Cryptocurrency and Digital Assets in Estate Planning
Cryptocurrency can be defined as the collection of binary data that is designed to work as a medium of exchange where individual coin ownership records are stored into computerized databases using cryptography in order to secure transaction records. One of the most common types of cryptocurrency is Bitcoin. Bitcoin has existed since 2009 but has recently been growing in popularity. Many more investors have invested in these cyber assets, but care needs to be taken when you are developing your estate plan.
In an estate where cryptocurrency is held, an executor or administrator of this estate may be put into a tough situation where they have to choose how to secure control over these digital assets. This includes determining where all of the digital accounts are held, but most importantly locating all of the decedent’s private keys and passwords. A simple solution to an issue like this would be for the account holder to leave behind all of the detailed instructions of how someone can access the “coins.” If this was done, however, it would ultimately defeat the purpose of investing in these digital assets. Information like such would have to be stored in a way that would protect these accounts from being hacked. In retrospect, if someone with a will has accounts in cryptocurrency, the digital assets would be distributed to whoever is legally designated to receive them or there would be an intestacy (no will) where the state law would say where all of the assets, including the cryptocurrency accounts, would go. Traditional assets such as bank accounts or real estate are normally relatively easy to find, access and thus designate them with the correct legal documentation, but cryptocurrency poses unique challenges when it comes to estate planning.
The reason cryptocurrency poses such a challenge is because digital assets don’t have a central regulatory authority that registers the ownership or title, whereas bank accounts are easy to access because they are registered under a legal name and remain subject to oversight. The idea of cryptocurrency not having this registration to a legal name is all a part of the blockchain technology that allows crypto to work; this distributes information over many different locations. Because of this, crypto investors usually maintain their assets using something called “digital wallets” that are only accessible to them through a password or private key. This private key is normally in the form of a 256-bit long string of alphanumeric characters and remains known to only the account holder. Without having access to these private codes, there really is little chance of someone being able to access a family member’s crypto account after they have passed.
At Musi, Merkins, Daubenberger & Clark we have been drafting digital asset clauses into wills, but more recently Pennsylvania has enacted a new law regarding these digital assets. Based on this law, we have a few recommendations regarding the rapidly changing world of crypto and protecting digital assets. The following is what we recommend:
- Write down on a piece of paper a detailed list of all assets, specifically including your crypto assets. On this list include where these assets are located and how someone would be able to access them.
- After writing this information down, store the information somewhere that is highly secure and make sure that the executor of your will or trust will be able to have access to these instructions and information.
- When completing your will, assign digital powers to your executor that will allow them to access and gain control over your crypto accounts.
- When creating a will, make sure to create a will that specifies who gets what, and when doing so, include crypto in that documentation.
Even if you give your executor ability to access your crypto, it introduces another issue. Under the Revised Uniform Fiduciary Access to Digital Assets Acts (RUFADAA), it becomes illegal for someone to log into a deceased person’s account. Some types of crypto such as Coinbase and Binance have their own regulations to deal with the crypto holding of someone’s account who has passed away. Nothing involving crypto is simple and all steps need to be taken with the utmost care.
Something else that is extremely important to note when it comes to assets in the form of crypto is that crypto becomes taxed just like any other asset in your estate. The crypto would be valued as of the date of death and is subject to capital gains tax on any increase in value or gains from the date of death. Part of your overall planning should include the understanding of how your assets will be taxed, when the tax is due, and how and from where it will be paid. If you have trouble with this, Musi, Merkins, Daubenberger & Clark is here to help.