Did someone make off with the initial Bitcoin trove? BTC$88,268.31 Intergenerational wealth transfers these days could easily include cryptocurrencies, if you have assets or if your grandchild persuaded an elderly family member to accept a flyer of coins or tokens.
Not so long ago, families in this position faced uncertainty over a fundamental question: “Will cryptocurrencies be considered property?” How does it fit in from an estate planning perspective? This is less of an issue today, as many jurisdictions have updated their rules regarding wills and trusts to accommodate digital assets.
Even with improved regulatory clarity, digital assets add a layer of complexity beyond much of the advisory industry, said Christopher Nekubinda, director of global learning operations at Cannon Financial Strategists, an Athens, Ga.-based educational institution specializing in wealth management.
“We have been hearing for a long time that there is hesitancy at the advisory level when it comes to establishing whether digital assets are part of the family estate,” Ncubinda said in an interview with CoinDesk. “I think asset managers often have to ask questions about things that the holder knows better than they do, and all of a sudden the advisor becomes less of an expert.”
Although numbers vary, more than 50 million adults in the United States own cryptocurrencies, making it likely that the average American owns digital assets and will need to transfer them to his or her heirs upon their death. And this is where estate planners and wealth advisors need to change their plans to navigate the complex world of transferring digital assets from one owner to the next generation.
Let’s break it down.
Who owns cryptocurrencies?
The first thing planners need to know is whether individuals hold cryptocurrency and how it is stored.
For cryptocurrencies teeth Nekvinda said other questions arise, such as how these assets are stored and who has signing authority. Are the beneficiaries aware of the holder’s intentions? Is there documentation outlining whether the assets will be liquidated or continue to grow?
Custody is a key component when it comes to crypto assets, and their management and availability is controlled by a highly protected code in the form of a long string of alphanumeric numbers.
Keys are often shared with trusted digital asset custodians. This includes platforms like cryptocurrency exchange Coinbase (COIN) or crypto asset management specialists like Bitgo (BTGO) and Fireblocks. Another approach is to use a hardware device such as Trezor. In some cases, cryptocurrency holders may prefer to print their keys on paper and keep them in a safe or vault.
Entrusting digital assets to a custodian may be easier than holding a cold wallet, but the question is how does it affect the transfer of assets to the owner’s heirs? This has been a burning question for some time, Ncubinda said, but is now clearer after the revised U.S. trust rules under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA).
“This fiduciary update was necessary because executors and trustees will be able to access digital assets in the same way as traditional securities,” Ncubinda said in an interview. “This means that, with the proper documentation, a custody shop, such as Coinbase, for example, must legally allow an executor or trustee to access a decedent’s digital assets. Previously, the law did not require them to do so.”
“Detective Story”
However, this will not prevent some cryptocurrency assets from simply disappearing.
Azriel Baer, a partner in the estate planning group at New York law firm Farrell Fritz, said leaving real estate or mutual funds in a will is a very cumbersome process, but without proper planning, inherited cryptocurrencies can easily be lost due to probate delays, lost private keys, or a trustee unfamiliar with the asset class.
Baer, who has experience working on estates where tens of millions of dollars in cryptocurrencies were lost to heirs due to poor planning, said a simple point to remember is to make sure you appoint the right person to handle these types of assets. Someone with knowledge of working with social media accounts, online transactions, blockchain-based assets, etc.
“An uncle or cousin who is an organized person may know the family in a trusted capacity and understand what’s going on, but they may struggle when asked to figure out how to get Bitcoin out of their wallet,” Baer said in an interview. “So consider appointing someone with some expertise in the world of digital assets to handle your assets in your absence.”
One problem is that some people who own digital assets tend to avoid any form of hard copy and instead store information about their accounts digitally in email or Drive. Baer said it’s fine as long as it doesn’t become a “detective story,” alluding to the fact that searching for passwords and sending endless emails can make these things even harder to find.
“I always advise my clients to prepare a list of important accounts and information and give it to their children or keep it in a safe deposit box. Many times I encounter people who are at a loss trying to dig through filing cabinets or computer files,” he said.
shell company
What if the virtual currency holder has not created a will?
The legal process of distributing a deceased person’s estate can involve an administrator appointed in the absence of a will, and that too could pose certain problems for cryptocurrencies, Baer warned.
Baer noted that the probate process can take six to 10 months before the court appoints a trustee. In the meantime, no one can manage the assets. This can be a problem for highly volatile assets like cryptocurrencies, where being nimble and able to sell quickly is important.
“Sometimes we plan around that, especially in the United States and New York, where we have a trust that we set up as a transfer on death or to the current owner of the asset,” Baer said. “This allows the trustee of that trust to immediately access that trust with the snap of a finger after someone dies, as opposed to having to wait for a court to step in and give authority to another trustee.”
If you need liquidity quickly or there are market events that may be missed, it may be worth forming a limited liability company (LLC) as a shell to deposit and easily transfer your cryptocurrencies.
“If you have a cold storage wallet and you want to transfer it to a trust, it’s not the same,” Baer says. “With this method, you simply transfer the LLC to a trust. The transaction is simple, but the LLC ends up owning the digital assets.”
An important point to remember is that in New York State, wills become public records once they are filed with the New York State Surrogate’s Court and enter the probate process. “So don’t include the actual encrypted information in your will, because it becomes public knowledge and people can potentially obtain that information,” Baer says.
