With today’s economic uncertainty, many investors are looking into cryptocurrency and non-fungible tokens (NFTs) as a means to diversify their portfolios. What these investors may not understand is that basic estate planning documents may lack the means to properly protect and transfer these digital assets.
Crypto-assets present complex challenges for securing and transferring this type of wealth. Estate planning strategies continue to evolve in this area, but a lot of unknowns still exist. Think of trying to predict social media in 2007. That is what it is like to predict crypto-assets and estate planning now in 2022. But with all that said, there are a number of ways to protect these digital assets.
Cryptocurrency is accessed through a private key, typically a series of alphanumeric characters known only by the owner. The owner stores this private key in either a digital wallet or someplace physical and secret (known as cold storage). An example of cold storage would be writing it on a piece of paper and keeping it in a fireproof safe. The issue with both of these storage methods is that if the owner dies or becomes incapacitated, someone trustworthy needs to know 1) the crypto-assets exist; 2) how to locate the private key; and 3) what to do with the key. Whoever has the private key can buy, sell and use the digital money. This makes it susceptible to theft as well as simply remaining unknown and lost forever.
Given that some of these assets translate into significant wealth, these risks need to be addressed through proper estate planning. Ensuring that loved ones know these cryptocurrencies exist, where to find them and what to do with them is critical to ensuring that the owner’s legacy goals are met. The main issue in digital estate planning is to identify a custodian and trustee. Some of the following strategies may be employed to pass along the private key information:
- You can simply provide a cold storage copy of the seed phrase and private keys to a trusted family member or friend. (High Risk)
- You can divide the seed phrase and private key among multiple trusted individuals. (High Risk)
- You can create a trust and fund the trust with these assets, appointing a trustee who is held to a fiduciary standard to manage them. (Low Risk)
- You can place the cryptocurrency in a digital wallet, or some type of software application with instructions left for your personal representative in your will and your agent under a power of attorney. (Moderate Risk)
- You can use a dead man’s switch app (example: https://www.deadmansswitch.net/). How it works – You subscribe to a dead man’s switch service and draft emails that should be sent only if you pass away. The switch service checks on you periodically by requiring you to acknowledge you are still alive and well. If you fail to respond, after a specific period of time and number of attempts, the service is triggered to send your emails. These emails can contain the information needed to access and transfer the cryptocurrency. (Moderate Risk – still depends on the trustworthiness of recipients to carry out your goals.)
As you can see, creating a trust for crypto-assets may be your safest strategy. To learn more about protecting digital assets, contact the knowledgeable attorneys at Stouffer Legal in the Greater Baltimore area. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
