Matthew Mellon, a cryptocurrency multimillionaire, died unexpectedly in April at age 54. When he did, he took $500 million in Ripple (XRP) with him because he didn’t leave anyone the codes to his cold wallets. There is no central party Mellon’s heirs can approach to recover his holdings. No account statements they can use to find those assets.
Mellon’s situation illustrates why estate planning attorneys must incorporate discussions about cryptocurrency holdings into meetings with their clients. Upon learning that a client owns cryptocurrency, attorneys should stress two key points. First, the importance of properly incorporating these holdings into their estate plan. Second, the creation and maintenance of a workable and secure access plan for their heirs.
Why Estate Planning for Cryptocurrencies is Different Than Other Assets
There are well-established and well-known ways to safeguard and pass down physical assets. Cryptocurrencies, on the other hand, have some unique characteristics that call for a more specialized planning approach.
One of the first key differences is the fact they are virtual assets. They are represented by only a string of code stored on a blockchain. Being a virtual asset, cryptocurrency in estate planning presents an array of custody and security issues. Understanding the various ways cryptocurrencies can be purchased, transferred, and stored safely is fundamental. With those basics, you can draft a workable access plan and corresponding estate plan for a crypto holder’s heirs.
The second major difference is that cryptocurrency ownership isn’t controlled by a legal document or proceeding, such as probate. Instead, it is controlled by an underlying crypto assets technology protocol. Ultimately, the holder of the digital asset’s private key (similar to a password) is the owner. Whoever hold’s or gains access to a cryptocurrency owners private keys effectively owns and controls it. Protecting a client’s private keys from disclosure to any unauthorized parties is paramount in the planning and estate settlement process.
Helping Clients Create an Effective Access Plan
The first step toward an effective estate plan involving cryptocurrencies is to create an access plan to safeguard those assets. It should also provide adequate cryptocurrency access instructions for the asset holder’s heirs, personal representative, and trustees.
An access plan begins with a simple letter that the cryptocurrency holder drafts for their heirs notifying them of their crypto holdings. The letter should warn the recipient about ways the assets could be lost or stolen. Ideally, the plan should distribute trust and provide several levels of oversight to minimize the risk of loss or theft.
The client should:
- Write the letter by hand.
- Store the letter in a tamper-evident sealed envelope, with their signature written across the seal.
- Name a helper (ideally not an heir) who is knowledgeable about cryptocurrencies to assist in gaining access to and distributing digital assets. This person should be aware of their role in the client’s estate plans.
- Include in their letter an inventory of the digital assets and where they are located.
- Include a list of the devices, software, and exchanges, as applicable, used to access each of the holdings (hardware wallets, flash drives, paper wallets, laptops, phones, etc.)
- Document where to find the information their heirs will need to access their digital assets.
Please note: The plan itself should not contain any crypto keys, seeds, or access codes. That information, along with wallet backups, should be stored separately in a fireproof, waterproof, access-controlled location. The client should store plan itself in a safe place that heirs can find and access upon their death or incapacitation. A backup copy of the plan should be stored in a separate but similarly safe and accessible location. The plan should be a separate document from the client’s will, but it may reference the will, or vice-versa.
Durable Power of Attorney and Cryptocurrencies
If a client owning cryptocurrency becomes mentally disabled due to an accident, illness, or age-related cognitive decline, a POA with language giving the agent(s) authority over the digital assets and instructions for managing the holdings is a critical component of a client’s estate plans. The POA should also provide instructions on where to find the client’s access plan. The agent could be an attorney, accountant, or financial advisor. Any person named to this role should:
- Be knowledgeable about crypto.
- Have a legal duty to act in the client’s best interest.
- Have malpractice insurance, so that heirs can sue if the agent makes a serious mistake or breaches their fiduciary duty.
Incorporating the Disposition of Cryptocurrencies into a Client’s Will
Providing a cryptocurrency access plan for a client’s heirs is not enough to ensure that these assets get distributed according to the client’s wishes. An access plan should NOT include any distribution plans, as the will or trust provides those instructions. Private keys, seed words, and access codes should never be included in a will since wills become a matter of public record. Including such information will almost guarantee that the client’s crypto assets will be stolen by a tech-savvy person who views the will before the court has finalized the painstakingly slow process of probate—before heirs have a chance to sell the assets or transfer them to a different location with new, secure access credentials. Further, crypto assets can quickly change dramatically in value. Having those assets tied up in probate for 12 to 18 months could prove disastrous.
