According to CoinMarketCap data, there are currently more than 18,000 different types of cryptocurrencies, with Bitcoin and Ethereum being the most popular ones of the bunch. As crypto continues to evolve and become more mainstream, it only makes sense that its value in your investment portfolio will continue to rise as well.
The only challenge this poses is—unlike traditional assets, crypto exists virtually, meaning it has no physical manifestation in the real world. You can immediately see how this would be a problem when it comes to incorporating it into your estate plan.
With that in mind, this article explores everything you need to know about estate planning with cryptocurrency.
Bitcoin and Estate Planning – Understanding the Legal Challenges
First off, Bitcoin and cryptocurrency are generally designed to be anonymous. This setup creates three main issues for estate planning:
- The lack of personally identifiable information associated with your crypto asset
- The fact that crypto exists only in the virtual space
- No crypto transaction can be authorized without the owner’s private key
Below is an in-depth look into each of these challenges.
1. The Lack of Personal Identifiable Information
Every Bitcoin wallet has a private key and public address associated with it. The owner of the crypto assets does not put their name, social security number, or any other form of personally identifiable information. There’s no account statement, deed, or certificate of title that comes with cryptocurrency to prove ownership.
In a conventional Revocable Living Trust estate plan, an individual would transfer an asset to the Trust. By doing this, the successor trustee acquires legal rights over the asset upon the settlor’s passing. Unfortunately, this is not possible with a crypto wallet.
2. Crypto Only Exists in the Virtual Space
To complicate matters further, cryptocurrencies are virtual assets. They can be stored in a cloud, hard-drive, smartphone, USB drive, or any other storage device capable of holding data. Even if your heirs came across that information after your passing, they likely wouldn’t have any idea what they’re looking at, especially if they were not aware that you owned crypto assets.
3. All Crypto Transactions Require the Owner’s Private Key
The only way anyone can transact Bitcoin, Ethereum, or any other crypto asset is they have the owner’s private key. This key is usually saved in the owner’s digital ticket and is the “golden ticket” that grants access to the crypto assets, therefore, allowing them to transact. This presents two problems:
- As the crypto owner, you would need to keep the private key secure while you’re alive and also provide a means for your heir(s) to find it after your demise; and
- If you lose the private key, you and subsequently your heir(s) will no longer have access to your crypto assets.
The second issue can be particularly problematic for your estate plan. Generally, there’s usually a third-party holding the asset in question with all other assets. This asset is subject to court jurisdiction. If it is left out of a Trust for some reason, the successor trustee can file a petition with the Probate Court.
The probate route is not an option for cryptocurrency. If your private key gets lost, there’s no court order in the world that would be able to recover it. Any crypto assets you may have held will be lost forever.
Cryptocurrency in a Will
To pass your crypto estate to your heirs, ensure that your estate plan has a disclosure provision for your digital assets and that it provides a means to securely transfer your private key to your surviving kin after your demise.
One way to do this would be to include detailed instructions in your will to your successor trustee, which you would then place in a safety deposit box. Alternatively, you could set up an automated dead man’s switch that transfers crypto asset custody to your successor trustee upon your passing.
Other Estate Planning Techniques of Passing Crypto Assets After Death
The fact that digital wallets don’t come with a “reset password” function means that you need to devise a foolproof way of making sure your loved ones find a way to access your virtual asset after your demise. If you hold the crypto alone, consider letting your loved ones know that the wallet exists, let them know where to find it, and show them how to access it using your private key.
You could share your wallet information – private key included – with your spouse, trusted family member, or a close friend. Remember to treat your private key and wallet information like your bank account. Access to the private key itself is all they would need to access your wallet and claim the assets as their own.
You could splinter your private key among a few individuals you trust. You could provide your financial advisor with half the key and your attorney with the other half. That said, it’s always advisable to enter into an agreement with all the parties involved to define how and when the splintered information is to be shared with the intended beneficiaries.
Alternatively, consider splitting the key information among the intended beneficiaries. However, keep in mind that they should know how to decipher it correctly when the time comes.
For instance, suppose you give your spouse, son, and daughter digits 123, 456, and 789, respectively. While it might make sense when they’re all together, it might not be as obvious if one of them ends up losing their key. A better solution would be something like 123(A), 456(B), and 789(C) for your spouse, son, and daughter, respectively. That way, even if one of them loses their “code,” the entire key can still be deciphered.
All in all, consult an experienced estate planning attorney to explore all your options on the best way to pass your crypto assets to your loved ones after your passing.
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