By Jonathan Bick
Cryptocurrency, such as Bitcoin, has value and therefore is increasingly likely to become an estate asset. Due to the nature of cryptocurrency, typical wills and revocable living trusts may not be well suited to efficiently transfer this new type of asset. Consequently, new estate planning questions and clauses are needed.
While cryptocurrency is not sufficiently mature to allow existing legal structures to promulgate a complete set of rules and regulations, its technological character allows estate planning to protect the intent of clients holding it. However, the lack of statutory structure necessitates proactive steps.
Crypto SecurityCryptocurrency estate planning presents a novel security issue. Cryptocurrency is transferred as a result of following a set of technological protocol rather than presenting legal documents. Secrecy is the primary protection for cryptocurrency, since the identity of the cryptocurrency holder is not required. Thus, probate, a public process which makes all assets in a will and related will documents part of the public record, may compromise the secrecy associated with such secrecy. Probate information may also result in other difficulties related to making the cryptocurrency holder’s heirs a target for hackers or other bad actors.
Cryptocurrency holders may be sufficiently savvy to manage the ever-changing value of their virtual assets, but are unlikely to have that savvy reflected in their estate documents without assistance from their estate professionals. By the same token, due to the enigmatic nature of cryptocurrency, as well as its virtual embodiment, estate professionals may lack sufficient technical know-how to prepare proper estate documents without assistance from their cryptocurrency savvy clients.
Consequently, without timely interaction between cryptocurrency holder and estate professional, said holder risks losing everything for their heirs due to a number of circumstances. Hence, the estate professional must make specific inquiries as to cryptocurrency holdings and prepare cryptocurrency-specific clauses.
Crypto PropertyThe specific inquiries as to cryptocurrency holdings must address the fact that cryptocurrency is treated as property rather than currency for tax purposes. Just like traditional financial assets, the Internal Revenue Service has found that crypto-currency is subject to tax.
Specifically, Notice 2014-21 describes how existing general tax principles apply to transactions using virtual currency. Therefore, capital gain and loss on property transactions involving cryptocurrency must be reported. Such treatment, while well known, is not normally reflected in estate documents.
Next, said inquires and clauses must address the fact that there is no central cryptocurrency authority and, hence, no entity to authorize access to another’s cryptocurrency. Due to this lack of authority to give access to cryptocurrency to an executor or agent under a power of attorney, estate documents must be supplemented by business or technological options to preserve a cryptocurrency holder’s estate.
One supplemental action might be a business service that allows a third party to transfer cryptocurrency to an entity other than the cryptocurrency holder upon the demise of the cryptocurrency holder. Such a transfer service could avoid an unwanted legal duty for an executor or trustee to diversify out of cryptocurrency, and it will relieve them of the need to be cryptocurrency savvy, along with the attending liabilities.
A technological solution, which results in the sale of cryptocurrency due to predetermined conditions, such as the cryptocurrency holder’s failure to renew a cryptocurrency covered option, will have the same results. Like the business option, it will eliminate or ameliorate the need for cryptocurrency clauses in the related estate documents.
Another technological option is to use an Internet application that will transfer cryptocurrency to a revocable living trust upon the execution of a will. Once this application is fully executed, the cryptocurrency will then be subject to a trust and the responsibility of the trustee named in the application.
However, simply using an Internet application to transfer cryptocurrency is insufficient to protect the cryptocurrency; the holder will still need to leave instructions with an executor, with a recitation as to how to transfer these assets into a trust. Ideally, the transfer keys should remain in the control of, and transferred to, the heirs of the cryptocurrency holder in a letter that is stored with the estate documents.
If neither business nor technological estate document supplements are employed, then estate professionals must actively encourage cryptocurrency holders to document that they own cryptocurrency, document where they bought the cryptocurrency, and how a third party can get access to it.
Such information is required because unlike traditional assets, cryptocurrency holders can buy cryptocurrency without communicating their identity. It should be noted that not all cryptocurrency transactions are anonymous. For example, cryptocurrency associated with South Korea is regulated, and such regulations require cryptocurrency holders to be identified.
At a minimum, estate professionals should encourage cryptocurrency holders to keep a dynamic written record of what cryptocurrency they own, where it is located, what they paid for it, from whom they acquired it, and, if they sold their cryptocurrency, the amount for which it was sold. Most importantly, estate professionals should encourage cryptocurrency holders to record the private digital key needed to access it.
Normally, crypto-currency exchanges do not ask for the identity of the cryptocurrency holder, much less request that a cryptocurrency holder record the name of a beneficiary. As a result, failure to secure sufficient information concerning cryptocurrency for a particular holder may result in the need for unnecessary asset accounting, and possibly expensive and time-consuming litigation.
In addition to updating wills and revocable living trusts, power of attorney authorization should be updated to reflect the need for a specific person to act on behalf of cryptocurrency holders. The wills and revocable living trusts should include information related to how to distribute cryptocurrency. The power of attorney authorization should allow entities acting on behalf of the cryptocurrency holder to access the holder’s computers, storage devices, accounts and data, so as to facilitate the transfer or disposition of the cryptocurrency.
Ideally, such updating of wills, revocable living trusts and power of attorney authorization should be accompanied by administrative and technological actions by the cryptocurrency holder. Estate professionals should advise their cryptocurrency holder clients to place cryptocurrency information (such as the information noted above) on a USB drive, or paper, and place it in a bank safe deposit box or home safe. Such precautions will make losing cryptocurrency less likely.
Jonathan Bick is of counsel at Brach Eichler in Roseland, NJ. He is also an adjunct professor at Pace and Rutgers law schools, and the author of 101 Things You Need to Know About Internet Law (Random House 2000). He can be reached at firstname.lastname@example.org.