As cryptocurrency adoption rises, understanding how to navigate cryptocurrency in estate planning is vital for estate planners and digital asset holders, making effective strategies for asset protection and distribution increasingly important.
Understanding Cryptocurrency
Cryptocurrency is a type of digital or virtual currency that utilizes cryptography for enhanced security. This characteristic makes it challenging to counterfeit. One of the unique attributes of cryptocurrency is its decentralization; it isn’t regulated by any central authority, making it ostensibly resilient to government interference or manipulation.
Cryptocurrencies operate on a decentralized control framework, contrasting with centralized digital currency and central banking systems. The decentralized control inherent in each cryptocurrency is facilitated through blockchain technology, a public transaction database that functions as a distributed ledger. Bitcoin, introduced as open-source software in 2009, is widely acknowledged as the pioneer decentralized cryptocurrency. Since Bitcoin’s inception, more than 4,000 alternative cryptocurrencies (altcoins) have been launched.
The Need to Incorporate Cryptocurrency in Estate Planning
The burgeoning ownership of cryptocurrency has necessitated its inclusion in estate planning. Cryptocurrency assets can prove challenging to access and distribute after death; thus, incorporating them in your estate plan is crucial.
Estate Planning Strategies for Cryptocurrency Holders
If you’re a cryptocurrency holder, it’s crucial to engage an estate planning attorney to discuss how best to include it in your estate plan. The attorney can provide options and help devise a plan that addresses your unique needs. Here are two strategies for incorporating cryptocurrency into your estate plan:
1. Have a will: This document allows you to specifically enumerate your cryptocurrency assets and designate the beneficiaries you wish to inherit them.
2. Establish a trust: Trusts can provide a robust shield for your cryptocurrency assets against creditors and litigation. Furthermore, trusts give you control over the distribution of your assets upon your death.
One Critical Estate Planning Strategy for Cryptocurrency Holders
An emerging challenge in the cryptocurrency world is the loss of assets due to holders neglecting to provide heirs with access information. To prevent such an unfortunate outcome, it’s crucial to ensure your beneficiaries are informed about your cryptocurrency assets. If your Personal Representative (executor) lacks access to this information, your assets may become irretrievable, resulting in potential loss or forfeiture.
Here are some proactive steps to ensure your heirs can access your cryptocurrency:
1. Include specific details about your cryptocurrency assets in your will or trust and name your preferred beneficiaries. Make sure to include its type, location and the amount purchased, if possible.
2. It is critical to also separately store access information – such as passwords and keys – in a safe place where it can later be found by your heirs (e.g., a handwritten document kept in a safe or safe deposit box, clearly referenced in your will or Trust). While general information on your cryptocurrency in a Will or Trust is necessary, a lack of this further access information will require the heirs to work with the exchange and be subject to their potentially arbitrary rules and requirements. Make sure not to include passwords or key information in documents that third parties – even law firms – can access before your passing. When in doubt, enlist a cryptocurrency expert’s help.
3. Impart knowledge to your heirs about cryptocurrency, the process of accessing it, and your intentions regarding its distribution.
Strategies for Estate Planners Handling Cryptocurrency Assets
Estate planners considering cryptocurrency should take note of the following:
1. Acquaint yourself with cryptocurrency basics to comprehend the risks and benefits involved in incorporating it into your clients’ estate plans.
2. Investigate the various storage methods for cryptocurrency, each with its unique risks and advantages. Guide your clients in choosing the storage method most suitable for their needs.
3. Stay abreast of the evolving tax laws surrounding cryptocurrency. Ensure your clients understand the tax implications of owning and transferring cryptocurrency.
4. Ensure the estate documents prepared by you contain sufficient identifying information to permit heirs to access the cryptocurrency post-death. This information should include its type, where it is located and the amount. You should not include password or key information in the Will or Trust: such access information should be referenced as being stored separately in an identified, secure location. If the access information is lost, the will or trust should still provide sufficient information to obtain the asset (just with more work and requirement of proof of authority to access).
6. Consult a cryptocurrency expert if you are uncomfortable with handling cryptocurrency matters. This will ensure your clients’ estate plans are properly crafted and executed.
Conclusion
Cryptocurrency is a complex asset, and estate planning for cryptocurrency can be challenging. However, by reviewing the above information, both clients and attorneys can ensure that cryptocurrency assets of clients are properly distributed after they die.
While the Law Offices of Spence | Brierley does not often draft Trusts or Wills, we regularly litigate disputes over them. This firm has seen many cases where poor planning has resulted in costly litigation over the distribution of assets. By providing the above information, it is our hope that attorneys and their clients will be able to avoid at least one known difficulty in administering estates – locating and obtaining digital assets.