The cryptocurrency and digital asset market has exploded over the past decade. Early investors have been catapulted from middle-class working citizens to mega wealthy in the space of a few years, and new entrants continue to amass large wealth through this up-and-coming asset class.
Cryptocurrency is still in its infancy, is largely unregulated, and often misunderstood. As a result, there are various grey areas surrounding its classification, taxation, and how best to own and protect it. In this article, we will clear up some misconceptions about cryptocurrency, explain why it should be protected in the same way as other valuable assets, and discuss the best means for doing so.
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In this day and age, there are numerous threats to your hard-earned personal wealth. These can include the likes of liability suits, creditor claims, divorce, and many more.
To combat this, specialised asset protection strategies have been created to help keep your assets out of harm’s reach. Financial vehicles such as offshore bank accounts and limited liability companies have been used with great success to help safeguard people’s wealth. However, by far the most effective instrument for protecting your personal wealth is that of an Asset Protection Trust (APT).
While cryptocurrency is unique in many ways, it is not different from any other class of assets when it comes to being under threat from lawsuits and other risks. As such, the exact same type of care needs to be taken to safeguard your crypto wealth, especially if it is worth a substantial sum. There are two features of cryptocurrency which makes it similar to any other type of asset class:
Firstly, it is important to understand that cryptocurrency is treated as property by the IRS for tax purposes. Depending on exactly how the ownership of the virtual currency is maintained, it could be treated as either personal, investment, or business property.
The main point here is that any digital assets you hold will be viewed by a court of law as a form property, similar to real estate, stocks, or any other form of personal or investment asset.
As such, if you are faced with a civil lawsuit, liability claim, or creditor collection, any cryptocurrency you hold can be used to settle the liability the same as any of your other assets would.
There are no special exemptions applied to virtual assets just because they are intangible. As such, they need to be protected as you would any of your other assets.
A common misconception about digital currencies like Bitcoin and Ethereum is that they maintain anonymity of the owner, and that their transactions cannot be traced. In fact, the public blockchain on which all cryptocurrency transactions are recorded is extremely transparent and traceable, which makes transacting in these currencies much less private than cash.
According to Crypto Group, there are exceptions, such as privacy coins like Monero, whereby transactions are anonymous. However, it is best to assume that any digital asset or virtual currency you hold can and will be traced back to you.
This further adds to the importance of ensuring that you find legal methods to protect these assets from greedy outsiders, other than just assuming they are hidden and therefore safe. Cryptocurrencies should be included in your asset protection strategy.
Asset protection trusts (APTs) have long been the best means of asset protection available for a variety of asset types, and cryptocurrency is no different. APTs are specially designed to be highly impenetrable in the event of legal claims and other threats to assets.
They are irrevocable trusts which cannot be altered or terminated once they are established. This means that once the grantor has transferred ownership of assets to the trust, they are no longer directly controlled or owned by them, and thus cannot be claimed if the grantor faces personal legal issues.
At the same time, an asset protection trust allows the grantor to simultaneously be the beneficiary of the trust, meaning they will inevitably retain the benefits of the assets, without the risks of keeping them in their personal estate.
As such, a well-structured Asset Protection Trust in the right jurisdiction is seen to provide the best level of asset protection to your assets, whether they be digital in nature or not.
There are various specific types of APTs, and they can be found in different jurisdictions. Due to the different ways in which digital currencies are regulated and treated in each jurisdiction, this becomes an especially important factor to consider when determining the best asset protection strategy for cryptocurrency.
A Domestic Asset Protection Trust (DAPT) certainly does provide a good level of protection, due to the fact that it legally separates ownership, and contains provisions which help to protect assets in the event of a court case against the grantor.
That being said, DAPTs are not impervious to domestic dangers. The fact that they are located in the same jurisdiction as the local courts makes them more vulnerable to local creditor claims and court cases. On the plus side, DAPTs are usually cheaper and easier to form.
Offshore Asse protection Trusts tend to provide much better overall asset protection than DAPTs. Being situated outside of the jurisdiction of local courts and regulations provides a much-needed additional layer of protection.
Specifically, an offshore APT in a favourable foreign jurisdiction such as the Cook Islands provides the highest level of asset protection available. There are special trust regulations in place which make it nearly impossible for foreign courts and creditors to claim against the assets held in a Cook Islands APT.
