Crypto for Advisors: Bitcoin Inheritance Strategies
Then, Peter Dunworth from The Bitcoin Adviser answers questions about these strategies from an advisor's point of view in Ask an Expert.
Thank you to our sponsor of this week's newsletter, Grayscale. For financial advisors near Houston, Grayscale is hosting their exclusive Crypto Connect event on Thursday, April 17.
– Sarah Morton
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At its recent all-time high, the bitcoin market cap hit $2.1 trillion, indicating that significant wealth has been created for holders of the original cryptocurrency. With the regulatory tailwinds behind digital assets in the new administration and increasing institutional adoption, individuals and their advisors should consider strategies to mitigate potential estate taxes on bitcoin wealth.
Many tax professionals expect Congress to extend the increased lifetime gift exemption amount established by the 2017 Tax Cuts and Jobs Act, currently set at roughly $14 million per individual. This means that any American can gift $14 million tax-free, but amounts exceeding this amount are subject to a 40% estate tax. If you believe bitcoin will appreciate significantly in the future, gifting it at today's price can be a strategic move, allowing future appreciation to occur outside of your estate.
There are several ways to transfer bitcoin out of one's estate, each with varying tax and control implications. These options include:
Gifting bitcoin directly by transferring it to a loved one's digital asset wallet.
Funding an irrevocable trust with bitcoin for the benefit of their loved ones.
Using bitcoin to purchase a BTC-denominated life insurance policy that pays out to their loved ones upon death.
These strategies are not mutually exclusive — when used in concert, they can maximize tax benefits and wealth preservation. Let's look at each of them in turn.
Gifting bitcoin directly
Transferring bitcoin to someone's digital asset wallet as a gift is a simple way to move it out of your estate. However, there are important considerations to this approach:
Loss of control: A gift is irrevocable, meaning the gifter forfeits all control over the asset. This might not be ideal for those transferring wealth to children if there are concerns around handing over full control of an asset.
Cost basis retention: The recipient inherits the original cost basis, meaning if/when they sell the bitcoin, they owe capital gains tax on any appreciation since the price at which you originally acquired it.
Funding an irrevocable trust with bitcoin
An irrevocable trust allows for some level of control over bitcoin despite it being outside of your estate. You can design the trust to pay out at certain ages or life events, as examples. However, like direct gifting, it does not solve the cost basis issue — beneficiaries of the trust receive the bitcoin via distribution at the same cost basis it held when you originally funded the trust.
Bitcoin-denominated life insurance
Bitcoin-denominated life insurance is a new concept that allows an individual to pay their life insurance premiums in bitcoin and borrow against their BTC-denominated policy tax-free, with the policy paying out more, stepped-up cost basis bitcoin at death to the beneficiaries. If a policy is owned individually, the death benefit pays out into the estate and, therefore, can be subject to estate tax.
Combining an irrevocable trust with bitcoin Life Insurance
Using an irrevocable trust and a BTC-denominated life insurance policy together solves for all of these concerns — estate tax, cost basis and control. Here's how it works:
The irrevocable trust purchases a BTC-denominated life insurance policy on the individual.
The irrevocable trust funds the policy premiums.
Upon death, the irrevocable trust receives more bitcoin than was paid in premiums, and those bitcoin have a new, stepped-up cost basis.
The bitcoin is then distributed according to the trust's terms, preserving control over how and when beneficiaries access it.
Bitcoin is typically viewed as a low time preference asset, meaning its holders (or, HODLers) tend to be long-term investors rather than traders; this, coupled with its meteoric rise and potential future price appreciation, makes it an important asset to plan for potential estate taxes. Advisors and individuals should consider one or a combination of these strategies to optimize bitcoin-related tax planning.
- Zac Townsend, co-founder and CEO, Meanwhile
Q. How might the new administration affect bitcoin investors?
A. With regulatory tailwinds and increasing institutional adoption, bitcoin investors now face both opportunities and challenges. The primary concern for those with significant bitcoin holdings is potential estate tax exposure, especially as many portfolios have grown substantially with bitcoin recently reaching a $2.1 trillion market cap.
Q. What are some strategies for reducing bitcoin estate tax exposure?
A. Three main approaches exist: direct gifting to family members, funding irrevocable trusts with bitcoin and utilizing bitcoin-denominated life insurance policies. Each offers different balances of tax benefits and control. The most comprehensive solution combines an irrevocable trust with a bitcoin-denominated life insurance policy.
Q. Why should one consider acting now rather than later?
A. Gifting bitcoin at today's valuation allows future appreciation to occur outside your estate. With the lifetime gift exemption currently at approximately $14 million per individual, strategic planning now can significantly reduce eventual tax burdens as bitcoin potentially continues to appreciate.
- Peter Dunworth, The Bitcoin Adviser
BlackRock adds Anchorage Digital as Crypto Custodian.
U.S. stablecoin issuer Circle has filed to go public.
The SEC issued a statement on stablecoins, clarifying that most are not securities, especially those used for payments.
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