There Should Be Nothing Cryptic About Cryptocurrency In An Estate Plan

Cryptocurrencies have a more prominent role in estate planning than they did a decade ago. Since Bitcoin was introduced 12 years ago, cryptocurrencies have steadily grown in acceptance. A recent survey showed that 10% of people in the United States now own some form of cryptocurrency. Additionally, a 2020 online survey by the Cremation Institute revealed that only 23% of 1,150 cryptocurrency owners who responded reported having a documented plan for passing on their crypto-assets in case of their death. Despite the lack of planning, 89% of those survey respondents worry about whether their crypto assets will be passed on to their loved ones. Unfortunately, many cryptocurrency holders don’t realize that their crypto-assets should be documented in their estate plan.
What Is Cryptocurrency?
Cryptocurrency is a digital currency in which transactions are verified and records are maintained by a decentralized system using cryptography, also known as blockchain technology, rather than by a centralized authority (i.e., a sovereign government). There are thousands of types of cryptocurrencies, the most common being Bitcoin, Ethereum, Litecoin, Chainlink, and Dogecoin, to name a few. Increasingly, these digital currencies can be used to make purchases. Elon Musk recently announced that Tesla may start accepting Bitcoin as payment for the purchase of vehicles. PayPal now allows users to buy and hold cryptocurrency in their digital wallets. And, BNY Mellon announced that it will hold, transfer and issue bitcoin and other cryptocurrencies on behalf of its asset management clients. 
Since its inception, Bitcoin has seen a dramatic increase in value and in the last year alone, Bitcoins’ gains were stratospheric increasing by 440% (one Bitcoin worth $5,413 in March 2020 was worth $48,634 by March 2021). Based on this appreciation and a mainstream adoption in the markets, it’s clear why Fortune 500 companies and individuals are eager to invest in cryptocurrencies. 
Learn From The Mistakes Of Others
When German-born programmer Stefan Thomas recently made headlines after a lost Bitcoin password rendered $220 million worth of his Bitcoin inaccessible, there was a universal gasp of dismay from people around the world. This mishap served as an important wake-up call to cryptocurrency holders, reinforcing the need to develop a plan to protect and pass on their digital assets. Without a password, cryptocurrencies are inaccessible because there is no system for password recovery. The digital “currency” is created through an algorithm and does not save a person’s password or “key”. 
Document All Crypto-Investments
Unlike traditional investments, there are no traditional ownership or beneficiary designations on cryptocurrency accounts. Bitcoin and other cryptocurrencies are entirely anonymous, so if the holder dies without communicating that s/he owns a cryptocurrency and does not provide the corresponding password or “private key,” the asset dies with them. Ownership is established by “blockchain” records and transactions, akin to the registry of deeds tracking deed transfers. Imagine you lost the deed to your house, and the registry of deeds did not exist (decentralized)—you would not be able to sell the house or prove your interest in it. The only way to access Bitcoin is with the password or “private key.” Without the private key, you have no access, and without access, you have no Bitcoin, and all the value is lost.
Given the significant increase in cryptocurrency values, you must document what you own, where the passwords are stored, and what the purchase price was for each cryptocurrency. It is important to understand how to manage cryptocurrency assets and maintain the security of passwords, while being mindful of the IRS tax treatment of virtual currency transactions.
Cryptocurrencies can be purchased on exchanges such as Coinbase and held there. Exchanges like Coinbase provide easy access to the owner but are not as secure as “wallets.” Outside of exchanges, there are two main ways to store cryptocurrencies—in “cold” or “hot” wallets. Cold wallet storage refers to offline storage devices such as a USB drive, computer, phone or tablet that are not connected to the internet. Hot wallets are online or desktop apps that allow you to store keys and passwords to access cryptocurrencies. There is significant literature that outlines the pros and cons of each option, and ultimately you need to decide what you are most comfortable with.
Ensure Accessibility To Crypto-Assets
The most sensitive aspect of owning cryptocurrencies is that the person with the password (“key”) is the “owner.” Anyone with the key to the crypto account, can access the cryptocurrency and move it to some other location which the original owner cannot access. Cryptocurrency owners need to ensure that they have a documented process whereby named fiduciaries they trust can access their accounts.
As an initial step in the estate planning process, you should document your ownership of cryptocurrencies and provide a document to your trusted fiduciary about how to access those assets after death or disability. The simple step of keeping an asset inventory and documenting where passwords can be found on an exchange or a “wallet,” can help ensure that crypto-assets are not lost at the death of the original owner.
If you have any questions about cryptocurrencies in your estate plan, please don’t hesitate to contact me!
-Original Article found here –

Leave a Reply

Your email address will not be published. Required fields are marked *