Asset Protection Trusts for Cryptocurrency and Digital Assets – Fin Tech


With more investors diversifying their investment portfolios, cryptocurrencies and other types of digital assets (that is to say, non-fungible “NFT” tokens) have become a more popular option in recent years. The Internal Revenue Service states that digital assets are property, however they are accessible to creditors, so certain types of trusts can be established to help protect these assets and allow access to online accounts, particularly for cryptocurrency assets. A state-based National Asset Protection Trust (DAPT) allows a trust creator (“trustor”) to protect their outgoing digital assets with a legal instrument that shields them from creditors. Previously, these types of trusts were only available overseas. Fortunately, many states in the United States have adopted DAPT statutes to allow this type of trust to be legally established in their jurisdiction.

What is a National Asset Protection Trust?

Prior to the enactment of DAPTs, a trustor/settlor had to establish an irrevocable trust created by a third party to protect their assets. A DAPT is a self-established trust that allows the protection of the trustee/settlor to be the beneficiary, to transfer a portion of the assets of the estate to the trust and to provide certain protections against future creditors, legal complaints, malpractice claims and other financial consequences. events. Formally known as a qualified spendthrift trust, this is a trust that allows the trustor to transfer assets into a trust of which the trustor/settlor is also a beneficiary to protect themselves from creditors. This type of irrevocable trust can ensure that wealth can be saved for future generations and protects wealth from liability risk.

Each state has a slightly different statute of limitations and creditor exemptions. So far the states of Alaska, Connecticut, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia and Wyoming have passed DAPT legislation. . Additionally, DAPT legislation generally abolishes the rule against perpetuities and allows dynasty trusts.

Meanwhile, ten states that have not adopted a DAPT, such as New York, offer similar provisions under an irrevocable grantor trust.

Not all states pass DAPT law, so case law has primarily determined that residents of states without DAPT laws who establish a DAPT in a DAPT state will likely not have their trusts continued in their home state. The situs of the trust, which is usually determined at the outset, will likely determine whether or not DAPT will apply. Ultimately, while cryptocurrencies and other digital assets on the blockchain are a global currency, the location of the place of trust will determine whether a DAPT law applies. Although state-by-state adoption of DAPT legislation is not yet universal, at least one trustor/settlor can establish a DAPT in the United States knowing that their assets will not have to be sent overseas to be settled. protected.

Tax Responsibilities of Trusts and Cryptocurrencies

A trustor/settlor could use a DAPT only for their cryptocurrency and digital assets. However, cryptocurrency will still be subject to federal (and state) taxation. Crypto transferred into a living trust is taxable because the living trust is not considered a separate taxpayer. With non-grantor trusts, the grantor is not taxed, but the trust pays taxes and distributions from the trust may be taxed. With self-established and irrevocable trusts, the trustee/settlor remains the beneficiary, so any taxable income or deduction earned by the trust will be taxed on the trustee/settlor’s tax return. Even offshore digital asset trusts will be subject to US taxation. If the trustee/settlor decides to open an offshore asset protection trust instead of a domestic trust, they will be responsible for filing IRS Forms 3520, 3520-A, 8938 and FinCEN Form 114 (also known as FBAR) .

As discussed in our previous Insight article, the Internal Revenue Service (IRS) treats cryptocurrency as property, not currency (see IRS Notice 2014-21). Fair Market Value (FMV) is determined at the time the cryptocurrency is purchased and in turn, gains/losses will be calculated when the digital asset is sold, either converted back into US dollars or into another crypto -currency or other digital asset (that is to say, NFT). Gains or losses from cryptocurrencies are reported on IRS Form 8949 and Form 1040 Schedule D, which apply to short-term and long-term fixed assets. Currently, the IRS has not issued any known federal gift or estate taxes for DAPTs.

Considerations for Cryptocurrency and Digital Asset Trusts

As a decentralized digital currency, cryptocurrencies are stored on the blockchain and each token or coin has a unique signature. While this aspect may be appealing due to less regulation, it may save administrators or non-owners from having problems accessing digital assets after the owner dies. When delegating fiduciary responsibility for crypto assets in a trust, trustees and/or trustees will need to be very careful about accessing digital wallets. Once someone has access to digital wallets or cryptographic keys, a person can access digital assets without the permission of the owner. Knowing the volatility of cryptocurrencies, a trust should be designed to have instructions in place should a cryptocurrency value crash. The administrator will need explicit guidelines and the ability to access digital wallets and cryptographic keys in the event of an emergency such as a stock market crash.

More entities can act as trustees on cryptocurrencies and digital assets, so there are more options. In July 2020, the United States Office of the Comptroller (OCC) issued an interpretative letter authorizing federally chartered banks and federal savings associations to provide custodial services for cryptocurrencies, including holding unique cryptographic keys.

Whichever trust company, bank, or entity a cryptocurrency or digital asset owner decides to use, those trustees will need to carefully determine who controls the digital wallets and encryption keys to ensure that no one can access the assets to reduce risk. theft or mismanagement. With the increase in the number of owners of crypto and digital assets and the rising value of these assets, asset protection trusts offer a new vehicle to protect these assets from creditors, allow access to beneficiaries and trustees and preserve them for future generations.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


About Author

Comments are closed.