In our recent article about digital assets, we skipped over planning for your crypto. We encouraged getting your digital affairs in order by doing an inventory of all digital accounts so your estate administrators can manage your affairs without additional stress. Crypto requires even more care.
The Crypto Basics
Cryptocurrency and other “blockchain” assets such as non-fungible tokens are digital assets that exist thanks to computers all over the world that record and validate transactions on a ledger called a blockchain. The transactions are both transparent and anonymous. The chain tracks transactions, but not to an individual, only to a code. To access the asset, you need a complicated passcode, called a private key.
That’s the primary difference that affects estate planning. They also are volatile, risky assets, which also has an impact. Estate planning techniques to deal with them, however, are not different. You have to identify the asset, decide where it should go at your death, and arrange for that transfer. If estate tax is a concern, techniques that employ discounts could be even more attractive. Crypto assets may get additional discounts due to their volatility.
Holding Blockchain Assets
There are two ways to hold blockchain assets: on an exchange or outside an exchange.
Exchanges include Binance and Coinbase, and they operate a lot like regular bank or brokerage accounts. You purchase and hold cryptocurrency with the exchange. The exchange holds your private keys for you. Our earlier article, to a large extent, applies to these accounts. If you hold digital assets on an exchange, just list these accounts along with Facebook and Flickr, and all your other accounts. Some exchanges allow ownership and succession options that work like normal accounts: joint ownership, beneficiary designations, and ownership in trust or business entities.
But many investors hold their own wallets and private keys themselves. They purchase crypto via decentralized exchanges or transfer assets from the exchange. One main attraction of these assets is the fact that there’s no organizing authority. They are decentralized and peer controlled. No oversight, no institutional structure. Many believe holding the with an exchange misses the whole point. And exchanges can be a security risk. If there’s a data breach, you could lose everything.
Planning Is Critical
If you are one of these investors, planning for your crypto is especially important. A digital wallet without the private key is useless—and worthless. There is no “forgot password” option. Death or incapacity without proper planning can wipe out a user’s entire digital fortune. Plus, anyone with the key can access and run off with the assets. So it’s crucial to plan AND protect the plan so the secret code doesn’t end up in the wrong hands.
Investors store wallets and keys online (“hot” storage, like apps) or offline (“cold” storage, such as on USB drives or even paper). Cold storage is more secure because it’s not out there in the digital space vulnerable to hackers.
Regardless of storage choice, you need to plan for how your loved ones will obtain access in the event you become incapacitated and transfer the assets after your death.
Planning for Your Crypto, Step by Step
Step One: Keep detailed records of blockchain assets, digital wallets, and keys and make sure your trusted advisers (like your estate planning attorney) know you have them. No one can manage or plan for an asset they don’t know about. Don’t share keys or expect your advisers to participate in securing keys. The risk is higher than an attorney or financial adviser should take on.
Step Two: Have a plan. An alarming number of Americans still don’t have an estate plan. Crypto holders are among those who should. (More details below)
Step Three: Plan for disclosing account keys and wallets at death AND incapacity. The codes need to be secure – but not too secure!
- Store a secure location such as a safety deposit box or fire-proof home safe and provide access only to trusted allies.
- Provide instructions about how to access the code with estate planning documents, but not IN the documents themselves. Wills often become public record, and trusts can if disputed.
- Digital asset vault, which is a website designed to house digital assets. These are relatively new and risky; security may be breached or the firm could go out of business.
- Share with spouse, other trusted family member, or friend BUT make sure it’s clear that you did not intend a lifetime gift!
- Splinter the private key up among a few trusted individuals.
- Create a “dead man’s switch,” which automatically contacts trusted contacts if the account owner does not log on and authenticate the account for a period time.
- Hold in an app (such as Safe Haven, Casa).
- Hold in a hardware wallet (a roundup of the “best’).
None of these options is perfect. The technology is so new, options will continue to be created (and marketed). Whatever option you choose, make sure it’s trustworthy and not a shell set up to swipe your key. You don’t want to spend time and money planning for your crypto only to see it taken from you.
In the Estate Plan
Consider addressing ownership of digital assets specifically in your documents. Wills and trusts often dispose of different types of property in different ways. (Your “stuff” is tangible, your bank accounts are intangible.) Because key storage can be held in ways arguably either tangible (offline) or intangible (online), language that clearly devises blockchain assets and the storage devices that hold them can help eliminate ambiguity and possible disputes over who is supposed to inherit them.
Consider estate administrator carefully. You can name more than one person to administer your estate. Consider naming a person who has knowledge and expertise with digital assets to handle just those. If named administrators are not familiar with the assets, consider providing a step-by-step guide.
- Make sure your trustee or executor is absolutely trustworthy. Again, access to the key itself is all that is needed to access the account, move it, and claim it.
- Ensure your choice will do the job. Many professional estate administrators (like banks, trust companies, or private fiduciaries) would be wary of holding digital assets. Such fiduciaries are bound by rules that require prudent investing, which means adequate diversification and low volatility. Because blockchain assets are risky, they likely fall outside the rules and would quickly be sold. Consider specific provisions authorizing the investments and absolving a trustee from liability. (But carefully consider whether that’s best for your beneficiaries.)
Investing in blockchain assets can be exciting, but don’t dip into the space without acknowledging that there are risks, both in the investment itself and passing it on. Take some extra time and effort with estate planning for your crypto.