Is anyone hoarding large amounts of early Bitcoin? assets, or a grandchild convincing an older family member to hand over some coins or tokens as a flyer, today’s intergenerational wealth transfers can easily include cryptocurrencies.
Not long ago, families in this situation faced uncertainty about a basic question: Do cryptocurrencies count as property? How does it fit in from an estate planning perspective? Today, this is no longer an issue as the rules regarding wills and trusts in many jurisdictions have been updated to accommodate digital assets.
Still, even with clearer regulation, digital assets add a daunting layer of complexity that is beyond the reach of many in the advisory industry, said Christopher Nekvinda, director of global learning operations at Cannon Financial Strategists, an Athens, Ga.-based educational institution specializing in wealth management.
“For a long time, we’ve heard about hesitation at the advisory level in determining whether digital assets form part of a household’s wealth,” Nekvinda told CoinDesk. “I think it often comes down to wealth managers having to ask holders about things that they may know more about than they do, and now all of a sudden, advisors don’t look like experts.”
Figures vary, but with more than 50 million adults in the United States holding cryptocurrencies, it’s likely that the average American owns digital assets that may need to be transferred to their heirs if they die. This is where estate planners or wealth advisors need to change their planning to deal with the complex world of transferring digital assets from the owner to the next generation.
Let’s break it down.
Who holds cryptocurrencies?
The first thing planners need to figure out is whether an individual holds cryptocurrency and how it is stored.
If encrypted yes Nekvinda said being held by investors raises other questions, such as how the assets are stored and who has signing rights. Do beneficiaries understand the holder’s intentions? Is there documentation outlining whether the assets will be liquidated or continue to grow?
Escrow is the main component of a crypto asset, and its control and spendability are controlled by a closely guarded code in the form of a long alphanumeric string.
Typically, keys are shared with trusted digital asset custodians, which may be platforms such as cryptocurrency exchange Coinbase (COIN) or cryptocurrency custody experts such as Bitgo (BTGO) or Fireblocks. Another method could be a hardware device like a Trezor or similar device. In some cases, cryptocurrency holders may prefer to print the keys on paper and keep them in a safe or safe deposit box.
While it may be easier to own a custodian’s digital assets than to hold them in a cold wallet, the question is how this affects the passing of the assets to the holder’s heirs. Nekvinda said this has been a pressing issue before, but is now becoming clearer following changes to U.S. trust rules under the Revised Uniform Fiduciary Digital Asset Access Act (RUFADAA).
“This trust update is necessary because it enables executors and trustees to access digital assets in the same way as traditional securities,” Nekvinda said in an interview. “This means that as long as the correct documentation is in place, custodians such as Coinbase are legally required to allow executors or trustees to access the digital assets of the deceased, which was not previously required by law.”
“Detective Story”
However, that doesn’t stop some cryptocurrency fortunes from disappearing.
Azriel Baer, a partner in the estate planning group of New York law firm Farrell Fritz, said that while leaving property or mutual funds in a will is a fairly simple process, without proper planning, inherited cryptocurrencies can easily be lost due to probate delays, loss of private keys or the trustee’s unfamiliarity with the asset class.
Bell once worked for an estate where heirs lost tens of millions of dollars in cryptocurrency due to poor planning. Bell says a simple point to remember is to ensure the right person is appointed to handle such assets. Someone with the knowledge to handle things like social media accounts, online transactions, and blockchain-based assets.
“The uncle or cousin is a well-organized person who may know the family and understand its dynamics in a trustworthy way, but he may get stuck when he is told how to withdraw Bitcoin from the wallet,” Bell said in an interview. “So, consider appointing someone with some expertise in the digital asset space to handle the asset in your absence.”
One problem is that some people who hold digital assets tend to eschew any form of hard copy, preferring to store information about their accounts digitally in emails or drives. That’s fine as long as it doesn’t turn into a “detective story,” Bell said, alluding that finding them through searches for passwords and endless emails might become more difficult.
“I always advise clients to make a list of important accounts and information and either tell your children or keep it in a safe. Too often we encounter people trying to comb through filing cabinets or computer files and get overwhelmed,” he said.
shell company
What if a cryptocurrency holder doesn’t have a will?
Bell warned that the legal process of distributing a deceased person’s estate in the absence of a will may involve the appointment of an administrator, another occasion where cryptocurrencies could raise special issues.
Bell noted that the probate process can take six to 10 months before the court appoints a trustee. During this period, no one has control over the asset, which can be problematic for highly volatile assets like cryptocurrencies, where it pays to be flexible and able to sell quickly.
“We’ve done some programs, particularly in the U.S. and New York, where we create trusts and set up the trust to transfer to the current owner of the assets or upon death,” Bell said. “This allows the trustee of that trust to immediately acquire the rights to the trust when someone dies, just snap their fingers. Instead of having to wait for the courts to step in and delegate the power to other trustees.”
If liquidity is needed quickly or there is a risk of missing out on a market event, it may be worth setting up a limited liability company (LLC) as a shell, depositing cryptocurrency, and then transferring it easily.
“If I have a cold wallet and want to transfer it to a trust, that’s a different thing,” Bell said. “That way, I just transfer the LLC to a trust. The transaction is easy, but the LLC will own the digital assets.”
An important thing to remember is that in New York, a will becomes public record once it is filed with the New York State Surrogate’s Court and enters the probate process. “So don’t put actual encrypted information in your will because it will become public knowledge and people can get the information,” Bell said.