' Don’t Bury your Bitcoin! Estate Planning for Cryptocurrencies | MTLR

Don’t Bury your Bitcoin! Estate Planning for Cryptocurrencies

From the transferability of social media or email accounts to maintaining online accounts linked to a client’s virtual assets, estate planning issues regarding digital assets have existed for some time. But, now that blockchain based assets such as cryptocurrencies are more commonplace, there is an increased need to plan for the disposition of these digital assets. Estate planning for cryptocurrencies raises unique concerns and the blockchain technology behind cryptocurrencies might provide potential solutions.

 

What are cryptocurrencies?

 

Cryptocurrencies, such as Bitcoin, are forms of digital assets that are encrypted and typically decentralized across a large number of computers so that they are very difficult to counterfeit. Other valuable assets based on blockchain technology exist as well.

 

A basic understanding of the technology behind cryptocurrencies is helpful to understand some of the estate planning challenges posed by cryptocurrencies. A blockchain is a database that stores “blocks” of information. Blocks are records of information bundled together. Each block has a unique code called a hash. Hash codes connect blocks together in a specific order. So, if one block is altered, the hash is changed, and the enormous amount computing power required to recode all the hashes and restore the chain precludes hacking. The blockchain is shared across a network of computers. This results in the records stored in the blockchain being very difficult to tamper with or change.

 

Additionally, in order for an individual to access or transfer their own cryptocurrency, they must use their key. A key is essentially equivalent to a password, and usually takes the form of a seed phrase, a randomly generated list of 12 words that is statistically impossible to guess or force. This provides security to users, but without it the cryptocurrency cannot be accessed.

 

In everyday life, cryptocurrencies are often used, talked about, and conceptualized as currencies. However, it is important to note that, generally, for tax purposes cryptocurrencies are treated as personal property.

 

What does this have to do with estate planning?

 

Estate planning is the process of planning for how your property will transfer to others at the time of your death. Generally, wills and trusts play central roles in estate planning. Wills must be executed in accordance with strict formalities that serve evidentiary, channeling, cautionary, and protective functions. In short, requiring compliance with formalities ensures that a will is not tampered with and the intent of the deceased is effectuated.

 

Unlike traditional assets, like the money in your bank account, your house, or the family jewels, cryptocurrencies could be lost when you die unless the proper precautions are taken. For cryptocurrencies to be transferred to someone else, they must be both legally transferred and technologically accessible so that the executor of the estate can either transfer it or sell it according to the will. The first issue here is that many people do not plan for their cryptocurrencies. So, some estate planners have started encouraging clients to keep careful updated lists of online assets and making a plan for how heirs can access them.

 

The second issue is that if your executor knows your assets exist but can’t access them, there is no way to recover the assets. Because accessing cryptocurrencies requires passwords called keys and seeds, someone will need to have access to these codes. This requires a balance between the need during a person’s life to keep keys secret in order to protect cryptocurrencies and the need to pass them along so that the assets do not remain stuck in the blockchain and uninheritable after that person’s death.  As a solution, some estate planners recommend leaving a trusted attorney or family member a guide to accessing the assets. For example, one can break up the ‘seed’ into parts and store the parts separately in safety deposit boxes or home safes.

 

This solution seeks to balance ease of use for heirs and executors and security. It also provides a way for cryptocurrencies to transfer through the probate process. This means that cryptocurrencies can transfer to an executor at death and be distributed as provided for in the will. But this process still leaves some security risks by requiring the individual to leave a roadmap for how to access the assets.

 

Are there alternatives?

 

One possible alternative to distributing your cryptocurrencies through the probate process would be to follow a similar procedure, but just for a friend or loved one to find without involving the court system. This has very similar risks with the additional possibility that anyone could claim they are the intended beneficiary and litigation could ensue over who should inherit these assets.

 

Another alternative could be to put your cryptocurrencies into a revocable living trust, naming yourself as the beneficiary during your life and transferring to someone else with a new trustee upon your death. This would have the added benefit of allowing your cryptocurrencies to avoid probate and prevent the bequest from becoming part of the public record. It would also allow you to name someone as a trustee who would understand the technology even if your intended beneficiary does not. Though this method would add some benefits, the need to leave someone a way to access your assets wouldn’t be removed.

 

Finally, it is technologically possible to craft a self-executing will to distribute digital assets. Through blockchain technology, a ‘smart contract’ could be executed to transfer digital assets automatically upon notice of your death. This transfer would occur right on the blockchain, obviating the need to write out any instructions for how to access or transfer them and avoiding a potential security risk. While this mode does raise questions of how to incorporate the transfer into the rest of your estate planning so that there is no chance the already transferred assets could be claimed subject to probate, it is a potentially promising way to greatly simplify and add security to estate planning for cryptocurrencies.

*Laura Kirtley is is an Associate Editor on the Michigan Technology Law Review.

1 Comment

  1. Am I understanding this right, if a person dies and no one knows the “key” or “seed phrase” the money that has been invested into bitcoin is lost/given to bitcoin?

    I know my son invested into Bitcoin at one time because he and I discussed it. Unfortunately, he has passed away and I do not have access to his phone or email to find out any information.

    It doesn’t seem right that Bitcoin gets to keep the money. Please advise if I am wrong

    Reply

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