According to the Cremation Institute (opens in a new tab), nearly 90% of cryptocurrency owners are concerned about what will happen to their digital assets after they die. It turns out they have good reason to worry.
Currently, there are over 12,000 different cryptocurrencies globally, which makes tracking them a challenge, especially if the owner becomes disabled or dies. The number of cryptocurrency investors is also growing, and according to Blockchain.com, there are now more than 83 million blockchain wallet users. This number is expected to grow, making it more likely than ever that you or a family member holds digital currencies.
What are crypto assets?
Cryptocurrency is a type of digital currency that uses cryptography for increased security. Along with Bitcoin (BTC), cryptocurrencies that you may have heard of include Ethereum (ETH), Litecoin (LTC), Cardano (ADA), and Dogecoin (DOGE), to name a few.
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Cryptocurrencies had a rocky first half of 2022. Bitcoin is barely holding its head above $19,000, but investors don’t think the price will be lowered for long. A recent study by Deutsche Bank found that about a quarter of bitcoin investors believe that prices of the cryptocurrency will be above $110,000 in five years. Of those interviewed, more than 70% said they planned to increase their crypto activity in the next twelve months.
Crypto assets present challenges when the owner dies
As the popularity and value of these assets grows, one of the areas struggling to keep pace is the estate planning field, as digital currencies and assets create unique challenges at death. Instead of being treated like cash in a bank account, they are considered assets. But because these assets exist only in virtual form and are encrypted, they can be nearly impossible to find for surviving heirs.
According to Marc Zimmerman, an experienced trust, estate and tax attorney at The Law Office of Michael A. Zimmerman, “Traditional methods of writing a will and expecting the named executor to find all the assets will not work with Bitcoin and other digital currencies . While you’re still alive, one of the biggest advantages of a crypto wallet is that no one can get into it. This isn’t so good once you’re dead.”
Cryptocurrency is stored using a virtual wallet, and a private key is required to open it. This private key is a string of random characters, essentially the password that accesses the wallet contents. This is like a physical key to open a bank safe. Of course, a bank can eventually gain access to a vault if the physical key is lost, but that is not true for a wallet with a missing virtual key.
Zimmerman explains, “If you die without leaving anyone the details of your private key, your cryptocurrency will become almost impossible for your loved ones to access.” While numbers are not readily available for many cryptocurrencies, Bitcoin estimates that approximately 4 million Bitcoins have been lost due to the death of their owners and missing private keys. That’s more than $240 billion today.
Be considerate of those you will eventually leave behind by giving your heirs access to your crypto assets. Many experts recommend that investors write down the private key in your documents. However, Zimmerman cautions that it is not always safe or viable to do so. “Wills are public documents, and sharing private crypto keys in them is not ideal. Leaving a small piece of paper with the key poses additional risks. An unscrupulous family member who understands crypto can walk away with the private key without anyone else knowing that crypto assets exists. A piece of paper can also be thrown out by a well-meaning friend who helps clear away the contents of the home.”
Solutions
“One option is to move crypto to an exchange,” suggests Certified Financial Planner Avani Ramnani, Principal Advisor at Francis Financial (opens in a new tab). Exchanges and custodians like Coinbase offer a more traditional alternative, providing a vault that is essentially a physical safe deposit box for your private crypto key.
In addition, Coinbase offers joint accounts, which allow a smoother transfer of inherited crypto assets to heirs. If the custodian does not offer joint accounts, you create a receiver at the exchange that holds your crypto investments. Ramnani cautions investors to “review the custodian’s service policies to understand how they plan to handle postmortem account management, and ensure your loved ones easily inherit your assets.”
A trust account is also an option. Zimmerman is working with a client to create such an account that owns the crypto. Zimmerman explains, “A trust account is beneficial because it avoids the probate process with possible easier transfer to heirs. The only issues surrounding a trust that owns crypto is that the estate attorney must make sure to put language in the documents to allow the executor to buy and sell ‘risky’ investments like crypto.”
Other digital assets
Cryptocurrency might be an extreme example, but Ramnani recommends giving instructions and access to your entire digital life to the recipients. “Include information on how to access online banking accounts, frequent flyer miles and other rewards points, PayPal, Venmo, Google Wallet, Apple Wallet, as well as prepaid cards such as from Starbucks or Uber.
Each of these accounts can have significant amounts of money in them, and it’s important to make sure that money goes to your family.” Password managers like Keeper (opens in a new tab)LastPass (opens in a new tab) or Dashlane (opens in a new tab) allows you to create strong passwords and share with family members, when appropriate.
This article was written by and presents the views of our contributing advisor, not the Kiplinger editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).
