If someone threw away a lot of early bitcoin holdings, or a grandchild has persuaded an older family member to take a flyer on a coin or token, intergenerational wealth transfer these days can easily include crypto.
Not so long ago, families in this position faced uncertainty about the basics: Does crypto count as property? How does it fit from an estate planning perspective? This is not such a problem today because the rules surrounding wills and trusts in many jurisdictions have been updated to accommodate digital assets.
Still, even with improved regulatory clarity, digital assets add a daunting layer of complexity that surpasses many in the advisory industry, according to Christopher Nekvinda, director of global learning operations at Cannon Financial Strategists, an Athens, Georgia-based training institute specializing in wealth management.
“For the longest time, we heard of hesitancy at the advisory level when it came to determining whether digital assets formed part of a family’s wealth,” Nekvinda said in an interview with CoinDesk. “I think it’s often about asset managers having to ask about something that the holder probably knows a lot more about than they do, and now the advisor suddenly doesn’t look like the expert.”
Numbers vary, but with somewhere over 50 million adults in the US holding crypto, it’s highly likely that the average American will have digital assets that may need to be passed down to their heirs if they pass. And this is where estate planners or wealth advisors will need to change their planning to navigate the complex world of transferring digital assets from their owners to the next generation.
Let’s break it down.
Who has the crypto?
The first thing a planner needs to figure out is whether individuals have crypto and how it is stored.
If crypto is held by an investor, which raises other questions, Nekvinda said, such as how those assets are held and who has signing authority. Are the recipients aware of the owner’s intentions? Is there a document that describes whether the assets should be liquidated or continue to grow?
Custody is the main component when it comes to cryptoassets, whose control and usability are governed by closely guarded codes in the form of long alphanumeric strings of digits.
Often keys are shared with trusted digital assets, which can be a platform like crypto exchange Coinbase (COIN) or a crypto custody specialist like Bitgo (BTGO) or Fireblocks. Another approach could be a hardware device such as a Trezor or similar. In some cases, a crypto holder may prefer to have the keys printed out on paper and stored in a safe or deposit box.
While having digital assets with a custodian may be easier than having a cold wallet, the question is how it affects the transfer of the assets to the holder’s heir. It had been a burning question before, but following revised US fiduciary rules under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), it is now much clearer, Nekvinda said.
“This fiduciary update was necessary because it gives executors and trustees access to digital assets in the same way as traditional securities,” Nekvinda said in the interview. “This means that with the right documentation, a custodian, such as Coinbase, must legally give an executor or trustee access to a deceased’s digital assets, where previously it was simply not required by law.”
‘A Detective Story’
However, this does not prevent some crypto riches from simply disappearing.
Although leaving property or mutual funds in a will is a fairly cut-and-dry process, without proper planning, inherited crypto can easily be lost due to delays in probate, missing private keys or administrators unfamiliar with the asset class, said Azriel Baer, a partner in the estate planning group at New York law firm Farrell Fritz.
Baer, who has worked on an estate where tens of millions of dollars in crypto were lost to the heirs due to poor planning, said a simple point to remember is to make sure an appropriate person is appointed to handle this type of asset. Someone who has the knowledge to handle things like social media accounts, online transactions, and blockchain-based assets.
“An uncle or cousin who is an organized person might know the family in a trusted capacity and understand its dynamics, but when asked to figure out how to get a bitcoin out of a wallet, it might be a hoot,” Baer said in an interview. “So think about naming someone who has some expertise in the digital asset world to handle the asset when you’re not around.”
One problem is that there is a tendency among some people who have digital assets to avoid any kind of hard copy in favor of storing information about accounts digitally in emails or on drives. That’s fine, as long as it doesn’t turn into “a detective story,” Baer said, alluding to the fact that finding these could be made even more difficult by searching for passwords and going through endless emails.
“I always advise clients to have a list of important accounts and information and either tell your kids about it or keep it in the safe. Too many times we come across people trying to comb through filing cabinets or computer files and are at a loss,” he said.
Shell companies
What if a holder of crypto has not created a will?
The legal process of distributing a deceased person’s assets can involve an appointed administrator in the absence of a will, and that’s another occasion that crypto can present particular problems, Baer warned.
The probate process takes six to 10 months before a court appoints a trustee, Baer pointed out. Meanwhile, no one is in control of the assets, which can be problematic in the case of a highly volatile asset like crypto, where it pays to be nimble and be able to sell quickly.
“There are things that we do to plan around that specifically in the United States and New York where there are trusts that we create and we set up the trust as transfer on death or current owners of the asset,” Baer said. “This allows that trustee to have access to it immediately, with a snap of a finger, after someone dies. As opposed to having to wait for the court to come and step in and give the authority to another trustee.”
If liquidity is needed quickly or there is a market event that could be missed, it is worth forming a limited liability company (LLC) as a shell, depositing the crypto and then transferring it easily.
“It’s not the same if I have a cold wallet and want to transfer it to a trust,” Baer said. “This way, I just transfer the LLC to the trust. It’s easy to do business with, but the LLC owns the digital asset.”
An important point to remember is that in New York a will becomes a public record when it is filed with the New York State Surrogate’s Court and goes into probate. “So don’t put the actual encryption information in your will because it will become public knowledge and people can get that information,” Baer said.
