Including Cryptocurrency Holdings in Estate Planning – What are some of the issues and consideration?

More sophisticated and technologically savvy investors are seeing cryptocurrencies and security tokens as a new product type to be added to their existing portfolios as a mean to diversify holdings and generate potentially outsized returns. It is therefore likely to see more people acquiring these assets in their investment portfolios and incorporating them into their estate plans. 

As cryptocurrency is a new asset class, the estate planning involving such holdings is no easy task. Here are some issues and concerns to take note of when including cryptocurrency holdings in one’s estate plan. 

1. Not easily discoverable and no paper trail characteristic

Cryptocurrency or non-fungible assets (NFTs) has little to no paper trail and is therefore not an easily discoverable asset. They are typically stored in wallets where their ownership is anonymous and where there are no designated beneficiaries. If no one has the details of a wallet, it will generally not be possible to have access to its contents. A massive wealth of cryptocurrencies or NFTs are worthless if left behind by an individual who did not ensure any of his or her family members knows (1) of their existence, (2) where they exist and (3) how to access them. If the next-of-kins have no knowledge of the existence of an individual’s crypto accounts or wallets and passkeys, it does not help even if one has the most technologically savvy heirs or executors around. 

2. Technical skills required for proper handling 

On the other hand, even if there is knowledge of the existence of a massive wealth of cryptocurrencies left behind but locked in a wallet with private key(s), it is not worth a dime to the heirs if no one seems to have the specific technical skills needed to access, transact, and move the assets in a crypto account. Although one may consider setting out clear step-by-step guide or access instructions with detailed information including the location of the hardware device in a ‘cold wallet’ situation, or passwords and PINs, there is no guarantee that the executor or beneficiary is able to properly handle the cryptocurrencies in accordance with one’s wishes. 

3. Data Security and Lack of privacy

The problem with having letters of instructions is that someone else may get hold of pertinent information such as the passwords, PINs and access instructions, therefore gaining access to the crypto assets without the rightful owner’s or beneficiary’s knowledge or permission. 

Another concern is the lack of privacy in the case of a will being used as a succession tool to include the cryptocurrencies because when wills go through probate, they become part of the public record. 

While it is not recommended that such details be written in a will or trust or any other estate document as whoever has access to these details will be able to access the wallet, it is also important to have this risk balanced against the risks of incapacity and the certainties of death in determining who has access to the assets, along with when and how. 

4. Risk of misplacing or losing one’s private keys 

If one were to misplace or have his or her private key (whether in physical or digital form) stolen, the ability to transact or transfer the cryptocurrencies is lost totally. The thief can fully impersonate the individual to gain access to his or her money in the wallet, and the access to monies contained in the crypto account almost certainly cannot be restored. 

3. Selecting an executor or trustee

Most banks and brokers would typically require the executor or trustee handling a traditional bank account (where there is more oversight and checks) to produce an original death certificate, grant of probate, letters of administration or testamentary to take control of the accounts in the deceased owner’s estate. However, the executor or trustee handling cryptocurrency holdings simply needs to hold the complex, multi-character passcode that is required to access, invest, and manage the cryptocurrency account. Should the executor or trustee make a cryptocurrency transfer that is not authorized by the relevant estate planning document, although the transfer could be traced, it would be nearly impossible to recover.

Therefore, whether it is planning to leave the cryptocurrency through a will or a trust, crypto owners should be exceptionally cautious when selecting an executor or trustee. Not only should the selected executor or trustee be a trusted and honest person, he or she must be tech-savvy enough to navigate the crypto world, thereby relieving the beneficiaries of the burden to manage assets they are unfamiliar with. 

4. Fiscal Implications/Tax Exposure

The tax treatment and accounting of cryptocurrencies is uncertain and differs in each jurisdiction. Changes to tax laws and regulations may have a large impact on the returns on one’s investment in cryptocurrencies, and in the worst scenario, even render a previously accepted investment illegal. Other than regulatory changes, there are various factors that cause the value of cryptocurrencies to be unpredictable and highly volatile. In countries where there is no capital gains tax (e.g., in Singapore and Hong Kong), the differences in valuations from the time a cryptocurrency is acquired by a testator, bequeathed, inherited, and converted to fiat are irrelevant. However, valuations may be relevant for practical purposes when one tries to bequeath specific sums to his or her heirs or beneficiaries, as the asset’s value changes over time. 

Therefore, if individuals are keen to make gifts of cryptocurrency with the hope to reduce their income tax liabilities in their holdings, they may want to get an appraisal of the fair market value of the gifted cryptocurrency and execute a contemporaneous memorandum containing details such as not limited to the date of the transfer and the fair market value of the gift at the time of the transfer. 

There are people who may even think of donating appreciated cryptocurrency to registered qualified charities to receive a charitable deduction on their income taxes for the gift. It is unclear how tax authorities in most countries would treat gifts of cryptocurrency, although in the US, the taxpayer is able to receive a charitable deduction on his or her income taxes for the gift and avoid paying capital gains taxes on the appreciation.

