If someone hid a mine of early bitcoins or if a grandchild persuaded an older family member to take a flyer on a coin or token, intergenerational wealth transfer these days could easily include crypto.
Not long ago, families in this situation faced uncertainty over the fundamentals: Is crypto considered property? How does this fit in from an estate planning perspective? This is not such an issue today, as the rules relating to wills and trusts in many jurisdictions have been updated to account for digital assets.
Yet even with clearer regulation, digital assets add a daunting level of complexity that is beyond many in the advisory industry, according to Christopher Nekvinda, director of global learning operations at Cannon Financial Strategists, an Athens, Ga.-based education institute specializing in wealth management.
“For the longest time, we’ve heard about hesitation at the advisory level when it comes to whether digital assets are part of a family’s wealth,” Nekvinda said in an interview with CoinDesk. “I think it often comes down to wealth managers having to ask questions about something that the holder probably knows a lot more about than they do, and all of a sudden the advisor doesn’t seem like the expert anymore.”
The numbers vary, but with more than 50 million adults in the United States holding cryptocurrencies, it’s highly likely that the average American will have digital assets that may need to be transferred to their heirs in the event of death. And this is where estate planners or wealth advisors will need to revise their planning to navigate the complex world of transferring digital assets from their owners to the next generation.
Let’s break it down.
Who owns the crypto?
The first thing a planner will need to determine is whether individuals hold cryptocurrencies and how they are stored.
If crypto East held by an investor, that raises other questions, Nekvinda said, such as how those assets are stored and who has signing authority. Are the beneficiaries aware of the holder’s intentions? Is there a document indicating whether the assets should be liquidated or continue to grow?
Custody is the main element when it comes to crypto assets, whose control and ability to use are governed by closely guarded codes in the form of long strings of alphanumeric numbers.
Keys are often shared with trusted digital asset custodians, which could be a platform like crypto exchange Coinbase (COIN) or a crypto custody specialist like Bitgo (BTGO) or Fireblocks. Another approach could be a hardware device such as a Trezor or similar. In some cases, a crypto holder may prefer to have keys printed on paper and kept in a vault or vault.
While it may be easier to hold digital assets with a custodian than to hold a cold wallet, the question is how this affects the transmission of assets to the holder’s heir. This was a burning question before, but after the review of trust rules in the United States under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), the situation is now much clearer, Nekvinda said.
“This fiduciary update was necessary because it gives executors and trustees access to digital assets in the same way as with traditional securities,” Nekvinda said in the interview. “This means that with the right documentation, a custodial store, Coinbase for example, must legally give an executor or trustee access to a deceased person’s digital assets, where previously this was simply not required by law.”
“A detective story”
However, this does not prevent some cryptographic wealth from simply disappearing.
While leaving property or mutual funds in a will is a fairly straightforward process, without proper planning, inherited cryptocurrencies can easily be lost due to probate delays, missing private keys or trustees unfamiliar with the asset class, said Azriel Baer, a partner in the estate planning group at New York law firm Farrell Fritz.
Baer, who worked on an estate where tens of millions of dollars in crypto were lost to heirs due to poor planning, said a simple point to remember is to ensure an appropriate person is appointed to manage these types of assets. Someone who has the knowledge to manage things like social media accounts, online transactions, and blockchain-based assets.
“An uncle or cousin, who is an organized person, may know the family reliably and understand its dynamics, but when asked to figure out how to get a bitcoin out of a wallet, they might flounder,” Baer said in an interview. “So consider appointing someone who has some expertise in the world of digital assets to manage the asset when you are not there.”
One problem is that some people with digital assets tend to avoid any form of hard copy and instead store account information digitally in emails or on drives. That’s fine as long as it doesn’t turn into a “detective story,” Baer said, hinting that finding them might be even more difficult by searching for passwords and using endless emails.
“I always advise clients to have a list of important accounts and information, and either tell their children about it or keep it in the safe. Too often we encounter people who try to rummage through filing cabinets or computer files and are lost,” he said.
Shell companies
What happens if a crypto holder does not have a will?
The legal process of distributing a deceased person’s assets can involve an administrator appointed in the absence of a will, and this is another occasion where cryptography can raise particular issues, Baer cautioned.
The probate process takes six to 10 months before a court appoints a trustee, Baer noted. Meanwhile, no one has control of the assets, which can be problematic in the case of a highly volatile asset like crypto, where it pays to be nimble and able to sell quickly.
“There are things we do to plan for this in the United States and New York in particular, where we create trusts, and we set up the trust as a transfer on death or to the current owners of the asset,” Baer said. “This allows the trustee of that trust to have access immediately, at the snap of a finger, after someone dies. Instead of having to wait for the court to step in and grant authority to another trustee.”
If cash is needed quickly or a market event could be missed, it’s worth setting up a limited liability company (LLC) as a shell, depositing the crypto, and then transferring it easily.
“It’s not the same if I have a cold storage portfolio and I want to transfer it to a trust,” Baer said. “This way, I just need to transfer the LLC to the trust. It’s easy to transact, but the LLC will own the digital asset.”
An important point to remember is that in New York, a will becomes a public document once it is filed with the New York State Probate Court and enters the probate process. “So don’t put the actual encryption information in your will because it will become public and people might get that information,” Baer said.
