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Should I pass on crypto to my family through my will?

I am an American citizen and have lived in London for almost 30 years. I hold a significant amount of money in cryptocurrencies and I’m starting to think a bit about how best to pass it on to my family and others I want to include in my will. What is the best way to bequeath my crypto investments, and does my status as a US and UK taxpayer make a difference?

Lauren Rapeport, associate in the private client and tax team at Withers

Lauren Rapeport, associate in the private client and tax team at Withers, a law firm, says congratulations on successfully navigating the turbulent crypto markets. You now have the unenviable task of deciding what to do with your winnings.

Crypto is, despite what some still believe, taxable in the UK. As a long-term UK resident, you will have to pay UK tax on your crypto returns. Assuming you are not a crypto trader or receive income from mining, staking or in connection with employment, you are liable for capital gains tax (CGT) at up to 20 percent currently on your profits when you sell your crypto or exchange or donated it for other crypto, after deducting personal allowances and losses.

The value of your crypto is also subject to inheritance tax (IHT) which is currently 40 per cent when that value is passed on to the extent it exceeds your nil rate band (currently £325,000), subject to exemptions and allowances.

When it comes to crypto, it is wise to plan early to avoid losing your keys and your crypto. If you hold the private keys – as opposed to an account with an exchange, for example – you can transfer crypto on the blockchain directly from your wallet to your beneficiary’s wallet, if they have one, or you can give them your private key give.

The type of crypto asset is also important. For example, some NFTs contain bundles of rights that may not automatically transfer. Ideally, you should document the gift and download the wallet data (if applicable) as proof.

A key consideration is whether to make the gifts now or with your death. If you make a gift now, you can pay CGT on any gains and you will need liquidity to pay it, but reduce your IHT bill on death if you survive seven years of the gift.

A gift on death may attract IHT, but the base cost is raised to market value, wiping out your lifetime gains. In either case, there is no IHT if the portfolio value is below your nil rate band, or your spouse is the beneficiary.

Alternatively, you can sell your crypto and give the proceeds, if you think your family and friends might prefer not to hold crypto.

If you leave crypto in your will, you’ll need to draft it carefully. The will may contain gifts of specific wallets or token holdings or it may establish a longer-term trust of crypto. Choosing an executor or trustee with relevant expertise is essential. Wills are public documents and therefore should not include sensitive information such as the private key or its location.

Finally, as a US citizen, you are also subject to US taxes. The IRS taxes certain crypto events in a different way to HM Revenue & Customs, so you should not assume that the same principles apply. We regularly advise UK-US clients on the importance of adopting a co-ordinated succession plan.

Are cohabitation agreements worth it?

My partner and I are planning to move in together and I am pregnant with our first child. We don’t expect to get married, but do we need to draw up any kind of legal agreement to protect our finances? I’ve heard of cohabitation agreements, but are they worth the paper they’re written on?

Kate Van Rol, advocate at 4PB

Kate Van Rol, lawyer at 4PB, a chamber of family law lawyers, says Cohabitation agreements, as long as they are properly drafted, are legally binding contracts that can be enforced by the courts. There are many reasons why a couple may choose to live together but not marry, but it is important to be aware that choosing not to marry severely limits your financial rights to each other.

Rules for cohabitation agreements vary slightly between the UK countries, but all will spell out exactly what each partner is entitled to if they split up. An agreement is a document that two parties who live together (or who plan to live together) can formulate and sign. It provides legal rights and protections that would be automatically assumed with a marriage and gives you some financial and legal security if one of you falls ill, dies, or breaks up. Any parties who live together can sign cohabitation agreements — you don’t have to be romantically involved.

A cohabitation agreement will give you certain rights, including those related to financial security, property rights, access to pensions and other financial assets, tax benefits and rights in relation to children. They can be tailored to meet your needs.

Take financial security. You will not automatically be entitled to each other’s assets without a marriage, civil partnership or cohabitation agreement. When the relationship breaks down, or on the death of one party, you will not necessarily have any rights to these assets, or your property (depending on the terms of your tenancy agreement or mortgage) unless it is left to you by agreement or in a will A cohabitation agreement can give you tax benefits that you wouldn’t otherwise be entitled to.

Let’s look at rights in relation to a child. The father will only have parental responsibility if he is named on the baby’s birth certificate. Parental responsibility gives each parent the right to make important decisions about the child, including decisions related to their education and health care.

In terms of next-of-kin status without an agreement, you will not be automatically informed if your partner is involved in an accident, falls ill or dies. You will not receive medical updates, or have a say in medical decisions or for that matter, funeral plans.

If you do want to create a cohabitation agreement, start by considering your assets and those of your partner, and your proposed division of these assets in the event of death or separation. This can include the property and any savings, investments or pensions.

You can either draw up a cohabitation agreement between you or with the assistance of a family lawyer. The cost will depend on the complexity of the agreement.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect consequence arising from any reliance placed on answers, including any loss, and exclude liability to the fullest extent.

Our next question

We have always been very close to my aunt but are worried because she is increasingly showing the warning signs of dementia. Her partner recently passed away and my aunt was named executor, so she is looking to get their extensive portfolio of assets, including property and funds, in order. She is also considering drawing up her own will to deal with her assets. We are happy to support her and ensure that her wishes are carried out. What should our next steps be?

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