Imagine if, at the moment of your death, a large portion of your assets just...vanished. Or that those assets continued to exist, but your loved ones couldn’t find them, access them, or maybe didn’t even know about them. The fruits of your labors, your careful investments, forever locked away from the people you meant to have them.
If that sounds like a nightmare scenario, you should know that it has already happened to some owners of cryptocurrency who died without creating an estate plan for their digital assets. Cryptocurrency is a type of digital asset. The best known type of cryptocurrency is Bitcoin, but there are others, such as LiteCoin and Ripple.
According to the BBC, research estimates that as of early 2020, up to 3.8 million Bitcoin, with a value of about $30 billion, has been lost. Much of the loss is due to owners of the cryptocurrency dying without giving heirs a way to access these digital assets.
Essentially, cryptocurrency is a digital form of currency—digital cash, if you will—that exists online. Cryptocurrency is a computer file, stored in a “digital wallet” on a computer or smartphone. Cryptocurrency may be used to make purchases (to the extent is accepted by a vendor), but typically, it is sent back and forth between digital wallets. Passcodes are required to access a digital wallet (or websites that store cryptocurrency remotely).
Cryptocurrency transactions are recorded using blockchain technology, which has been described as a digital ledger shared across a decentralized network of independent computers. Many users like the fact that cryptocurrencies are not controlled by governments or banks, and that the recording of every transaction provides a level of security. That said, passcodes can be lost or stolen, and some remote cryptocurrency storage sites have experienced thefts.
Cryptocurrency is a relatively new creation; Bitcoin, the first and still-best known of the cryptocurrencies, was created in 2008. Those who invested early in cryptocurrency may have seen their investments grow significantly—and for that reason, they may not inform those close to them of these digital assets. Unfortunately, if a holder of cryptocurrency dies without making an effective transfer of the asset, it could be lost forever.
Couldn’t a cryptocurrency holder just leave their access code information in a will? Theoretically, yes. But the reality is a little more complicated. Putting access codes in a will is something like leaving your ATM PIN lying around. You’re trusting an awful lot to both the competence and the integrity of other people—an iffy proposition when a lot of money is on the line. And since cryptocurrencies, unlike the dollar, don’t have a state-provided safety net, holders tend to keep their access codes a bit closer to the vest.
So how do you create an estate plan for cryptocurrency? There are a few options. There is digital inheritance software specifically designed for use with cryptocurrencies. The user chooses an inheritance design. That design specifies the conditions under which heirs can access the digital assets.
Arrangements can also be made in the case of multiple beneficiaries (generally, they must reach agreement before being allowed to unlock the cryptocurrency).
Other emerging digital inheritance technologies involve a “dead man’s switch;” if the owner of the cryptocurrency does not refresh the agreement on a regularly scheduled basis, the asset is made available to a designated beneficiary.
There are lower-tech options when estate planning for cryptocurrency as well. You could, for example, create a trust for the cryptocurrency, but this would require providing the trustee with the applicable passcodes. Also, you would need to make sure that providing this information would not violate any applicable laws or agreements regarding terms of service.
In Ohio, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) applies to cryptocurrency and other digital assets. Alert your estate planning attorney to your ownership of cryptocurrency so that he or she can advise you on providing guidance for your trustee.
Because Bitcoin and other cryptocurrencies have, in their short existence, been so volatile, you might want to consider having cryptocurrency as one small part of the trust’s larger, more diversified portfolio. If you do decide to have a trust containing only cryptocurrency, your estate planning attorney should make sure that the trust explicitly relieves the trustee of any duty to diversify the trust’s portfolio.
What about cryptocurrency and taxes? In the United States, cryptocurrency is treated as personal property, not as money. As far as federal inheritance tax is concerned, it only kicks in on estates worth more than $11.58 million, so it applies to a very small percentage of estates. State inheritance tax may have a lower threshold, so be sure to check in with your estate planning attorney if tax liability is a concern.
The bottom line is, if you have cryptocurrency as part of your asset portfolio, don’t assume you have plenty of time to plan for its transfer after your death. If you don’t make a specific plan to convey your digital assets, you could end up taking them to your grave.