And unlike a bank account or brokerage account, for which the owner can fill out a transfer on death form to automatically distribute account balances to heirs without probate, there are far fewer options to automatically transfer crypto assets to heirs.
Incorporating Cryptocurrency Holdings into the Client’s Trust Planning
While a will is certainly better than nothing as far as estate plans go, a revocable living trust is a far better tool, especially for digital assets where security and privacy are paramount.
As the use of a pour-over will as a means to add cryptocurrency holdings to a client’s trust is fraught with numerous issues, funding a client’s living trust while alive may be the better option. As of this writing, however, very few crypto exchanges currently offer trust account registrations, San Francisco based Kraken is one such exchange that does. For security reasons, clients often choose to hold the private keys to their digital assets themselves in hardware wallets, paper wallets or in a desktop/mobile wallet. In these cases, an assignment document that identifies the cryptocurrency using its public key can help ensure these assets are included in the trust’s holdings.
Cryptocurrency’s Basis Adjustments at Death
Estate planning attorneys should also understand the value and transfer of cryptocurrencies to the deceased’s intended heirs. Cryptocurrencies are considered property in the United States from an income tax perspective. That means they get a step up or step down in basis when the holder dies depending on whether the crypto’s value has risen or fallen since the deceased purchased it.
Additional Estate Planning Considerations
Various laws may govern a client’s virtual currencies and complicate how they are handled after death. It’s important to know what these laws are and understand how to work with them.
Most states have adopted or at least introduced the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) to make it easier to heirs to legally access digital assets, including cryptocurrencies (notable exceptions include California and Massachusetts). But it is unclear whether RUFADAA applies to digital assets owned by estates or business entities.
Under the federal Computer Fraud and Abuse Act (CFAA), a client’s heirs, executor, or fiduciary could commit fraud when they use the client’s login credentials to access the client’s accounts—even if the client is incapacitated or deceased. The problem is that even with clear legal authority to access an account, digital assets stored online are usually governed by a terms of service agreement. That agreement generally prevents anyone other than the account holder from using the account’s login credentials, and the US Justice Department has in fact prosecuted individuals for violating terms of service agreements. Based on previous court cases, current best practice is to have a client provide express consent for disclosure of digital assets in a will, trust, or power of attorney. Incorporating specific language citing the Stored Communications Act (SCA), the CFAA, and the RUFADAA into the client’s estate planning documents will ensure that designated individuals have lawful consent to access the client’s cryptocurrency when the time comes.
Here’s another complication: RUFADAA allows for the use of an online tool distinct from a terms of service agreement to “provide for a ‘designated recipient’ to administer the digital assets of the user.” The caveat is that an online tool that provides such instructions legally “supersedes directions in the user’s estate planning documents, even if those directions are contrary to the user’s preferences as expressed in an online tool.” Estate planning attorneys should talk to their clients about whether they have used any such online tools and the implications thereof.
Further, the client’s state’s version of the Prudent Investor Act could classify a client’s cryptocurrency holdings as investments even though the IRS classifies them as property. In practice, that means the executor or trustee of the client’s estate could be required to sell or diversify those assets to minimize risk, whereas the client might have wanted the heirs to determine that themselves. The solution to this potential problem is to add specific language to a will or trust explicitly overwriting this requirement.
Because not every state has passed RUFADA, it can be a real challenge for estate executors of deceased persons who held crypto assets to know what to do under the prudent investor rule and the fiduciary rule. The help of an estate planning attorney who is up to date on the latest laws regarding digital assets is essential.
Without proper estate planning, millions – even billions – in assets could be lost in the coming years. Those lost assets could be used to send grandkids to college, fund cancer research, and more. True, planning for the disposition of cryptocurrencies in the event of a client’s incapacitation or death is difficult. But to avoid such planning is negligent at best and destructive at worst. Attorneys should seek out professionals knowledgeable this new and complex field to assist in the planning process. These helpers can include fiduciary financial advisors, CPAs, and other attorneys specializing in cryptocurrencies.
The information in this article is for informational and educational purposes only. Investing in ICOs, cryptocurrencies or tokens is highly speculative, and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.