can change rapidly, and new regulations or technologies are emerging all the time. Therefore, you need to review and update your estate plan to reflect any changes in your cryptocurrency holdings as well as any life events.
Keeping cryptocurrency details current is another good reason to use a memorandum, as discussed above. The memorandum can be updated without the effort involved in updating the will itself.
Whatever your assets, make a will
Simon Dippenaar and Associates are specialists in family law and can help you draw up your will to ensure your estate is distributed exactly the way you would like after your death. If you hold cryptocurrency, appropriate distribution of your assets requires a bit more planning than usual, but at SD Law we don’t overcomplicate things. We’ll advise you on the correct treatment of your cryptocurrency and other assets, partnering with experts in the field as required, and keep you informed every step of the way. Contact Simon now on 086 099 5146 or email him on firstname.lastname@example.org to discuss your needs.
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The information on this website is provided to assist the reader with a general understanding of the law. While we believe the information to be factually accurate, and have taken care in our preparation of these pages, these articles cannot and do not take individual circumstances into account and are not a substitute for personal legal advice. If you have a legal matter that concerns you, please consult a qualified attorney. Simon Dippenaar & Associates takes no responsibility for any action you may take as a result of reading the information contained herein (or the consequences thereof), in the absence of professional legal advice.