Digital Currencies are perfectly suited to being held in an offshore APT like a Cook Islands Trust, as they are not location-specific, and ownership can easily be transferred to a foreign jurisdiction. In addition, offshore jurisdictions in tax havens like the Cook Islands tend to have a more favourable stance towards cryptocurrency ownership than the US.
Asset Protection Trusts provide numerous benefits in addition to safeguarding assets, especially those based in a tax-friendly offshore jurisdiction like the Cook Islands. Some of these include:
Transferring your cryptocurrency and other assets to an APT removes them from your personal estate, and can help optimise taxes.
A Cook Island Asset Protection Trust is capable of securely storing and handling digital assets and cryptocurrencies. One of the primary considerations when it comes to using an APT for cryptocurrency is how the private keys will be managed and safeguarded.
There are providers in the Cook Islands, as well as other notable jurisdictions, who are capable of safeguarding digital assets. Cook Islands trusts can make use of safe deposit bank accounts in Switzerland or Liechtenstein to store the private keys in one of their vaults for added protection.
Offshore asset protection trusts provide high levels of financial privacy which help protect the assets from unwanted attention. That being said, FATCA still requires that the assets are reported to the IRS for tax purposes.
The most effective way to protect your crypto assets is by using an asset protection or offshore asset protection trust. This form of corporate entity represents the best form of protection that can be had in the world today.
We generally recommend using an offshore trust located in the Cook Islands which has some of the worlds strongest asset protection clauses in the world.
Go here for more information on a Cook Islands Trust, and which is the bulletproof security for your assets.
A second option is to use an Offshore LLC. We generally recommend using an Nevis LLC or a Cook Islands LLC. An LLC is a corporate entity which can used to separate you from your assets, it gives you limited liability and does provide some of the same asset protection mechanisms as a trust.
However, the two are not equal by any means as an offshore trust also has wealth management and estate planning capabilities that are not found in an LLC. Trusts are much more complicated in nature and have layers of protection mechanisms that safeguard the assets from creditors and frivolous lawsuits.
What you chose will depend upon you and your situation and requires personal guidance to implement. Seek out proper consul before your go offshore to make sure that you have chosen the option that best works for you.
Cryptocurrencies have some unique features which require special consideration when it comes to using an Asset Protection Trust or other type of vehicle to hold and manage them. Primarily, ownership of digital currencies is secured by means of a “private key”.
Due to the fact that cryptocurrencies are decentralised and therefore not controlled by any specific issuing authority, the only proof of ownership and protection of these currencies is by securely maintaining this private key.
Anyone who has access to the private key can also access the crypto wallet without the original owner’s knowledge or permission, and transfer the funds out of it. Such a transaction would be irreversible and there would be little to no means of recourse.
This is an especially important issue to be born in mind when determining how access to the crypto wallet is administered upon transferring it to a trust. The risk of sharing access to the private keys needs to be balanced against the risk of beneficiaries being unable to access the wallet if the grantor dies.
Fortunately, there are ways, such as special custodial wallets, to safeguard the keys to the wallet while enabling the beneficiaries to be able to access it after the death of the grantor of the trust.
By nature, cryptocurrency is extremely volatile. This itself poses an additional risk and consideration, as there should be explicit guidelines as to how the trust should manage the assets in the event of major market movements, crashes, and so forth, which could all significantly alter the value of the assets held by the fund.
While cryptocurrency brings exciting new opportunities and wealth generating prospects, it also has its fair share of risks. Aside from its volatile nature, there are additional security risks associated with cryptocurrency. These include safe custody of private keys, as well as potential scams and fraud. Furthermore, like any other asset, your crypto is also at risk if you are faced with a lawsuit or bankruptcy. It is therefore of utmost importance to come up with an effective asset protection strategy for your cryptocurrency, which incorporates its unique features.
In this regard, an asset protection trust is an ideal vehicle to safeguard your cryptocurrency. If you are looking to establish an asset protection trust for this purpose, it is advised to consult with a trust expert and financial advisor to find the best solution which fits your circumstances and help you with the process of setting up the trust in your jurisdiction of choice.
For more information on Crypto
Why You Need A Plan B
Threats to Your Assets
Global Diversification Planning