Digital assets come in many forms. They can be documents or any other type of file that has financial value. Cryptocurrencies, like Bitcoin, Ethereum, and Litecoin, are digital assets. With its anonymity and high return, more and more individuals and businesses are now putting a significant percentage of their wealth into it.
However, cryptocurrencies are also prone to risks. In countries that treat crypto as property, cryptocurrency holders must report all of their crypto transactions, and gains are taxable. So, anonymity is not guaranteed. If a business or a crypto holder is involved in litigation, the court may order them to disclose their digital assets. That’s why crypto asset protection plays a significant role, so creditors and other claimants cannot go after your digital assets.
Read on to learn how you can protect your digital assets.
Protecting Your Crypto Assets From Creditors And Other Claimants
If you’re holding many digital assets, you need to take extra care to protect them from creditors and other claimants. One way to do this is to create a trust.
What Is A Trust?
A trust is a legal arrangement where a trustee holds and manages property or assets for the benefit of a third party. The settlor is the person who creates the trust and transfers the estate to the trustee. The beneficiary, on the other hand, is the person who will receive the benefits from the trust.
The advantage of setting up a trust is that it can help you protect your assets from creditors, lawsuits, and other claims. If the settlor is sued, the court cannot go after the assets in the trust since the trustee legally owns it.
Another benefit of setting up a trust is that it can help you minimize taxes. Taxing digital assets doesn’t only exist in the United States. Other countries like Thailand have also implemented taxes on cryptocurrencies. So, regardless of where you live, setting up a trust to minimize or even avoid paying taxes on your digital wealth is crucial.
The settlor can put conditions on how the assets can be used and when the beneficiaries can receive them. This can help you minimize estate taxes since the assets in the trust are not included in your estate.
Different Types Of Trusts
Asset protection trusts have different types that you can set up to safeguard your digital wealth.
- Domestic Asset Protection Trust (DAPT)
A domestic asset protection trust or DAPT is a trust created under the law of your home country where the settlor can be the beneficiary as well. Some find DAPT a more convenient option because you don’t have to deal with the regulations of another country. Creating a DAPT for your crypto assets will not only safeguard your digital wealth from creditors but also from a soon-to-be ex-spouse and other potential claimants.
- Foreign Asset Protection Trust Or Offshore Trust
A foreign asset protection trust is a trust created in a jurisdiction other than your home country. People who want more privacy and protection of their assets from their home country’s laws use offshore trusts. The laws of the foreign country where the trust is created will govern the trust. If a claimant from your home country sues you, they will have to deal with the foreign country’s laws that have jurisdiction over the trust.
If you’re thinking of setting up an offshore trust for your digital assets, countries with strong asset protection legislation are the ideal places to set this up. They make it hard for foreign authorities to access information about the trust and its assets.
Safeguard Your Digital Wealth From Hackers
Creating a trust will protect your digital assets from creditors and other claimants. But it won’t safeguard your wealth from hackers. Whether you’ve set up a trust, you need to take extra steps to protect your digital assets from hackers.
Here are some of the best ways to do it:
- Keep Your Crypto In A Cold Wallet
A cold wallet is a cryptocurrency wallet that stores your private keys offline. Storing private keys offline makes it more difficult for hackers to steal them since they need physical access to your cold wallet.
There are two types of cold wallets: hardware and paper. Hardware wallets are physical devices that store your private keys, like a USB. Paper wallets are simply printouts of your private keys. Both hardware and paper wallets are more secure than hot wallets, which store your private keys online.
- Limit The Number Of People Who Have Access To Your Wallets
When delegating trustee responsibilities, you must limit the number of people who have access to your wallets—the more people who have access, the greater the risk of theft. Since creating a trust means giving someone else control of your assets, choosing the right trustee is essential. Whichever entity you entrust your digital wealth with must carefully determine who should have access to your wallets and to what extent.
Factors you need to consider when choosing a trustee include their expertise, trustworthiness, and ability to follow their client’s instructions.
Crypto asset protection is essential, especially in countries treated as property. Setting up a trust is one of the best ways to protect your digital assets from creditors and other potential claimants. But this won’t be enough. You need to designate a qualified trustee, use a cold wallet, and restrict access to your cold wallets.