Friday, August 12, 2022

What Happens to Your Cryptocurrency If You Die?

Cryptocurrency is a novel asset but for those who are new to the game, it can also be an exciting but rather confusing world. Industry best practices and government regulation have barely kept up and in the majority of cases, it’s non-existent. 

With cryptocurrency investments it’s important to watch the markets on a daily basis and focus on short term goals. However, thinking long-term is also important. It’s vital that you prepare for what should happen to your crypto when you pass away. Arizona probate law requires that your assets, including any crypto assets, are administered according to your Will. The same applies in all other US states.  

Crypto assets are decentralized. Rather than being managed by a centralized authority such as a bank, crypto transactions live on an immutable public ledger called a blockchain. They are independently verified by a network of computers. Unless you leave clear instructions regarding how to access your crypto assets, those assets will be stuck in a cloud and of no use to your heirs. 

The issue of decentralization makes it extremely important that you include your crypto assets in your estate plan. Also, you must choose someone you trust to execute your plan. If you don’t take action, it might be impossible for your beneficiaries to gain access to your assets when you pass away. 

Why You Should Include Your Crypto Assets in Your Estate Plan

Crypto is considered a probate asset, just like any other real estate property and possessions. Crypto assets have to go through probate before they can be legally transferred to your beneficiaries after you die. If you have an estate plan, the probate process is likely to be quicker and easier for everyone involved. 

Be aware that most popular crypto exchanges don’t currently support any type of beneficiary designation for crypto assets. Common methods of keeping traditional assets out of probate such as TOD (transfer on death) or POD (payable on death) don’t apply. 

There are also some unique safety concerns surrounding crypto, because of its decentralized nature. Such concerns aren’t typically an issue when assets are managed by a centralized authority such as a bank or investment account. 

Crypto is a digital currency, but you should treat it like a physical asset with value, much the same as you would with diamonds, cash, or precious metals. If you give someone access to your crypto, they’ll be able to use it. However, if you die without giving someone access to your crypto keys, your crypto assets will likely be gone forever, locked in a digital wallet that can’t be accessed.  

Passing on Your Crypto Assets – What You Should Do

If you want your loved ones to benefit from your crypto assets, there are some things you should do. 

Name a beneficiary in your estate plan

A beneficiary is a person you name in your Will. It can also be an organization. A beneficiary inherits an asset when you die. In your estate plan, you must list all your crypto assets, where they are stored, and which beneficiaries should receive them.

As well as naming beneficiaries in your Will, you should also name an executor. This is the person who will administer your Last Will and Testament. 

It’s also possible to name a separate digital executor who will be tasked with protecting and preserving your digital property and digital assets. It is advisable that you nominate an executor or digital executor who is familiar with cryptocurrencies. 

Consider an irrevocable trust

If your estate is valued over a certain threshold it could be subject to estate tax when you die. For individuals, the current federal estate tax exemption is $12.06 million. For married couples it is $24.12 million. There are also a few states that impose a state-level estate tax. 

If your estate could be subject to estate tax, you might want to consider establishing an irrevocable trust. If it is properly structured, this type of trust can remove valuable assets from your taxable estate.  

Document your crypto details

You can store your crypto in different ways and the way you choose will impact your executor and beneficiaries. 

For example, if your crypto is stored in a custodial account on a crypto exchange such as eToro, Gemini, or Coinbase, they will have to contact these exchanges for your assets to be transferred. The process starts when they provide your death certificate, probate documents, and proof of identification. The beneficiaries will also have to provide a letter signed by the executor instructing what to do with the crypto in the account. 

If you’ve chosen to store your crypto offline in a cold wallet, access following your death will depend on how well you document your assets. Best practices that are generally accepted include:

  • Document the location of the wallet itself (ideally, store it in a safe deposit box or fireproof safe).
  • For each wallet you own, document the private and public keys. Both of these are needed to access your crypto. It’s advisable to keep both keys separate but in secure locations.
  • If any other information is needed to access your wallet this must be documented also. Examples include your recovery phrase or PIN code. 

Of course, it’s down to you where you store this information. Here are some suggestions for you to consider:

  • A safe deposit box
  • Listing it in your estate plan
  • Entrusting it to an attorney, family member, or friend

Final Thoughts

The crypto landscape is constantly evolving and at a rapid rate. It’s therefore essential to have an estate plan if you want to protect your crypto assets when you die. The decentralized nature of crypto makes it your responsibility to keep stock of your investments and also to share access instructions with your beneficiaries and executor in the event of your death.

While having an up-to-date estate plan is important for everyone, it is particularly vital for any crypto investors who want their loved ones to be able access their crypto assets. Your cryptocurrency won’t die with you, but if you don’t make plans, it could spend eternity in a cloud with no one able to access it.