Estate and inheritance planning for crypto assets

Despite the uncertain regulatory environment in the US, investment and use of crypto-assets is not slowing down.

The UK, the EU, the United Arab Emirates and Southeast Asia have all passed legislation regarding crypto-assets and decentralized financial participation. American investors, both individuals and businesses, remain interested in and continue to invest in and use blockchain-based systems.

This continued movement toward crypto opens opportunities for financial advisors to guide clients, even if those advisors cannot or choose not to recommend or manage crypto assets.

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More customers than you think own crypto assets in one form or another. Some may use a custodian, such as Coinbase or Kraken, and have accounts with 4-5 figure bitcoins. Some may have been alarmed by the failures of several custodians, and decided to move their assets to hard wallets or to cold storage, according to the “not your keys, not your crypto” mantra.

As we continue to witness the creation of new accounts and new wallets every day, it is clear that more investors are moving some fiat to crypto. These investors now require some guidance in establishing an estate and succession plan for their crypto assets, even if they believe they have the custodial part in place.

Younger investors are often the ones who dive deeper into crypto without informing their spouse or family members or educating them about the nature of crypto custody. They may not consider themselves wealthy enough to justify typical estate planning since crypto assets can be so volatile. However, proper planning is essential to ensure that your assets are passed on to your heirs according to your wishes.

Legacy planning in digital assets is different from the planning we see with traditional assets. In crypto, the technical plan is often more important than the legal plan, especially for typical investment amounts. For example, I can create the legal conditions to ensure my daughter receives my bitcoin after I pass, but if I haven’t given her the technical ability to control the bitcoin, the legal planning won’t matter.

Legacy planning for digital assets poses additional unique challenges, including regulatory uncertainty, cost basis and rapid innovation.

Many crypto investors have yet to consider these unique aspects of legacy planning, whether their assets are held in centralized exchanges or self-sufficient wallets. As we move from simply buying cryptoassets to participating in on-chain protocols and holding tokenized securities, the need for proper legacy planning will only increase, creating opportunities for financial advisors to add value.

To provide value to clients in legacy planning, financial advisors can begin by asking the following typical question: “Do you own crypto assets?” “How do you keep these assets?” “Have you thought about what happens to your cryptographer when you’re not here?”

Centralized managers offer APIs that can be included in some reporting tools. There are also new reporting and management tools such as Kubera that already have the ability to offer traditional and crypto assets in one package.

If the client hasn’t prepared to pass on their crypto, that’s usually the next step. Most custodial accounts do not provide the ability to transfer on death, so the advisor must assist the client in making these arrangements.

If the client has assets in hard or soft wallets, multi-sig wallets or vaults, the advisor now has even more value to provide. Access is often more critical than legal ownership in this case, so advisors should help clients arrange the transfer of seed phrases or private key material to the heirs. We’ve all heard the horror stories of people dying without leaving the keys to heirs.

Education is a crucial part of the old crypto plan, which differs from traditional asset planning. In my case, I need to make sure my daughter understands how to use the keys I leave her with and some investment philosophy behind my decisions. I don’t want her to have to go on the internet and ask how to use the 24 words dad left behind, as that is a surefire way to get scammed. I also want her to know that I have a 5-10 year time horizon and understand my plan for hodling vs. sale.

Advisors can add so much value by helping clients prepare the inventory, the technology-focused senior plan, and the education plan for these heirs.

Ultra High Net Worth (UHNW) in crypto also face unique challenges when addressing their estate planning needs. They have tax issues, which are further complicated by basis considerations and jurisdictional issues. They may have received their tokens en masse before a project starts or participated in a mining or staking program.

In addition to the typical planning needs, these customers have security concerns – both personal security and wallet/fund security.

They will likely need to employ the services of a crypto-savvy advisor, attorney, and probably a multi-family office to provide some structure to their newfound wealth. This would involve using some of the same structures used by the wealthy for decades, but adding the custodial element. The goal will be to protect assets, engage in proactive tax planning and preserve wealth while allowing them and their families to enjoy it.

To maintain tax efficiency and asset protection, they may have to do something they never thought they would…use a centralized custodian. Except it may be in a jurisdiction like Switzerland or Liechtenstein, where they offer true custody of assets, with a structure that still allows for security of the funds and the ability to manage the assets.

Financial advisors will have a critical role in guiding clients through estate and legacy planning for crypto assets, regardless of whether their client is the typical investor or the ultra-high net worth individual.

As cryptocurrencies and digital assets continue to gain prominence, it is important that clients’ estate plans account for these unique assets in a tax-efficient and legal manner.

Financial advisors will help navigate the complex landscape of digital assets, develop technology strategies for wealth transfer and protection, and collaborate with legal and tax professionals to ensure successful implementation of estate plans that accommodate both traditional and digital assets.