Digital Assets Are Part of Your Estate
With the rise of blockchain technology and cryptocurrencies, it is important that investors know how to protect and manage their assets. Unlike retirement accounts or life insurance policies, bitcoin and other cryptocurrencies (collectively, “cryptocurrencies”) do not have beneficiary designations. While they are subject to Wills and trusts like any other asset, there are some special rules that should be considered in your estate plan.
If you are still alive but incapacitated and unable to manage your finances, it is important that you have a power of attorney in place that authorizes your agent to access your cryptocurrency or other digital assets. Once you have died, your executor or trustee will have authority to access your tokens on behalf of your estate; however, they must be aware of them. Due to the private nature of cryptocurrencies, if someone acting on your behalf, does not know that you own tokens, it is likely that your holdings may be lost or will die with you. Cryptocurrencies are not like bank accounts and your agent or executor cannot write to the institution to access your tokens. They must have information about your exchanges, wallets, and hardware devices in order to access your tokens and keep them safe.
Most exchanges are centralized and hold funds for you in an account that allows you to trade between local currency and cryptocurrency. Many people purchase tokens using local currency, through exchanges, such as Coinbase. In order to access your accounts, your agent or executor will need to know what exchanges you are using and the ones that you no longer use but are still open.
Your executor will need to know about your “wallets.” Many exchanges have their own wallets, most of which are “hosted wallets,” meaning you do not hold what are known as “private keys,” or the actual cryptocurrency itself. If you are using a hosted wallet such as Coinbase or Circle, your executor or agent needs to know the exchange you are using, the associated wallet, and your username/password. If you are holding your own private keys, then your agent or executor will need to know (1) the name of the wallets you use, and (2) where your wallet backups are located. If you use advanced features, like an encrypted password or passphrase, they will also need to know where those are stored. Anyone who has access to wallet backups can steal the funds, therefore it is important that you exercise caution when choosing who should help you and have this information about where your backups are located.
Finally, your agent or executor will need to know what hardware devices you use to access your wallet accounts. Devices like the Ledger Nano S or Trezor are hardware wallets that hold cryptocurrencies offline, thereby providing better security for you holdings. These devices have different security measures and private keys , so it is important that your beneficiaries know not to throw away, donate, gift, or destroy these devices until the funds have been successfully moved and the devices wiped.
It is important to understand that if the private keys associated with each cryptocurrency are lost, so too are the cryptocurrencies. A quick Google search will provide countless stories of fortunes lost as a result of individuals losing their private keys, and therefore access to their digital assets.
If you have questions or would like to speak to someone how to plan for your estate and cryptocurrency holdings, do not hesitate to contact us.n (Amanda M. Kita, Esquire, February 27, 2018)