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Asset protection for physician crypto currency investors

Medical Economics JournalMedical Economics June 2021
Volume 98
Issue 6

Crypto currency is all the rage. It continues to make some physician coin investors small fortunes even as prices swing widely. These are some basic measures to keep your digital wallet safe.

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 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. Some physicians have been targeted by marketing that pitches such schemes as being secret, tax free and creditor remote — they aren’t.

How do 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.

Crypto & 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 key/passwords. If you die without providing access, it dies with you.

What coin you bought, when you bought it, and the 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., an exchange like Coinbase vs. holding it in an online wallet or offline, in physical device such as a removable hard drive).

Any instructions or wishes on the management of the assets.

Physical & digital security

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. Bitcoin itself advises that you maintain two separate wallets, one with limited funds for trading and daily access and a secure, physical, offline 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.

Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. Send your legal questions to medec@mjhlifesciences.com.

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