With the increasing number of investors in cryptocurrency, the need to incorporate these assets into an effective estate plan and to help with the administration of cryptocurrency assets in the event of an investor’s incapacity or death is no doubt going to become more and more commonplace.
From an estate planning perspective, cryptocurrency is classified as a digital asset, and Ohio has recently taken great strides to permit fiduciaries to control so-called digital assets. In April 2017, Ohio’s version of the Federal Law known as the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”) became effective and empowers principals under powers of attorney, fiduciaries of probate estates and trustees of trusts to deal with digital assets. The Federal Law generally allows an individual to provide for his or her fiduciary to have access to his or her digital assets and to compel a third party custodian to cooperate with requests to access digital assets.
Unfortunately, the Federal Law is largely untested and may fail to incorporate many of the concepts needed to access cryptocurrencies. While the Federal Law can be used to compel a third party custodian of assets, any cryptocurrency that is stored on a decentralized exchange may not have any third party custodian who could be compelled to cooperate. For many investors, this concept of decentralization attracted them to cryptocurrencies in the first place. With many of these assets, unlike traditional investments, there will not be a third party provider who can assist with the transfer of assets into or out of an estate or Trust.
As such, proper planning for these assets is paramount as the law may not provide a solution when it comes to accessing this specific type of digital asset. A successful plan will: (1) provide for access of cryptocurrencies by a fiduciary, but only at the appropriate time; (2) ensure access to the assets is restricted and maintained safely; and (3) deliver continuity in the management of the digital asset portfolio throughout the estate or trust administration process.
Giving a fiduciary access to cryptocurrencies is a two-step process. First, an effective plan should contain provisions in a Health Care Power of Attorney, Financial Power of Attorney, and a Will and/or Trust to allow a fiduciary to lawfully access digital assets. Next, a cryptocurrency owner should create a highly detailed inventory of the owner’s digital assets. The inventory should include all cryptocurrency holdings on both exchanges and in wallets (including software and hardware wallets). For any assets that are stored on an exchange, the fiduciary, at a minimum, must be provided with a current inventory indicating which exchanges are used and which exchanges are no longer used. To provide the best access, the inventory must include all information needed to log in and control the assets directly. This inventory should be maintained and provided to a fiduciary at the proper time.
If a fiduciary encounters a situation where the owner utilized either a hardware or software wallet, there will almost certainly be no customer service representative available to help locate and administer the assets. Thus, a thorough inventory is essential to accessing cryptocurrencies. Most cryptocurrencies have a two-key system. A public key is used to keep a log of the transactions and may or may not be traceable back to the owner through the ledger. A private key is used for the owner to gain access to the currency. A private key is not unlike the password to an online bank account, so keeping the private key safe is paramount. It is advisable to provide an inventory that ensures that a fiduciary will know the name of the wallets/devices that hold the assets as well as where the wallet and/or backup is located. Often, additional layers of security such as encrypted passwords or passphrases for seeds will be involved. In those instances, information should be provided to the fiduciary to know where that information is stored. Of course, this information should not be stored directly with the wallets.
If you own cryptocurrencies in your portfolio, it is crucial that your estate planning documents are in order and that you have created a thorough inventory of those assets. Without taking these two steps, cryptocurrencies could lose substantial value during your incapacity or during the administration of your estate. Worse, failure to plan could result in these assets being lost permanently. If you have any questions about cryptocurrencies and how to incorporate them into your estate plan, contact your attorney at Carlile Patchen & Murphy LLP or any member of the Family Wealth & Estate Planning Group.
- A decentralized exchange is an exchange where trades occur directly between users through an automated process instead of through a third-party institution.
- A “seed” is a combination of characters which allows you to access your wallet, similar to a username-password combination.