Cryptocurrency (Bitcoin in particular) has only been in existence since 2009 and widespread investment in crypto is very recent. But, it has become much more widespread, and many clients, even older clients, are buying some exposure to this new asset class.
And, like so many new technologies and digital assets, owning cryptocurrency poses challenges when you start to think about protecting it from creditors and for estate planning - passing it on, as part of your wealth and legacy, to a surviving spouse, heirs, or to even to charitable beneficiaries.
Some years ago, I had a very near-death experience.
In particular, I injured my spinal cord at two separate levels and was paralyzed (blessedly only until my surgery a few weeks later). What was most interesting, were the thoughts that went through my mind. I imagined what would happen if I didn’t survive the injury and was actually quite comforted that I had quite life insurance, a well done estate plan (that probably sounds like bragging since I did my own plan), and a clear record of the assets and where they were located (and how to access them).
Cryptocurrencies wouldn’t even exist for a few more years so I didn’t have to worry about it.
Had that happened today, Robin (my wife) and/or the kids would have faced a much more complicated scenario when it came to my estate and getting control over the cryptocurrency investments that I own.
For example, she would, as my Executor, have needed access to the accounts that hold the crypto but would have needed to know where it was held, as well as my private keys and account passwords to get it.
She might also have benefited significantly if I had the foresight to type up detailed instructions on how to access the “coins.”
But then where would I store that information that was safe from hacking, and/or real-world prying eyes?
So that’s the problem…
If anyone dies today, owning cryptocurrency, one of two things would occur:
If they had a will, the digital assets would be distributed to whomever was legally designated to receive them or there would be an intestacy (no will) where state law would say where the assets (including cryptocurrency) would go.
Traditional assets/investments such as real estate or investment/bank accounts are relatively easy to find, access, and delegate with a death certificate and other legal documentation.
But crypto poses some unique challenges.
Why? Unlike traditional bank and investment accounts, that are registered under a legal name and subject to oversight, digital assets don’t have a central regulatory authority that registers their ownership or title. It’s part of how the “blockchain technology” that permitted creation of crypto works. It distributes information over many different locations.
Crypto investors therefore currently maintain their own assets using “digital wallets” that are only accessible via a password or a private key — a 256-bit long string of alphanumeric characters that is only known to the account holder.
Without these access code or private keys, there is little hope of heirs ever accessing a dead loved one’s crypto holdings. They are essentially lost forever in a digital void. Worse yet, would they be taxable for inheritance or estate tax purposes?
There have been a few high-profile cases of this nightmare situation involving, collectively billions of dollars’ worth of lost wealth in the form of crypto coins.
Despite these tales, and despite the increasing numbers of people buying and owning crypto, many such investors haven’t given much thought to bitcoin as an estate asset.
So even if you own a small amount of cryptocurrency, it’s time to start thinking about preserving this wealth and making sure that your wills and/or trusts contain appropriate digital asset clauses.
For some years now we have drafted digital asset clauses into our wills, but Pennsylvania recently enacted and new (and helpful) law.
Based on that law, and best practices in this rapidly changing world of crypto, we are now recommending the following:
- Write down - on paper (and not a digital file stored on your computer that can be hacked) a detailed list of all of your assets and especially/specifically your crypto assets, including where they’re located, and how to access them.
- For security, store this information in a highly secure place (or multiple places) and make sure that your executor will have access to these instructions and information.
- Assign digital powers to your executor under your will to allow them to access to and control over your crypto.
- Create a will to specify who gets what (including specifically or generally) and include crypto in that analysis and documentation.
But your executor’s ability to access the crypto introduces another issue for executors.
Under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA – which has been enacted in PA), it’s technically illegal to log into a dead person’s account.
To access a Coinbase account, for instance, a beneficiary must provide the platform with a death certificate, a will, and other documentation, then wait to be approved for a transfer of funds.
So none of this is simple. But care needs to be taken.
But there are even more things you need to know. For example, what about inheritance, estate, and income taxes on crypto owned by an estate?
Let’s say you’ve cleared all of these hurdles and your executor gets access to the crypto and your will says where it goes.
Great. But when your heirs inherit your crypto, it’s taxed like any other asset: 1) It’s valued as of the date of death (and is subject to PA Inheritance Tax and in some cases, Federal Estate Tax); 2) It’s also subject to capital gains tax on any increase in value or “gains” from the date of death.
So part of your overall planning should include an understanding (most estate and trust lawyers and accountants can bring you up to speed) on how your assets (including crypto) will be taxed, when that tax is due, and how and from where it will be paid.
While this sounds complicated, doing effective estate planning with crypto and other asset classes, and making sure that you beneficiary designations and wills/trusts are up to date can save your executors and trustees as well as your heirs, vast sums of money and huge amounts of time. Failure to plan can mean these assets are unnecessarily taxed, or, worse yet, lost forever.
For more information on updating your estate plan to deal with Pennsylvania’s new Digital Assets laws, call 610-933-8069 to book an update call.