If someone has saved a treasure of the first bitcoins holdings, or a grandchild has persuaded an older family member to accept a flyer with some coin or token, intergenerational wealth transfer these days could easily include cryptocurrencies.
Not long ago, families in this position faced uncertainty about the basics: Does cryptocurrency count as property? How does it fit from an estate planning perspective? That’s not a big problem today, because the rules on wills and trusts in many jurisdictions have been updated to accommodate digital assets.
Still, even with greater regulatory clarity, digital assets add a daunting layer of complexity that is beyond many in the advisory business, according to Christopher Nekvinda, director of global learning operations at Cannon Financial Strategists, an Athens, Georgia-based educational institute specializing in wealth management.
“For a long time, we have heard of doubts at an advisory level when it came to establishing whether digital assets were 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 about something that the holder probably knows a lot more about than they do, and now suddenly the advisor doesn’t look like an expert.”
Numbers vary, but with more than 50 million adults in the US owning cryptocurrencies, it’s very likely that the average American has digital assets that need to be passed on to their heirs if they die. And this is where estate planners or wealth advisors will need to change their planning to navigate the complex world of transferring digital assets from their owners to the next generation.
Let’s analyze it.
Who owns the crypto?
The first thing a planner will need to determine is whether people own cryptocurrencies and how they are stored.
yes crypto is held by an investor, that raises other questions, Nekvinda said, such as how these assets are stored and who has the authority to sign. Are the beneficiaries aware of the owner’s intentions? Is there a document that indicates whether the assets should be liquidated or continue to grow?
Custody is the main component when it comes to cryptoassets, the control and spending ability of which are governed by closely guarded codes in the form of long strings of alphanumeric digits.
Keys are often shared with trusted digital asset custodians, which could be a platform like the Coinbase (COIN) crypto exchange or a crypto custody specialist like Bitgo (BTGO) or Fireblocks. Another approach could be a hardware device like Trezor or similar. In some cases, a cryptocurrency holder may prefer to print the keys on paper and keep them in a safe or deposit box.
While holding digital assets with a custodian may be easier than having a cold wallet, the question is how this affects the transfer of the assets to the holder’s heir. It had been a burning issue before, but after the revised rules for trust in the US under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), it is now much clearer, Nekvinda said.
“This fiduciary upgrade was necessary because it gives executors and trustees access to digital assets in the same way they would traditional securities,” Nekvinda said in the interview. “It means that with the right documentation, an escrow store, Coinbase for example, legally has to 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 crypto 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 delays in probate, lack of private keys, or fiduciaries who are unfamiliar with the asset class, said Azriel Baer, a partner in the estate planning group at New York law firm Farrell Fritz.
Baer, who has worked on an estate where heirs lost tens of millions of dollars in cryptocurrency due to poor planning, said a simple point to remember is to make sure you appoint a suitable person to handle this type of asset. Someone who has the knowledge to handle 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 their dynamics, but when they are told to figure out how to get a bitcoin out of a wallet, they could fail,” Baer said in an interview. “So think about appointing someone who has some experience in the world of digital assets to look after the asset when you are not around.”
One problem is that there is a tendency among some people who own digital assets to avoid any form of hard copy in favor of storing account information digitally in emails or on disk drives. This is fine as long as it doesn’t turn into “a detective story,” Baer said, alluding to the fact that finding them could be even more difficult by searching for passwords and through endless emails.
“I always advise clients to have a list of accounts and important information and to tell their children or keep it in the safe deposit box. Many times we encounter people who try to look through file cabinets or computer files and get lost,” he said.
Ghost companies
What happens if a cryptocurrency holder has not made a will?
The legal process of distributing a deceased person’s possessions can involve an appointed administrator in the absence of a will, and that is another time when cryptocurrencies can pose particular problems, Baer warned.
The probate process takes six to 10 months before a court appoints a trustee, Baer said. Meanwhile, no one has control of the assets, which can be problematic in the case of a highly volatile asset like cryptocurrencies, where it pays to be agile and able to sell quickly.
“There are things we do to plan for that in the United States and New York specifically, where there are trusts that we create and we set up the trust as a transfer upon death or the current owners of the asset,” Baer said. “This allows the trustee of that trust to have access to it immediately, with the snap of a finger after someone dies. Instead of having to wait for the court to step in and grant authority to a different trustee.”
If liquidity is needed quickly or there is a market event that could be missed, it is worth forming a limited liability company (LLC) as a front, depositing the crypto and then easily transferring it.
“It’s not the same if I have a cold storage wallet and I want to transfer it to a trust,” Baer said. “This way, I only have to transfer the LLC to the trust. It is easy to transact with it, but the LLC will own the digital asset.”
An important point to remember is that in New York, a will becomes a public record once it is filed with the New York State Surrogate’s Court and enters the probate process. “So don’t put the actual encryption information in your will, because it will become public knowledge and people could get that information,” Baer said.
