Cryptocurrencies have been making headlines as of late, with more and more investors wanting in on this digital currency. Cryptocurrencies are attractive to some of us because they are unregulated, decentralized, and anonymous. While secrecy is useful in some areas of life, when it comes to estate planning it can lead to disaster. Indeed, your entire cryptocurrency investment can essentially disappear into thin air the moment you pass away or become incapacitated. If you have not taken the proper steps to plan and protect these assets, your loved ones left behind have no way of accessing or recovering them.
C ryptocurrency is a form of internet currency. Instead of a central bank regulating the funds, encryption techniques are used to regulate the amount or units of currency. These techniques are also used to verify the transfer of funds. In this manner, cryptocurrency can be transferred online without a third party. Some crypto assets have units that are all the same (called “fungible tokens”). Bitcoin is an example of a fungible token since all bitcoins are the same as one another. Other crypto assets have unique attributes (called “non-fungible tokens”). Cryptokitties is an example of a nonfungible token since each digital “cat” is unique.
Notably, if you lose the key (i.e., the encryption) to your cryptocurrency, you will be unable to access your digital assets. Thus, making access to your key available to your loved ones upon your death or incapacity is vital to estate planning. This is because if there is no access to the key, there is no access to the assets. Unlike more “traditional” assets, there is no third party to control or compel assets nor reset the key for access to these digital funds. The software or hardware device that holds the keys to your cryptocurrency and manages your transaction is referred to as a “wallet.”
Cryptocurrency is not considered a currency under the internal revenue code. It is considered an intangible asset, like stock. And investing in a cryptocurrency is extremely risky. Like trading on margin, investing in options or structured products, or investing in private placements (restricted stock in a closely-held company), cryptocurrency investments are not for most of us. These investments are unregulated, not subject to agency examination or review, and not required to make the risk disclosures required for publicly-traded securities.
Digital Asset Estate Planning
It is important to understand that cryptocurrencies are typically a non-listed, non-vetted asset category. In other words – cryptocurrencies are not like publicly traded stocks, which are highly regulated, meaning they have undergone a detailed process of due diligence, are required to make legal disclosures concerning risk, and are subject to other trading requirements. In short, when it comes to digital currencies, the term “buyer beware” is more than applicable. Therefore, if you own cryptocurrency — or are thinking about investing in digital currency — understand that you will need a technical access plan (a way to ensure your successors can access your digital wealth) in addition to a legal plan in order to effectively create an estate plan that incorporates these digital assets. And because what is going on with digital currency is evolving all the time, and quickly, it is important to touch base with a knowledgeable estate planning attorney at least once a year to make sure you and your family’s needs are being met.
Keeping your money, family heirlooms, and other values hidden from everyone in a safe in an unknown location without giving anyone the combination to the safe is foolish. The same is true if you own cryptocurrencies and do not take the appropriate steps to protect this asset through estate planning. Do not let life’s surprises leave your family in the dark. Contact us today to learn about your options and how to protect the loved ones you will leave behind.