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Crypto inheritance planning
We are increasingly acquiring digital assets, and in a previous article, I explained the importance of including them in your Will. Here is some additional information, specifically regarding crypto inheritance planning.
A digital asset is anything created and stored digitally that is:
- identifiable; and
- discoverable; and
- has or provides value.
Examples of digital assets are:
- Photos stored on your phone or PC.
- Higher quality photos capable of being sold or licensed.
- Digitally created art (the phrase ‘non-fungible token’ is never far from the news these days!)
- Websites and blogs.
- Domain names.
- Digitally-held manuscripts.
- Cryptocurrency.
Crypto inheritance
Perhaps the most significant digital inheritance risk for families and dependents is the loss of cryptocurrency. Despite their notorious volatility, there is little doubt that these currencies are now a permanent feature of the financial landscape. However, there are several well-publicised examples of super-wealthy cryptocurrency investors dying without sharing the location of the digital keys needed to access their fortunes. These cases represent just the tip of the iceberg.
There are currently almost 22,000 cryptocurrencies in existence. The best known, Bitcoin, has around 24 million addresses open. Of course, that’s not to say there are 24 million Bitcoin investors, as a person can have more than one wallet. However, it indicates the extent of the potential risk, particularly as most investors are younger and, therefore, less likely to have given serious thought to crypto inheritance planning. The current estimate is that around 4 million Bitcoin are lost – at today’s price, that’s almost £312 billion!
Crypto inheritance planning
If you hold cryptocurrency, what steps should you take to secure your investment for your dependants?
First, if you have not already done so, you should make a Will.
Crucially, you must ensure that your executors are aware of your cryptocurrency investments. Create an inventory for them and keep it up to date. If a third-party provider (e.g. an online wallet provider or exchange) holds the cryptocurrency, include the provider’s details in the inventory.
Some cryptocurrency exchanges have specific policies and procedures regarding what occurs when an investor passes away. Review these carefully to ascertain what happens to your virtual wallet.
Do not include the inventory in your Will, as it becomes a public document following probate. However, your Will – or an accompanying letter of wishes – might include instructions to your executors on how you would like your digital estate to be administered.
It is equally important to establish a Lasting Power of Attorney (LPA) to determine what occurs if you lose mental capacity. The LPA should grant your attorney explicit authority to manage your crypto assets.
Of course, you will need to plan how and when to pass on the private keys to virtual wallets and the passwords for the hard drives containing the cryptocurrency to your executor(s) and attorney(s).
Crypto trust
Trusts are a common estate planning tool, both in Wills and during one’s lifetime. However, the volatility of cryptocurrency indicates they are a long way from becoming a mainstream investment for trusts. Trustees have legal duties and must invest prudently; crypto assets are inherently difficult to manage. Nevertheless, some professional trustees are now willing to administer trusts containing cryptocurrencies, provided that each crypto asset is held and managed by a reliable third-party custodian.
Cryptocurrency and tax
The tax position of crypto assets is often complex. Selling, receiving or gifting cryptocurrency has implications for Capital Gains, Inheritance, and Income Taxes, and taking advice is essential.