Estate Planning and Cryptocurrency
Cryptocurrency has become a popular investment in recent years. The meteoric rise of Bitcoin during the past decade has created a lot of new millionaires and gotten the attention of many investors who are looking for a place to earn a strong ROI. Crypto assets have also raised a lot of questions, however. And one of these is how they should be transferred to heirs and beneficiaries when the owner of the asset passes away.
How does Cryptocurrency Work?
Cryptocurrency is a class of digital assets that are created through a process known as “mining”. Mining involves the use of computer power to solve complex mathematical equations that generate “coins.”
Once created, these digital coins can be circulated and traded outside of the purview of a monetary authority such as a central bank. This peer-to-peer trading system enables anyone from anywhere in the world to send and receive crypto assets.
Cryptocurrency is not a physical currency that someone might carry around in their pockets. Instead, it is housed in an encrypted “digital wallet”, which could either be stored using secure online software or a physical device such as a flash drive. Advanced coding and encryption are used in the storing and trading of crypto assets in order to provide safety and privacy for its owners.
There are thousands of cryptocurrencies that are in circulation today. Bitcoin is the pioneer in the industry, and it is still the largest cryptocurrency with a market cap of nearly $400 billion. Ethereum is the second largest with a market cap of nearly $200 billion, and Tether is the third largest, with a market cap of nearly $70 billion.
Each cryptocurrency operates through a digital public ledger known as “blockchain”, which keeps an updated record of transactions and how much currency each account holder possesses. Users can purchase cryptocurrencies from brokers, then store and spend what they own through their digital wallet. There is no name assigned to their account, and the digital wallet can only be accessed using a private key that usually comes in the form of a 64-digit hexadecimal code.
Challenges with Cryptocurrency and Estate Planning
Because cryptocurrencies are designed anonymously with security and privacy in mind, they pose a number of challenges when it comes to estate planning and passing crypto assets on to the next generation. First and foremost, since the cryptocurrency is stored in a digital wallet with no name or any other personally identifying information attached to it, the asset will most likely go undiscovered if the owner fails to notify anyone else of its existence before he/she dies.
Secondly, even if the heirs are aware that the decedent owns crypto assets, they will still not be able to access the asset without the owner’s private key. That key is the only way to get into the digital wallet, and if it is lost, there is no way to recover the cryptocurrency that is inside the wallet, which means it could be lost forever.
Another issue that further complicates estate planning with cryptocurrency is that because there is no identifying information attached to the asset, crypto assets cannot be placed into the name of a trust.
With stocks, bonds, and other traditional investment accounts, the assets could be placed in the name of a revocable living trust, for example, so that they can pass directly to beneficiaries when the owner passes away (without the need for the assets to go through probate). But this strategy cannot be employed with cryptocurrencies.
Those who own cryptocurrency need to accomplish two primary goals to ensure that this asset is kept secure and transferred successfully at the time of their passing:
- Keep their private key fully secure while they are alive, so no one can steal it and access their digital wallet.
- Set up an effective way to disclose their crypto assets to their heirs and securely transfer their private key after they die.
One of the most common ways to resolve this is to create a document with detailed instructions on how to access your private key. This document may also need to contain an overview of how cryptocurrencies work so that your heirs can better understand what they are doing.
You will also need a safe place to store this document, such as inside a safety deposit box along with your will and other important documents. Be sure to work closely with your estate planning attorney to set up the solution that works best for you.
Contact Our Skilled and Knowledgeable Southern Alabama Estate Planning Lawyers
Cryptocurrency is an emerging asset class that can cause some complications when it comes to estate planning. But with the help of an experienced attorney, you can implement a strategy to overcome the inherent challenges of having crypto assets in your estate.
For assistance with estate planning in southern Alabama, contact Stone Crosby, P.C. Call our Daphne, AL office today at (251) 626-6696 or message us online to set up a personalized consultation with one of our attorneys.