Reasons or Benefits for Cryptocurrencies to be held under Trusts 

Considering the various issues identified in the earlier section of this article, here are some compelling reasons why investors active in crypto asset investments should consider setting up trusts to hold their cryptocurrencies. 

• Minimise the risk of loss: By passing one’s cryptocurrencies (with clear instructions in a document separate from the trust deed) on to a trustee to manage and ensuring the existence of the cryptocurrencies is properly documented in the trust deed, this reduces the likelihood of losing the cryptocurrencies which may go undiscovered after one’s demise. This is crucial because, unlike other property, cryptocurrency has little to no paper trail and is therefore not an easily discoverable asset. If one’s loved ones do not already know about the existence of the cryptocurrency and how to access it, the discovery of such cryptocurrency after one’s death would be almost impossible, and the asset might be lost to them forever. 

• Bypass probate process: If one leaves their cryptocurrencies through a will (or worst still if they make no plan at all), the cryptocurrencies will go through probate and his/her loved-ones will not have access to these assets until the probate process is complete—usually many months, or even years, after one’s death. With the volatile nature of the cryptocurrency markets, cryptocurrencies could lose tremendous value before one’s beneficiaries ever get access to the digital wallet. However, it would be different where a trust is used instead to hold the cryptocurrencies. These crypto assets will be kept out of the probate process, allowing the trustee to have immediate access to trade the illiquid and volatile crypto assets where time will be crucial to their valuation, and distribute the cryptocurrencies in accordance with the terms of the settlor’s trust set up with the trustee. 

• Peace of mind: With a trust set up to hold crypto assets, one can have peace of mind that a trusted person (i.e., the trustee) will step in after one’s lifetime and be responsible for accessing, maintaining, securing, managing, and distributing one’s cryptocurrencies according to the terms of the trust. This also helps the beneficiaries to save time and money, relieving them of the burden to trace the assets, getting access to the assets faster. 

• No Burden for beneficiaries: In situations where there are very young beneficiaries, or those who are either unable to manage their own finances or are not tech savvy, it is a good idea for one to create a trust that sets out a system of management for the cryptocurrency that is going to be left behind. If the beneficiaries do not understand what cryptocurrency is or how it works, it may become burdensome for them to receive cryptocurrencies, either directly or through a will, since they would then have to learn about digital wallets, figure out cryptocurrency exchanges, and maintain all the security practices needed to secure the cryptocurrencies they inherit. On the other hand, if the cryptocurrencies are held and managed by a professional trustee, the loved ones are given a choice to either have some lead time to understand cryptocurrency before they get control of it, or they can choose to have the trustee manage this asset for them indefinitely – all these can be tailored via a trust to fit the specific needs of the settlor and his beneficiaries. 

• Privacy and Security: The storage of crypto assets via ‘cold wallet’ comes with keys and passwords. Once the private key (whether in physical or digital form) to one’s wallet is misplaced or stolen, the thief can fully impersonate the rightful owner and have access to the cryptocurrencies in the wallet. Not only is the ability to transact or transfer the cryptocurrencies lost, but access to the cryptocurrencies is almost impossible to be restored. Where assets are to be dealt with via a will, the will can become part of the public record when filed with the court during the probate process, which means there is no assurance of privacy. However, information about one’s cryptocurrencies can be accorded with more privacy when held under a trust since trust documents are not part of the public record. This will help maintain the security of the crypto assets for both the individual and their beneficiaries. The cold wallets (offline) would be in the possession of the trustee for access purposes, and this helps keep one’s cryptocurrencies private, safe and off the radar of hackers and scammers. This is ideal for people with a wealth of cryptocurrencies, as any public information about the cryptocurrencies will make it an easier target for hackers and scammers. 

• Maintain control of investments after death: One of the greatest benefits of creating a trust that holds one’s cryptocurrencies is the possibility of maintaining some control over investments even after his or her demise. Unlike leaving cryptocurrencies through a will which gives an individual’s loved ones complete control over his or her cryptocurrencies after inheriting them, the settlor can use the trust to direct the trustee as to how an asset is used and for what purpose. The settlor can spell out clearly in the trust documents if the wish is for his or her beneficiaries to stay invested in cryptocurrencies for a specific period. This can thus prevent a premature sale of the said assets if he or she strongly believes that the crypto investments will get more valuable as time goes on. 

Conclusion 

Given the various issues and concerns, to include cryptocurrency in one’s estate plan, although not an easy task, yet a likelihood in the future, is very important. The key to passing on one’s crypto assets smoothly and effectively in accordance with his or her estate plan is to make sure that someone trustworthy is aware of the assets’ existence and there is a secure method of transfer of the private key to one’s heirs. The solution, though not ideal, may be as simple as having placed in a safety deposit box a detailed letter of instruction to one’s executor trustee or heir. 

It is important for crypto owners to communicate and work closely with all relevant parties in the estate planning process (such as legal or tax advisors, executors or trustees including their heirs and beneficiaries), and exercise special care to ensure that cryptocurrency, a new and evolving asset class, is properly treated in their estate plan and a workable solution is implemented. 

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