To ensure that cryptocurrencies such as bitcoin are effectively passed on to heirs or beneficiaries, financial advisors must embark on some unique estate-planning in this area, attorneys Joseph Doll and Michael Kearney write on ThinkAdvisor.
How to Ensure Cryptocurrencies are Passed On
Clients should physically record the private access details of their digital assets and give them to their estate representatives, according to the authors. Public-private key systems are used by most cryptocurrencies, and the private one is known only to the investor, Doll and Kearney write. This gives access to, and verifies ownership of, digital assets, and should be kept very safe — a physical copy in a safety deposit box could prove most effective, according to the lawyers.
Furthermore, many investors store digital assets in digital wallets on various online platforms known as exchanges, Doll and Kearney write. The usernames, passwords and security questions for these sites must be recorded, along with those needed for the two-factor authentication that exchanges often require, according to the authors.
Digital assets can be moved into hardware wallets — typically, encrypted flash drives — which are less susceptible to hacking, Doll and Kearney write. They are normally accessed with a PIN or password, and many have 24-word recovery phrases in case access codes are forgotten or the hardware is damaged, stolen or lost, according to the authors. Secondary hardware wallets that mirror the first should be purchased, all access information recorded, and the wallets and information assigned in a will, Doll and Kearney write.
Some version of the Uniform Fiduciary Access to Digital Assets Act has been passed in at least 24 states, and while it allows fiduciaries to manage digital assets, it may fall short for cryptocurrencies and hardware wallets, the authors write. For example, New Jersey’s 2017 UFADAA gives access to online exchange account information but not private keys, which are essential for cryptocurrency transfers, according to Doll and Kearney.
Finally, digital assets are treated as property rather than currency by the Internal Revenue Service, and therefore any capital gain or loss on them must be reported, the authors write. Many online exchanges provide records of transactions for tax purposes, and for those that don’t, investors can record trade confirmations, Doll and Kearney write.
