Digital currencies are quickly evolving from niche investments to mainstream assets. Whether you’re a believer or a skeptic, it’s increasingly important to understand how cryptocurrency fits into modern estate planning.
Even if your clients don’t currently own cryptocurrency, it could still affect their estate planning, either through their investments, an inheritance or their responsibilities as a trustee, executor or power of attorney. Taking simple steps to update estate plans to account for these investments can prevent valuable assets from disappearing after death, preserve legacies and protect loved ones from additional burdens.
What’s Cryptocurrency?
Cryptocurrency, also known as “crypto,” is a digital form of money that uses cryptography to secure transactions and verify the transfer of funds. Blockchain, the technology behind cryptocurrency, creates a decentralized public ledger that records transactions and is resistant to tampering. Bitcoin, created by the pseudonymous Satoshi Nakamoto, was the first widely known cryptocurrency and remains the most popular today.
Why Care?
Cryptocurrency ownership is on the rise. It is estimated that nearly 28% of American adults, or about 65 million people, own some form of cryptocurrency. With this surge comes an increased likelihood that crypto assets will play a role in your client’s estate planning, whether through direct ownership or inheritance.
The consequences of not planning for crypto can be dire. In 2021, the New York Times estimated that $140 billion worth of cryptocurrency had been lost or stranded in inaccessible digital wallets. Moreover, an unorganized transfer of crypto often puts heirs in a vulnerable position. Without proper estate planning, it’s entirely possible that your clients or their heirs could face losses.
Legal Considerations
For now, governmental agencies remain in a holding pattern when it comes to creating major regulatory frameworks for digital currencies. The Securities and Exchange Commission tends to treat it as a security, though legal challenges have questioned whether cryptocurrencies meet that definition. The Internal Revenue Service, on the other hand, treats it as property – applying general tax principles to transactions involving crypto. Notably, virtual currency doesn’t qualify for foreign currency gain or loss treatment under U.S. tax law.
It’s often overlooked that, unlike stocks and bonds, nobody will know your client owns crypto assets unless they provide that information in their estate plan and detail how to access it. Cryptocurrency can be stored centrally, through platforms like Coinbase or Kraken that offer a user experience akin to a traditional bank account, or decentrally, using private wallets and keys. Crypto wallets, especially decentralized ones, don’t leave an obvious paper trail. In fact, private wallets are compared to “hiding cash under your mattress.” If a fiduciary doesn’t know the cryptocurrency exists or does not have the access credentials, those assets could be lost forever.
Ohio law, for example, provides guidance under the Ohio Revised Code, requiring a custodian to disclose digital assets if the personal representative presents proper documentation, including proof of consent. This is a good start, but navigating these rules can still be complicated.
Cryptocurrency Checklist
Creating a robust estate plan that incorporates cryptocurrency involves some crucial steps:
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Document everything: Prepare a detailed list of all cryptocurrency assets, wallets and access instructions.
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Authorize access: Give fiduciaries explicit legal authority to access your digital devices and accounts via wills, trusts and powers of attorney(POAs). Simply providing the passcode key to your cryptocurrency wallet might not be enough and could put the fiduciary at risk of violating federal law in the process.
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Consider using trusts: Evaluate your specific situation and determine what estate plan best serves your needs, including whether to create a trust for holding your digital assets. Not everyone will have the same considerations or need the same protection, but a trust can simplify cryptocurrency asset management for some families.
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Talk to the custodians: Inquire whether they allow legacy contacts. Having legacy contacts doesn’t mean they operate like beneficiaries on bank accounts, and they could still be required to pursue the asset in probate.
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Consult a knowledgeable attorney: Given the complex and rapidly changing legal landscape, working with an estate-planning attorney who understands cryptocurrency is essential.
Opportunities and Challenges
With a well-crafted estate plan, fiduciaries can face fewer hurdles in accessing the decedent’s virtual assets than brokerage accounts or retirement funds, as financial institutions often implement lengthy security measures that can delay the estate’s administration of assets. Additionally, cryptocurrency can be held in a trust alongside more conventional assets, offering an added layer of control. As more politicians recognize the importance of implementing laws and regulations specifically for crypto, we may see even greater advantages emerge.
Until then, fewer checks and balances involved with cryptocurrency underscores the importance of safeguards for your client’s fiduciary and beneficiaries. The decentralized nature of crypto means that, unlike traditional financial institutions, there are fewer built-in protections. For example, if a court replaces a fiduciary due to incompetence or dishonesty, they could still have retained access to your client’s crypto assets by using a passcode. While some view bank security measures as overkill, others find those measures reassuring and necessary.
This doesn’t mean that centralized crypto wallets are unsafe or untrustworthy. Rather, the nuances between the different types of storage options and wallets make it less predictable. For example, wallet providers are inconsistent in how they handle post-death access and legacy contacts. In the worst-case scenario, this could lead to a crypto owner believing they’ve made the right arrangements for passing on their assets, only to have their fiduciary locked out of the account.
Nevertheless, cryptocurrency is no longer a fringe financial tool, and it must be considered part of any modern estate-planning conversation. Whether or not your client invests in digital currencies, the likelihood of encountering them in some legal or financial capacity is only growing. It is far more prudent to plan for the possibility of crypto in your client’s, or their loved one’s, estate than to wait until it becomes a problem.
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