The rapid growth of cryptocurrency over the past decade has created a new class of digital assets. According to the World Economic Forum, the total market cap of the crypto sector grew by 187.5% in 2021. Like all other types of assets, it is important to include digital holdings in an estate plan. If not properly accounted for, the assets in a digital portfolio can go to waste. Determining the best strategy regarding cryptocurrency and your estate plan will depend on the types of assets you hold, the value of your digital portfolio, and the relative value of your cryptocurrency in relation to your overall assets. You can learn more about incorporating digital assets into an estate plan and all other estate planning matters by contacting the Colorado estate planning lawyers of Johnson Law Group at (720) 463-4333.
The nature of cryptocurrency presents some unique challenges. Access to cryptocurrency accounts is granted through the use of a private key, which is usually a random series of letters, numbers, and special characters. Many cryptocurrency holders store this key in either a digital wallet or cold storage (such as a USB drive or other data storage device), both of which are designed to protect their holdings from theft. Bitcoin accounts do not contain any personally identifiable information about the account’s owner. Anyone who knows the key has the authority to buy, sell, and transfer the cryptocurrency held in the account, which makes this type of digital asset vulnerable to both theft and loss.
Most cryptocurrency owners may already be aware that they need to keep their cryptocurrency private keys secure to protect the contents of their accounts, but it is equally important to consider what will happen to a cryptocurrency account when the owner passes away or becomes incapacitated. For cryptocurrency owners with large account balances, failing to provide adequate instructions for distributing the account balances could result in a disastrous loss of assets for the family of the deceased or incapacitated.
Cryptocurrency owners should carefully consider whether their estate planning needs will be best met with a will or a trust. Those who choose to add their crypto holdings to a will should make sure to mention the digital assets in their will, but all assets included in a will are subject to the probate process. This process can be lengthy and expensive, and probate is also a matter of public record. Most cryptocurrency experts advise against telling others how much Bitcoin you own, so allowing this information to become public can pose a security risk.
Trusts are not subject to the probate process, so the existence of the cryptocurrency accounts remains private. Both wills and trusts provide an official record of the existence of digital assets. This is critical, as cryptocurrency is nearly impossible to discover unless the owner notifies others of their holdings. While many crypto holders may wish to keep these accounts private during their lifetime, just about every crypto owner should strongly consider incorporating them into their estate plan. You can learn more about concerns related to cryptocurrency and your estate plan by contacting Johnson Law Group’s estate planning lawyers.
Every crypto owner’s estate plan should thoroughly describe all of their crypto holdings. Each account should be named, along with where beneficiaries can access each digital wallet. Most crypto owners use “hot wallets” - or wallets connected to the internet. These include online exchange accounts, mobile wallet apps, and desktop computer wallet programs. However, crypto owners with significant holdings often keep a minimum in a hot wallet, with the bulk of their funds residing in the more secure “cold wallets” - which include hardware and paper wallets that are not connected to the internet.
Cold wallet devices should be included with a named beneficiary in a will or trust. For hot wallets, the main device that was used to access the wallet should also be included with a designated beneficiary. Doing so will make it much easier for the beneficiaries to access the cryptocurrency funds that have been left to them.
Crypto owners should make sure to include all necessary passwords and PINs in their estate plans. However, those who have opted to use a will instead of a trust should not include this information directly in the will because of the fact that it will become public during probate. Instead, passwords and PINs should be added to a memorandum to the will, which will be referenced in the will but is not considered a part of the will. Memorandums are separate documents that do not become public record. They can also be updated as needed when passwords change or new accounts are added to a crypto portfolio.
Cryptocurrency owners who are looking to incorporate their digital assets into their estate plans should be as thorough as possible in their instructions. Like the other sections of an estate plan, the goal should be to ensure that the wishes of the estate owner are fulfilled and that the beneficiaries receive access to the digital assets with minimal difficulty. Crypto owners should assume that their beneficiaries are completely unaware of cryptocurrency and make their instructions extremely detailed. Along with account access instructions, crypto owners should advise beneficiaries on how to handle cryptocurrency.
Cryptocurrency ownership is on the rise, as a Texas University School of Law study estimates that 25 percent of people between the ages of 24 and 38 who have either $50,000 in investable assets or a yearly income of at least $100,000 own cryptocurrency. Estate planning is often a complicated process, and those who own cryptocurrency have additional complexities that must be taken into account. These assets must be protected and the necessary provisions must be included to ensure that beneficiaries are able to easily access the digital assets that have been left to them. Additionally, it is important to account for the evolving nature of cryptocurrency and potential future legal changes by regularly updating the estate plan.
An experienced estate planning lawyer can help crypto owners construct a strong strategy for including cryptocurrency and all other types of assets in an estate plan. For more information about cryptocurrency and your estate plan, contact the team of veteran estate planning lawyers at the Johnson Law Group at (720) 463-4333.