Crypto-assets, including cryptocurrencies and noncurrency blockchain tokens, can hold significant family wealth and also present complex challenges to securing, transferring, protecting and gifting that wealth.
Many elements of traditional estate planning are rendered obsolete in the realm of digital assets. But new strategies are evolving to meet the needs of a growing cohort of digital asset investors in a market worth more than $1 trillion.
Joel Revill, CEO of Two Ocean Trust – the first financial institution in the U.S. to offer a comprehensive digital asset wealth management platform – says estate planning may not, at first, appear compatible with the decentralized systems of cryptocurrency.
“The idea of handing over your crypto-assets or your private keys to someone else goes against that original ethos of the self-sovereign asset,” Revill says. “A self-sovereign asset is a wonderful concept, but when you put it into the context of succession planning or multigenerational planning, you begin to appreciate the fragility of that custody.”
Seasoned investors seeking asset diversification through the purchase of cryptocurrency may seek to formalize a plan for these assets in case of death or illness without hesitation. But for first-time investors holding a small amount of cryptocurrency or the lucky few who purchased $1,000 of Bitcoin in the early 2010s – and are now managing a portfolio worth millions – digital asset estate planning may not be top of mind. This leaves possibly millions in cryptocurrency assets vulnerable to being lost forever.
“If nobody knows you have it, it’s gone,” says Nathaniel W. Birdsall, senior counsel at Proskauer Rose in New York. “Somebody has to find those keys and know what they mean. It’s not good if your grandma cleans out your closet and finds that string of numbers on a piece of paper and doesn’t know what they are.”
Protect Your Crypto-Assets
Cryptocurrency is accessed through a private key, usually a series of alphanumeric characters known only to the asset’s owner and stored in a digital wallet or in cold storage. Whoever has the private key can buy, sell and use the digital money – making it highly susceptible to loss or theft.
“Even with traditional assets like a bank account, a brokerage account, things we are familiar with like a 401(k) or an IRA, it still gets screwed up, accounts still get lost or they’re handled improperly,” says Anthony S. Park, an estate planning attorney and executor in New York. “Even in the vanilla estate, big mistakes can be made and that risk is exponentially higher when you have this new environment with seed phrases and hardware wallets and USB sticks. Something catastrophic could happen, like loss of assets.”
A last will and testament can be useful to name your child’s guardian or pass down the family pearls, but it’s also a document that becomes public during court proceedings after an individual dies. When it comes to cryptocurrency, safe and secure transfer is paramount – meaning basic estate planning documents like a will often won’t be enough to ensure your digital assets and private keys fall into the right hands.
Loved ones must know these crypto-assets exist, where to find them and what to do with them if passing digital assets on to a beneficiary is a priority. The loss of crypto-assets could be disastrous for a family’s legacy, so to keep digital assets safe, investors must choose and execute a plan based on their holdings and circumstances.
The best strategy depends on the nature and value of the crypto-assets as well as the relative percentage of crypto-assets compared to other assets comprising the individual’s wealth, says Julia L. Cronin, attorney at Evergreen Legacy Planning.
“If a client has a small amount of cryptoassets on an exchange (Coinbase, Kraken, Binance, and other exchange accounts), the focus is on making sure that the clients leave a trail of breadcrumbs for their fiduciary to be able to find and access the account,” Cronin wrote in an email. “They can list the cryptoasset on the schedule of trust assets, and make absolutely sure the successor trustee has the login protocols to access the client’s account on the exchange.”
Create an Estate Plan for Cryptocurrency
In more complex cases, seeking professional help to establish a custodian and trustee of your digital assets may be necessary. One or a combination of these solutions can help investors protect and make an estate plan for their digital assets:
- Share your seed phrase and private keys with a trusted family member or friend.
- Splinter your seed phrase and private keys among multiple trusted individuals so that no one person has complete control of your digital assets.
- Create a trust and transfer crypto-asset ownership to the trust. Investors may designate a loved one or corporation to serve as trustee.
- Place crypto-assets in a custody, like a software application or hardware wallet.
- Use a dead man’s switch app to trigger the transfer of digital assets.
- Opt for a cascading multisignature wallet instead of a self-sovereign wallet.
Companies offering digital-asset custodian services include BlockFi, Casa, Unchained Capital, Anchorage and Genesis. Two Oceans also offers custodian services, alongside trustee services. Trusts created for crypto-assets are often lifetime discretionary trusts, Cronin says, but ultimately there is no template for a digital asset estate plan – solutions range from simple to very complex, with some favoring flexibility as this asset class continues to mature.
“I’ve seen people shard their keys or seed phrases, breaking them up into chunks of eight and giving different people subsections of their seed phrases. I’m not a big fan of that – it’s very ‘Da Vinci Code,’ very ‘Indiana Jones,’ making it overly complicated,” Park says. “I have no idea what direction things will go in. It’s been less than 15 years since the iPhone was invented, since Facebook was popularized. Can you imagine planning ahead for the smartphone era or the social media era? We never even thought of it. We have no idea.”
Lastly, a digital asset-based estate plan should include plans for what beneficiaries will do with crypto-assets upon a safe and successful transfer of ownership. It’s also important to consider the tax implications of transferring and possibly selling digital assets at this point.
“If a client creates a wallet, a trustee could transfer bitcoin to new, separate wallets for beneficiaries (if the beneficiaries want to receive in-kind distributions of the cryptocurrency),” Cronin says. “Or the Trustee could liquidate the cryptoholdings (after considering tax consequences) and distribute as normal currency (“fiat”). If a client does not have a trusted person to name as trustee of cryptoassets (because they have no idea what crypto is), some clients name a special Trust Investment Adviser specifically charged with managing and ultimately distributing cryptoassets.”
Copyright 2021 U.S. News & World Report