Bitcoin Investor Asset Protection and Estate Planning

With Bitcoin recently hitting $120,000, crypto currency continues to make some coin investors fortunes. These are some basic defensive measures to keep your digital wallet safe from liability, theft and make sure that it is included in your estate plan.

Crypto Fact vs. Fiction

One common bundle of myths about cryptocurrency is, “My coin is creditor proof because it's secret and no can find it and only I have the key”. Here's why that's false and why you shouldn't hold crypto currency, (or for that matter, any significant amount of non-qualified investment, savings, or other assets) in your own name:

• Any strategy that relies on “secrecy” also relies on your willingness to commit “perjury” and lie about the existence or value of your holdings in a debtor's exam, deposition, or similar sworn testimony
• Any U.S. court that has jurisdiction over you and your assets can order you to tender the assets to satisfy a judgment, this includes access to your crypto wallet
• Your crypto assets are discoverable through a variety of methods including your tax returns, where you have a legal duty to report crypto profits to the IRS.
• Failure to report crypto gains is criminal tax evasion and that includes holdings you may be holding through an offshore trust, LLC or similar device. It has come to my attention that physicians have been targeted by marketing that pitches such schemes as being secret, tax free and creditor remote, they aren't.
• One easy place I'd look for evidence that a debtor had crypto holdings: Their social media accounts. Most investors can't stop talking about it, hyping their coin of choice up and being triggered by any negative news or comments about their magic beans.

Think about how you hold title

Crypto assets held in your own name are subject to all your personal and professional liabilities, just like all your other liquid assets. As such, holding your coin through a properly structured legal entity that is legally distinct from your unrelated risks is best practice. Some commonly used holding structures include LLCs, Limited Partnerships, and irrevocable trust structures. Long term investors can also consider making their crypto holdings an “exempt' asset by investing in them through qualified, and legally protected retirement plans including self-directed IRAs.

Are your crypto assets included in your estate plan?

Your estate plan should include your valuable digital assets including your crypto holdings. At a minimum, it should allow the trustee of your estate to identify, take control of, and manage those assets. Some of the basics your crypto estate plan should include are:

• Access to your private key and passwords. If you die without providing access to this asset, it dies with you
• What coin you bought, when you bought it, and the purchase price
• How you are holding it, (i.e., in your own name in an LLC, etc.)
• Details on the platform you are using to hold it, (i.e., using an exchange like Coinbase vs. holding it in an online wallet or offline, in physical device like a removable hard drive)
• Any specific instructions or wishes on the management and distribution of the assets

Think about physical and digital security issues

You may have seen horror stories about wallets ranging from thousands to millions of dollars in value being lost when a password is lost or physical device is lost, stolen or destroyed. If you are using a physical device, it should be stored in a water and fire-resistant document safe to protect it from basic, recurring risks like flood, fire, hurricane or burglary.

Make sure you understand the security differences in the basic ways you can hold coin. As a recent Tech Radar report explains,

“Despite being a digital currency, there are four different forms of storage for your Bitcoin to choose from: mobile wallets, desktop wallets, web-based wallets, and physical hardware that acts as a wallet”.

The report also advises that Bitcoin.org itself advises that you maintain two separate wallets, one with limited funds for trading and daily access referred to as a “hot” wallet and a secure, physical, offline “hot wallet” that's stored in a safe and holds the bulk of your coin. The digital nature of purely online wallets means they are always vulnerable to online hacking and malware, so spreading your risk between several holding methods, including keeping the bulk of your holdings offline on a hardware device, is highly recommended.

Can Crypto Holdings Be Insured?

The wild ride for cryptocurrency investors continues as a variety of factors threaten both the value and the security of investor holdings including both various coins and their derivatives. Investor concerns including both direct hacking and theft from exchanges, which are reported on a weekly basis.

With this high level of volatility in mind, it caught my attention when I recently heard that crypto holdings can now be insured against theft from certain exchanges. The insurance industry professional who brought this to my attention is Ahmet Bidav, who works with HNW individuals and their family offices and advisors, and who is the founder of Lux-STR Insurance Brokerage Inc.

Ahmet was kind enough to answer some of the basic questions I had on this issue. While this list certainly isn't exhaustive, it covers some the key basics I thought investors would be concerned about.

Is there a dollar limit on the size of the portfolio you can insure?

Currently we are insuring up to $1M in limits.

Can you insure multiple wallets with multiple exchanges?

Yes, as long as the exchanges are on of these 4: Coinbase, CoinList, Gemini, Binance US.

Is the coverage limited to certain exchanges?

The limit is at the policy level, so $1M is for the total limit per policyholder (individual/legal entity). In other words, there are no sublimits per exchange.

Is the coverage limited to certain coins?

Yes, currently coverage is afforded to the following 20 coins: Bitcoin, Ethereum, Ripple, Tether, Solana, Cardano, USD Coin, Polkadot, Dogecoin, Avalanche, Shiba Inu, Terra, Wrapped Bitcoin, Litecoin, Uniswap, Polygon, Chainlink, Algorand, Binance Coin, Binance USD

What kind of events does this coverage apply to? Is it only for theft directly from the exchange or can you insure a cold wallet as well?

A. Loss of crypto assets resulting directly from theft of crypto assets being held within an Exchange wallet (whether the crypto was stolen from the exchange hot wallet or cold storage facility)

B. Loss of crypto due to email instructions from an exchange to transfer crypto from your exchange wallet into an unknown wallet.

How soon after the coverage is purchased is it in effect?

There is a 3-day waiting period.

What does the insured have to disclose to the insurer about their accounts to obtain coverage?

The exchange they custody their crypto, and the amount of crypto in each exchange.

What are some of the exclusions that crypto investors should be aware of?

It doesn't cover for third-party software or hardware wallets, losses due to user error, nor asset depreciation due to market volatility.

Who are the carriers providing this coverage? Are they traditional highly rated insurance carriers or is this a new specialty line offered by one carrier?

Breach Insurance was started by former Liberty Mutual executives. The fronting carrier is Trisura Specialty Insurance (A-) Excellent financial strength rating from A.M. Best and Relm Insurance is the reinsurer.

As an attorney, I don't sell insurance, so investors with additional questions should contact Ahmet Bidav directly at [email protected]

We advise clients on a wide range of asset protection and wealth preservation issues. These articles were originally published by asset protection attorney Ike Devji in 2022, and share information we provided our own clients. This is presented as general information, not fact specific legal advice, get personalized help.

#Crypto #AssetProtection #EstatePlanning #WealthPreservation #CFP #CPA #Advisor #CryptoInvestor #Bitcoin #BitcoinInvestor