Cryptoassets: Estate Planning with Cryptoassets Requires Savvy Guidance

Posted by Matthew McClintock

What are “cryptoassets”?  

By now, the term “cryptoasset” likely needs little introduction. But for the uninitiated, the term encompasses both crypto-currencies and non-currency blockchain tokens.  While many forms of cryptoassets don’t neatly fall into only one of these categories, they can generally be fairly defined as:

Cryptocurrencies – digital tokens used primarily as a store of value or as a medium of exchange; and

Non-currency tokens – used primarily to facilitate transactions on a blockchain or as a unique digital collectible (the latter often referred to a “nonfungible” tokens, or NFTs).

Cryptocurrencies can often be subdivided into store-of-value tokens (think bitcoin and other tokens that function like digital commodities with volatile value) and exchange tokens that have more stable value.  This latter subcategory also includes “stabletokens” whose value is pegged to a sovereign currency like the U.S. Dollar or Euro.

In any case, cryptoassets generally have monetary value for tax and inheritance purposes. As of this writing (January 2021), the combined global cryptoasset market capitalization exceeds $1 trillion U.S. Dollars.[1]  In addition to institutional investments, significant individual wealth is invested in this still-nascent and highly complex asset class.  Because of the unique nature of cryptoassets, and because this a newer form of asset which few professionals know how to treat appropriately, savvy guidance is necessary when developing an estate plan for holders of cryptoassets.

 

What is the most important consideration when planning with cryptoassets?

Access! Unlike traditional financial holdings, cryptoassets are protected by unique digital keys. If these keys cannot be located, it is possible that access (and that substantial value) will be lost forever.  Depending on the value of your cryptoasset holdings, this could be disastrous for a family’s financial legacy!

Thus, the primary concern when planning with cryptoassets is ensuring that someone you select (usually a highly competent successor trustee) has both the legal and practical ability to marshal and manage the cryptoassets when you, the holder, cannot (perhaps as the result of death or disability). The most appropriate way to ensure such access depends on the nature of the cryptoassets, the value of the cryptoassets in your portfolio, and the relative percentage of cryptoassets as compared to other assets comprising your wealth.

For individuals with substantial cryptoasset holdings, a professional cryptoasset custodian may be the most appropriate choice. Professional custodians can protect your cryptoassets and ensure succession planning by enabling cascading multisignature, or “multi-sig” wallets. Many custodial structures allow you to establish “M of N” controls and further classify controlling signatures, preventing your delegated signatories from transferring your crypto without your authorization.  This approach allows you to fragment your private keys by distributing limited controls across multiple people you choose and ensuring an appropriate succession of key-holders – much like creating successor co-trustees in a trust.

 

What are other options to ensure access is not lost?

Many holders (or “HODLers[2]”) of cryptoassets are leery of custodial arrangements, concerned that a security breach or other failure on the part of a third-party custodian could be disastrous.  Indeed, there are tragic tales of exchanges collapsing and investors losing all their holdings[3].  Many crypto investors prefer to maintain self-sovereignty and hold their cryptoassets in unilateral signature wallets, perhaps on a peripheral device.

The risk, of course, is that the holder’s unexpected disability (or inevitably, their death) is statistically much more likely than the risk of a third-party failure – particularly as custodial and multisignature wallet options improve.  In addition, it’s imperative to create a paper-based “trail of breadcrumbs” for your loved ones or most trusted friends to follow to be able to identify and gain access to your crypto in the event of disability or death.  It should go without saying that those instructions for your crypto MUST be kept in a secure location, but your most trusted crypto-savvy friends or family must know how to access it when necessary.

 

How can we help you?

There are very specific and sophisticated ways to address cryptoassets within trust-based estate plans.  Different types of trusts accomplish very different objectives – whether the purpose is merely an orderly transition of your wealth or income tax or estate tax leverage during your life.  We can create appropriate solutions to bring your cryptoassets within your estate plan, ensuring that access is not lost, that security is not compromised, and that your successors will actually be able to access and manage cryptoassets successfully, according to your directions.

Depending on the value of your cryptoasset portfolio, we can also connect you with an appropriate custodial relationship and/or offer other solutions as appropriate to your specific needs. As estate planning professionals, too often we have seen cryptoassets handled inappropriately… or worse, not handled at all! We would be happy to discuss your unique circumstances and cryptoasset holdings and offer our perspective on appropriate solutions.

Call us today at (877) 757-8120 or contact us online (https://evergreenlegacyplanning.com) to schedule a consultation so we can help you develop the best plan for your cryptoassets.

 

[1] Source: https://coinmarketcap.com/

[2] Perhaps apocryphal, the term “HODLer” originated with a post in 2013 on the bitcointalk forum. A user typed the letters “HODL” instead of “HOLD” in the context of whether to keep or dispose of bitcoin, which was then worth around $15 and was experiencing a wild volatility swing. The term morphed into an acronym for “Hold On for Dear Life.” For more of that story, see https://www.investopedia.com/terms/h/hodl.asp

[3] Most famously, the Mt. Gox hack in the early bitcoin days caused the loss of nearly 850,000 bitcoins in 2014. More recently, Quadriga, a Canada-based exchange, collapsed when its founder died under mysterious circumstances in 2018.

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