Estate Planning for Digital Assets (and not just your crypto!)

Adam J. Centner

When we sit down to discuss an estate plan, we always think of the “traditional” assets first – your home, retirement accounts, investments, business interests. But for a growing number of folks, digital assets are becoming just as important. This article explores proper planning for cryptocurrency and other non-traditional digital assets, including a cell phone and online accounts. 

Cryptocurrency

There are currently more than 4,000 different types of cryptocurrency. Bitcoin, Ethereum, and even Dogecoin are among the most well-known. As cryptocurrency continues to become more mainstream, its value as part of your portfolio will only rise, and unlike traditional assets, there is no physical manifestation of cryptocurrency, so failing to include it as part of your estate plan could be far more detrimental than failing to plan for traditional assets. 

Cryptocurrency is digital currency that uses encryption and links a network of computers to complete transactions. There are two primary ways to own a cryptocurrency account: through a cryptocurrency exchange, or in your own “wallet” with an encrypted private key. 

Crypto exchanges are similar to traditional brokerages in that a custodian holds the account. Unfortunately, to date, most exchanges do not allow for beneficiary designations or ownership by a trust or business entity, making traditional estate planning difficult. Another downside is that, if an account does “rip,” or explode in value, only so much can be withdrawn from the exchange daily, limiting immediate access to the assets and increasing the importance of long-term planning. A probate administration, although generally undesirable, will usually ensure the account is not lost upon the death of the owner. As cryptocurrency and exchanges continue to grow and evolve, they will likely become more “estate planning-friendly,” so better planning options are sure to lie ahead in the near future.

For crypto accounts not held on an exchange, each account is accessible by an encrypted private key – sometimes as long as 64 digits – that is unique to the owner. When you sign up for a wallet, you will receive a key unique to you that must be entered in an exact order to access the wallet. If the key is lost, there is no password reset or court order in the world that will recover the key – the account and all of its value is gone forever. News accounts are full of stories of inadvertent crypto mishaps; just take Mathew Mellon, heir to the Mellon fortune who died without passing along information on his $1 billion crypto account, or James Howells, the fellow who has been searching UK landfills for years to track down his USB drive with $280 million of Bitcoin.

For crypto held by the owner alone, loved ones must know the account exists, where to find it, and how to access it via private key. As such, there are a few estate planning techniques recommended to minimize the risk that a valuable crypto account is lost to theft or death. 

First, consider sharing the account information, including the private key, with your spouse or a trusted family member or friend. Remember, however, when selecting appropriate holders of this information, treat it like cash – access to the key itself is all the person needs to access the account, move it, and claim it as their own. For some, it may be better to include the pertinent information, including the private key, in a memo locked away in a safe deposit box or other secure location where a trusted family member will know where to find it when the time comes. If your family members or intended beneficiaries are not familiar with the workings of crypto accounts, a step-by-step guide to access and administer the cryptocurrency may be advisable.

Second, consider splintering the private key among a few trusted individuals. Perhaps your attorney holds half the key, and your financial advisor the other half. But an arrangement should be entered into with both as to when and how the information is shared upon your death, and as to what storage mechanism each can offer. 

Another solution is to sprinkle the key among intended beneficiaries, but keep in mind that when the time comes, they should understand how to decipher it appropriately. Giving your spouse digits 123, your son 456, and your daughter 789 might seem to make sense, but what if one of them loses their key? A better solution might be to give your spouse 123(A) and 456(B), your son 456(B) and 789(C), and your daughter 789(C) and 123(A). This way, two people are still required but the loss of one will not be fatal.

Other options, although not discussed in detail here, include creating a “dead man’s switch” where the ownership will transfer automatically to an intended beneficiary if you do not log on and authenticate the account (after multiple attempts to reach you) for a period of 18 months, or opting for ownership through software applications or hardware wallets.

Ultimately, as part of proper estate planning, you should discuss with your attorney ownership of the account by your trust at your death. Within the trust, the instrument should specify the disposition of cryptocurrency – should the account be transferred in kind to the beneficiaries, or liquidated? Can the trustee hold a concentrated position in cryptocurrency, or will the account default to diversification rules? Careful consideration must also be given to who will serve as trustee. Currently, many institutional trustees have policies against administering trusts with cryptocurrency or require the immediate liquidation of the crypto accounts, so an experienced individual trustee, whether only for crypto accounts or all trust assets, may be necessary.

Cryptocurrency accounts and estate planning techniques are sure to adapt and change rapidly in the coming years, so a good first step is discussing your options with your estate planning attorney. At KMK, we are constantly assessing the latest and greatest strategies and modifying our estate planning documents to appropriately address the transfer and administration of these important assets

Sentimental Digital Assets

Although failing to plan appropriately for cryptocurrency can be financially detrimental, the loss of some digital assets could take a more emotional toll. 

If you die today, would anyone be able to access your cell phone, or your iCloud photos? Fortunately, these types of assets are not at risk of theft or loss in the same way crypto accounts are, so planning can be a little easier. 

Some institutions provide “legacy” settings for you to control the disposition of the account at your death, but for most digital assets of this type, proper estate planning can be handled through the transfer of your log-in information. Your estate plan should first provide authority to your spouse or a trustee to access and manage these assets upon your death, and then the proper documents should be in place to assign or transfer the accounts and other digital assets to your trust or loved ones at your passing. Once the estate planning is in place, the only step left is to ensure your loved ones know how to access the accounts or digital records. Because these assets do not hold the same theft risk as cryptocurrency, writing a list of passwords and storing it in a safe location within your home or providing it to your attorney for safekeeping in your physical file may be sufficient. It is not recommended that you share the passwords widely during your life, but your spouse or children should know where to find the list if you pass away to allow easy access to the assets.

Estate planning for digital assets is a fluid process that requires regular maintenance, and this class of assets will certainly develop quickly in the coming years. The single most important first step is to start thinking about digital assets as an important part of your portfolio and to begin to contemplate the transfer of these assets in the event of your incapacity or death. 

If you’d like to discuss digital asset planning further, please call or email me at any time. May the New Year bring health and prosperity to you and your loved ones!