Cryptocurrency in Estate Planning
While cryptocurrencies are a relatively new concept, with the first – Bitcoin – created in 2009, they are becoming an increasingly popular investment. In fact, more and more businesses are now accepting payment in Bitcoin.
What is cryptocurrency?
Cryptocurrency is digital currency with no physical form like notes or coins. The currency is encrypted to prevent unauthorised access and is controlled by code. All transactions are recorded in a blockchain – a type of public ledger. Cryptocurrency funds are not controlled by a third party banking institution, but work through direct peer to peer transactions. Users can store and spend their money using encrypted virtual wallets. Access to virtual wallets can be obtained using private “keys” that only the user holds.
The largest and most widely recognised cryptocurrency provider is Bitcoin, although there are currently well over 1000 different types of cryptocurrencies around the world.
Cryptocurrency and estate planning
When someone passes away, the executor of their estate must locate all of their assets in order to distribute them to the beneficiaries. If the deceased has cryptocurrencies, the executor must be able to not only locate them, but also distribute them. If you have not planned properly, then there is a real risk that your cryptocurrency investments could be lost forever.
In order for your executor to be able to distribute your cryptocurrencies according to your wishes, they will need access to the encrypted codes and electronic signatures. This also applies to your attorney under your Power of Attorney in the event that you lose legal capacity.
Choosing the right executor
The first step to take in proper estate planning for your cryptocurrencies is choosing an executor who either knows about cryptocurrencies already or will be able to get help with it so that they can locate and transfer your assets.
Identifying your cryptocurrencies
The next step is to make sure your executor knows you have cryptocurrencies. Telling your executor about your cryptocurrencies will help to ensure that when the time comes, they will know where to look.
This can be done by leaving a letter with your will, which identifies your cryptocurrency investments and the keys to unlock them. We can provide a template letter to use for this purpose.
While it makes sense to store this information with your Will, it’s important that you are sure the information will be safe. It is vital that you do not put the private keys for your cryptocurrencies in your Will itself. When probate is granted, your Will becomes a public document, meaning there is a risk that it could be accessed by the wrong person.
Transferring your cryptocurrencies
Safety deposit boxes
Although providing a letter is the easiest and most hassle free way to ensure that your cryptocurrency investments are transferred according to your wishes, if you have concerns about the safety of doing this, there are other options.
For example, the keys to your cryptocurrencies can be kept on a hard drive, which can be physically stored in a safety deposit box. It is a good idea in this case to make a memorandum for your executor advising what is stored on the hard drive and where the safety deposit box is.
There are also ways of arranging for your cryptocurrencies to transfer to your elected beneficiaries in the event of your death without the need for your executor to do anything.
One of these is referred to by some cryptocurrencies as the “Dead Man’s Switch”. A computer programme checks whether you are still alive by scanning death certificate databases and sending you regular emails. If no response is received to the emails and your death certificate is located it activates a switch and signs the transaction to transfer your Bitcoin to your chosen beneficiary.
The main issue with this method is that it requires constant vigilance on your part, as you will need to make sure to keep responding to the emails.
A similar approach is the use of smart contracts, known as Lock Time Transactions with Bitcoin, which require you to identify a time at which the transfer of the asset is to occur. This may be, for example, in 12 months’ time. When the time is almost up, you then need to postpone the transaction for, say, another 12 months. In the event that you pass away, you will fail to postpone the transaction and it will occur, transferring your assets to your chosen beneficiary.
Again, however, this method requires a lot of involvement on your part as you must continue resetting the transfer date.
Another option is to divide your digital wallet into a number of pieces and give each of those pieces to trusted people. For the cryptocurrency to transfer to your chosen beneficiaries, all of the people who have the pieces of the wallet must put their pieces together to trigger the transaction.
The risks associated with this method are that a piece may be lost, or one of the people with a piece could refuse to cooperate to transfer the asset. There is also a risk that the people with the pieces could collude and transfer your cryptocurrencies without your consent.
Multiple signature transactions, in Bitcoin known as M-of-N transactions require a minimum number of signatures (‘M’) out of a number of possible signatories that you have provided (‘N’). For example, you might provide Bitcoin with the names of five possible signatories, including your executor and your estate planning lawyer. Bitcoin then requires at least three of those signatories to sign before your Bitcoin is transferred to the beneficiaries.
What should you do?
If you have cryptocurrency investments, it’s important that you prepare for what will happen to them in the event of your death or loss of mental capacity. Without adequate estate planning, you risk losing your investments forever. Make sure to raise your cryptocurrency investments when you are providing your Will instructions. We can help by providing you advice specific to your individual circumstances.
Today's article has been written by Solicitor, Grace Banner.
Please note: this article is posted in Adelaide, South Australia by Rossi Legal, a medium sized law firm with offices in Adelaide and Salisbury, providing legal services in most areas of law to individuals and businesses since 1989. This article is not intended to be legal advice. To obtain legal advice specific to your circumstances, please contact the writer or submit an enquiry here.