Strategies for Advisors on Bitcoin Inheritance
With favorable regulations and increasing institutional interest in digital assets, here are approaches to help mitigate potential estate taxes on bitcoin.
In the latest update for financial advisors focused on cryptocurrencies, Zac Townsend from Meanwhile—specializing in bitcoin life insurance—discusses estate planning options for managing bitcoin inheritance effectively.
Meanwhile, Peter Dunworth from The Bitcoin Adviser addresses key questions regarding these strategies from an advisory perspective in the segment “Ask an Expert.”
Estate Planning for Bitcoiners: Strategies Utilizing Bitcoin Life Insurance and Trusts
The bitcoin market recently reached a notable peak with a market cap of $2.1 trillion, showcasing significant wealth creation for its holders. Given the supportive regulatory environment and the growing institutional adoption, it’s essential for individuals and their advisors to explore strategies to minimize estate taxes concerning bitcoin.
Tax experts predict that Congress may extend the generous lifetime gift exemption amount from the 2017 Tax Cuts and Jobs Act, currently allowing a tax-free gift up to around $14 million per individual. Anything beyond this threshold incurs a 40% estate tax. Therefore, if you anticipate that bitcoin’s value will rise, gifting it at today’s price might be strategically beneficial, allowing future valuation increases to lie outside your estate.
There are multiple methods to transfer bitcoin out of one’s estate, each with different tax impacts and control dynamics:
- Gifting bitcoin directly: You can directly transfer bitcoin to a loved one’s digital asset wallet. However, this means conceding full control of the asset.
- Creating an irrevocable trust with bitcoin: This method allows some control over the asset while keeping it out of your estate.
- Purchasing a BTC-denominated life insurance policy: This policy pays out in bitcoin to beneficiaries after death.
These strategies can be synergistic, optimizing tax benefits and wealth preservation.
Key Considerations
- Gifting bitcoin directly: This entails a loss of control, as gifts are irrevocable. The recipient retains the original cost basis, impacting any future capital gains tax upon sale.
- Irrevocable trust funding: While it provides some control, it doesn’t address the cost basis concern.
- Bitcoin-denominated insurance: This innovative option permits premium payments in bitcoin and allows borrowing against the policy without facing taxes, with the policy effectively stepping up the cost basis.
Combining an irrevocable trust and a bitcoin life insurance policy addresses estate tax concerns, cost basis, and control all at once:
- An irrevocable trust can purchase a BTC-denominated life insurance policy.
- It funds the premium payments.
- Upon the insured’s death, the trust receives a tax-advantaged payout, distributed according to its terms.
As bitcoin is typically regarded as a long-term asset, planning for potential estate taxes is crucial. Advisors should evaluate one or more of these strategies to enhance bitcoin tax planning.
Ask an Expert
Q: How might the new administration impact bitcoin investors?
A: The current regulatory environment and institutional interest provide both opportunities and challenges, particularly regarding estate taxes on increased bitcoin holdings.
Q: What methods can reduce estate tax exposure for bitcoin?
A: The primary methods include direct gifting, funding irrevocable trusts, and utilizing bitcoin life insurance policies. The most effective combines both an irrevocable trust and life insurance.
Q: Why act now?
A: Gifting bitcoin today allows for appreciation to occur outside your estate. Considering the lifetime exemption, strategic planning can significantly lower eventual tax liabilities as bitcoin’s value may continue to rise.
