NFT-T&E: Succession Planning for Web3

I saw a tweet the other day which estimated there are roughly 700-2,000 CryptoPunks thought to be lost. They belong to people who likely forgot their wallet information or died without leaving instructions on how to access their wallet(s). At a current floor price of ~$273,000, that is $191-546 million lost forever. This brought to mind a topic which many traditionally wealthy people do but very few .jpg wealthy people are doing: planning for what happens to your Web3 assets when you die.

Disclaimer: I am not a trust and estates (“T&E”) attorney, but I have litigated enough estate disputes to understand the importance of early and comprehensive succession planning. This article will cover some very basic principles which will help you turn your new .jpg money into sustainable generational wealth. Consult a real T&E attorney before making any estate planning decisions.

Photo by Brett Sayles on Pexels.com

Succession Planning Background

First and foremost, make sure that the information needed to access your wallet(s) is written and stored in a secure location where your family can find it. DO NOT TYPE THIS INFORMATION AND STORE IT ON YOUR COMPUTER. This is one of the few times you want to go old school and write everything by hand so if your computer is compromised, your wallet/NFTs/funds are not. Cybersecurity is job security. Punk6529 recently laid out a good way to secure your information while also making it accessible to your family if you suddenly and tragically pass away.

Second, know that for a vast majority of people, you do not need some complex succession planning. States have various comprehensive rules for people who die intestate (meaning people who die without a will). Generally, if you are married your stuff will go to your wife, and if you are single your stuff will go to your parents or closest living relative(s). Each state is a little different and when there are step-children or other complexities then the rules can get complicated, but it’s a relatively simple equation for most. You should consult a local attorney for this information, but a simple google search of your states’ intestate succession rules should give you a reasonable background.

You shouldn’t depend on intestate succession plans if you can avoid it, though. Unless you have a large or complex estate, you can probably use a simple will to divide your assets after your die. Non-will dispersion of assets is fine for a small estate, but there are more formalities involved (requiring attorney time and expense) than having a will probated (i.e., recognized by the court as valid/binding). If you spend a few hundred dollars now to set up a will, you can potentially save your friends and family thousands of dollars later. Get an actual attorney to do this. Legal zoom or other template websites are only slightly cheaper and you don’t want your will getting thrown out later because your robot attorney didn’t follow some state specific formality or give you the information you need to make an intelligent decision.

I have seen otherwise close families be torn apart over money and related disputes when a loved one passes away without a set plan for their assets. Have those difficult conversations with family members beforehand. Have a plan in place when you pass away and know their plans for when they pass away. It can save your loved ones a lot of heartache and fighting after you are gone.

Setting Up An NFT Trust

For more complex or larger estates, setting up a trust could be in your best interests. Trusts are generally more easily modified than wills, and have additional tax benefits which traditional wills do not. For example, if you believe your estate will be large enough that you may owe tax on it when you die (which is currently set to increase to $12.06 million in 2022), then transferring those assets to a trust in your lifetime can be a powerful way to avoid those estate taxes.

One way to avoid estate tax liabilities is through utilizing the annual gift exclusion. There is an annual exclusion amount of $15,000 for individuals and $30,000 for married couples which can be gifted to each child or any individual (or trust to benefit that individual) tax-free. This means if you are a couple with 2 kids, you can set aside $30,000 in fiat (or crypto equivalent) without your children being taxed on it. If you want your kids to get that money eventually, but not immediately, this can be done through a trust in their benefit. This is an exceedingly simple but powerful tax-saving technique. The earlier this is set up, the more you can take advantage of it.

As I previously explained in my article about whether you should set up an NFT LLC, there are certain tax benefits for operating through formal entities like trusts or LLCs. For example, gas charges for purchasing an NFT could be a deductible business expense for a trust or LLC. However, an individual might not be able to claim that as a write-off. Instead, individuals may be stuck using gas fees as an additional part of the NFT’s basis when it is later sold. If the individual loses gas and don’t get the NFT, that money is potentially just gone. Similar to setting up an LLC, you should consult a tax professional to determine if running your NFTs through a trust make financial sense for your circumstances.

Additionally, similar to my article on dispute resolution, the ability to set up a multi-sig wallet for an NFT/crypto trust would allow for faster and more efficient decision making from trustees. With a solidity developer and a crypto-savvy attorney, you could set up a trust that allows you to run your assets in the exact same way you currently do (with a few additional tax benefits). Then, upon your death or disability, your assigned trustees can seamlessly step in and distribute your assets however you direct them to in the trust as signatories on that wallet.

You have seen it on the news plenty of times: rich people don’t pay taxes. I don’t agree it is that simple, but I do agree that rich people pay clever attorneys and accountants to work within the rules to pay less to the IRS than if they just used turbotax. This allows those rich individuals to use those tax savings however they please (to donate to local charitable organizations, provide for children in need, or build a rocket to take you to the upper atmosphere so they can put “astronaut” in their bio).

As somebody early to NFTs and reading this article, if you are not rich yet, I hope you will be soon. Start thinking about how you can retain as much of that newfound wealth as possible. This includes using tax saving mechanisms like trusts or LLCs. Those legal entities also have the added benefit of determining where those assets go when you are gone, saving your heirs a ton of time and money later.

Conclusion

If you read this article and need help with your estate planning needs, shoot me a DM. While I do not personally prepare those documents, I can refer you to somebody I know who does and will understand your specific NFT/crypto needs. The merger between law and Web3 isn’t always going to be seamless, and everybody needs an attorney who understands traditional law (i.e., Trust and Estates law) and also put in the right provisions to meet your uniquely Web3 needs. If that attorney isn’t me (like in this case) I am happy to help people find the attorney that does meet that need.

If you have any questions, or would like me to cover anything in particular, reach out to me on either of my twitter pages. As always, I am an attorney, I am not your attorney. For legal advice, you should always consult (and pay for) an attorney.

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