When we sit down to discuss an estate plan, we always think of "traditional" assets first: your home, retirement accounts, investments, business interests. But for a growing number of people, digital assets are becoming just as important. This article explores proper planning for cryptocurrencies and other non-traditional digital assets, including a cell phone and online accounts.
cryptocurrency
There are currently more than 4,000 different types of cryptocurrencies. Bitcoin, Ethereum, and even Dogecoin are among the best known. As cryptocurrency continues to become more common, its value as part of your portfolio will only increase, and unlike traditional assets, there is no physical manifestation of cryptocurrency, so not including it as part of your wealth plan could be Much more damaging than failing. to plan traditional assets.
Cryptocurrency is a digital currency that uses encryption and links a network of computers to complete transactions. There are two main ways to own a cryptocurrency account: through a cryptocurrency exchange or in your own "wallet" with an encrypted private key.
Cryptocurrency exchanges are similar to traditional brokerages in that a custodian holds the account. Unfortunately, to date, most exchanges do not allow beneficiary designation or ownership by a trust or business entity, making traditional estate planning difficult. Another drawback is that if an account becomes "torn" or explodes in value, only a set amount can be withdrawn from the exchange daily, limiting immediate access to assets and increasing the importance of long-term planning. A probate administration, while not generally desirable, will usually ensure that the account is not lost upon the owner's death. As cryptocurrencies and exchanges continue to grow and evolve, they are likely to become more โestate planning friendlyโ, so there are sure to be better planning options in the near future.
For crypto accounts not held on an exchange, each account can be accessed using an encrypted private key, sometimes up to 64 digits, that is unique to the owner. When you sign up for a wallet, you will receive a key unique to you that must be entered in exact order to access the wallet. If the key is lost, there is no password reset or court order in the world that will recover the key: the account and all its value are gone forever. News accounts are full of stories of unintentional crypto mishaps; just take Mathew Mellon, heir to the Mellon fortune who died without passing on information about his $1 billion crypto account, or James Howells, the guy who has been searching UK landfills for years to trace his USB drive. with $280 million worth of Bitcoin.
In the case of cryptocurrencies owned only by the owner, loved ones need to know that the account exists, where to find it, and how to access it via a private key. As such, some estate planning techniques are recommended to minimize the risk of a valuable crypto account being lost to theft or death.
First, consider sharing your account information, including your private key, with your spouse or a trusted family member or friend. Remember, however, when selecting the appropriate holders of this information, treat it like cash: access to the key itself is all the person needs to access the account, move it, and claim it as their own. For some, it may be best to include the pertinent information, including the private key, in a note kept in a safe deposit box or other secure place where a trusted family member knows where to find it when the time comes. If your family members or intended beneficiaries are not familiar with how crypto accounts work, a step-by-step guide to accessing and managing cryptocurrency may be recommended.
Second, consider dividing the private key among a few trusted people. Maybe your lawyer has half the key and your financial advisor the other half. But agreement must be reached on when and how information is shared after death, and on what storage mechanism each can offer.
Another solution is to spread the key among the intended recipients, but keep in mind that when the time comes, they must know how to crack it properly. Giving your spouse the digits 123, your son 456, and your daughter 789 may seem sensible, but what if one of them loses the key? A better solution might be to give your spouse 123(A) and 456(B), your son 456(B) and 789(C), and your daughter 789(C) and 123(A). In this way, two people are still required but the loss of one will not be fatal.
Other options, though not discussed in detail here, include creating a "dead man's switch" where ownership will automatically transfer to an intended beneficiary if you don't log in and authenticate the account (after multiple attempts to contact you) for a period of 18 months, or by opting for ownership through software applications or hardware wallets.
Ultimately, as part of proper estate planning, you should discuss ownership of the account in your trust at the time of your death with your attorney. Within the trust, the instrument must specify the disposition of the cryptocurrency: is the account to be transferred in kind to the beneficiaries or liquidated? Can the trustee hold a concentrated cryptocurrency position or will the account follow the diversification rules by default? Careful consideration should also be given to who will act as trustee. Currently, many institutional trustees have policies against managing cryptocurrency trusts or require immediate liquidation of crypto accounts, so an experienced individual trustee may be necessary, either for crypto accounts only or for all trust assets.
Cryptocurrency accounts and estate planning techniques are sure to adapt and change rapidly in the years to come, so a good first step is to discuss your options with your estate planning attorney. At KMK, we constantly evaluate the latest and greatest strategies and revise our estate planning documents to properly address the transfer and management of these important assets.
sentimental digital assets
Although not planning properly for cryptocurrencies can be financially damaging, the loss of some digital assets could take a more emotional toll.
If you die today, could someone access your cell phone or your iCloud photos? Fortunately, these types of assets are not at risk of theft or loss in the same way as crypto accounts, so planning can be a bit easier.
Some institutions provide "legacy" settings for you to control account disposition upon death, but for most digital assets of this type, proper estate planning can be handled by transferring your login information. Your estate plan must first give your spouse or trustee authority to access and manage these assets after your death, and then the proper documents must be in place to assign or transfer the accounts and other digital assets to your trust or loved ones instead . He passed. Once the estate planning is done, the only step left is to make sure your loved ones know how to access the digital accounts or records. Because these assets do not have the same risk of theft as cryptocurrencies, it may be enough to write down a list of passwords and store it in a safe place inside your home or give it to your lawyer to keep in their physical file. It is not recommended that you share passwords widely during your lifetime, but your spouse or children should know where to find the list if you pass away to allow easy access to assets.
Estate planning for digital assets is a fluid process that requires regular maintenance, and this asset class will no doubt develop rapidly in the coming years. The most important first step is to start thinking of digital assets as an important part of your portfolio and to start contemplating transferring these assets in the event of incapacity or death.
