Millions in crypto wealth at risk of vanishing when holders die. Here’s how to protect it

Whether someone has squirreled away a trove of early bitcoin BTC$88,228.78 holdings, or a grandchild has persuaded an older family member to take a flyer on some coin or token, intergenerational wealth transfer these days might easily include crypto.

Not so long ago, families in this position faced uncertainty about the basics: Does crypto count as property? How does it fit from an estate planning perspective? That’s not such a problem today, because rules around wills and trusts in many jurisdictions have been updated to accommodate digital assets.

Still, even with improved regulatory clarity, digital assets add a daunting layer of complexity that’s beyond many in the advisory business, according to Christopher Nekvinda, director of global learning operations at Cannon Financial Institute, an Athens, Georgia-based educational institute specializing in wealth management.

“For the longest time, we heard about hesitation happening at the advisory level when it came to establishing if digital assets formed part of a family’s wealth,” Nekvinda said in an interview with CoinDesk. “I think it often comes down to wealth managers having to ask about something that the holder probably knows a lot more about than they do, and now all of a sudden the adviser doesn’t look like the expert.”

Numbers vary, but with somewhere over 50 million adults in the U.S. holding crypto, it’s highly likely that the average American will have digital assets that may need to be transferred to their heirs if they pass. And this is where estate planners or wealth advisors will need to shift their planning to navigate the complex world of transferring digital assets from their owners to the next generation.

Let’s break it down.

Who holds the crypto?

The first thing a planner will need to figure out is whether individuals hold crypto and how it is stored.

If crypto is held by an investor, that raises other questions, Nekvinda said, such as how these assets are stored and who has signing authority. Are beneficiaries aware of the holder’s intentions? Is there a document outlining whether the assets are to be liquidated or continued to grow?

Custody is the main component when it comes to crypto assets, whose control and spendability are governed by closely guarded codes in the form of long alpha-numeric strings of digits.

Often keys are shared with trusted digital-asset custodians, which could be a platform like crypto exchange Coinbase (COIN), or a crypto custody specialist like Bitgo (BTGO) or Fireblocks. Another approach could be a hardware device such as a Trezor or similar. In some cases, a crypto holder might prefer to have the keys printed out on paper and held in a safe or deposit box.

While having digital assets with a custodian might be easier than holding a cold wallet, the question is how that affects passing the assets to the holder’s heir. It had been a burning question before, but after revised rules for trust in the U.S.under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), it is now much clearer, Nekvinda said.

“This fiduciary update was needed because it gives executors and trustees access to digital assets in the same way it would with traditional securities,” Nekvinda said in the interview. “It means that with the right documentation, a custody shop, Coinbase for example, legally has to give an executor or a trustee access to a decedent’s digital assets where previously this just wasn’t required to happen by law.”

‘A detective story’

This doesn’t, however, prevent some crypto wealth from simply vanishing.

While leaving property or mutual funds behind in a will is a pretty cut-and-dry process, without proper planning, inherited crypto can easily be lost to probate delays, missing private keys or fiduciaries unfamiliar with the asset class, said Azriel Baer, a partner in the estate planning group at New York law firm Farrell Fritz.

Baer, who has worked on an estate where tens of millions of dollars in crypto were lost to the heirs due to poor planning, said one simple point to remember is making sure an appropriate person is named to deal with this type of asset. Someone who has the knowledge to deal with things like social media accounts, online transactions and blockchain-based assets.

“An uncle or cousin, who is an organized person, might know the family in a trusted capacity and understand its dynamics, but when he’s told to figure out how to get a bitcoin off a wallet, could be floundering,” Baer said in an interview. “So think about naming somebody who has some expertise in the digital asset world to deal with the asset when you’re not around.”

One problem is there’s a tendency among some people holding digital assets to eschew any form of hard copy in favor of storing information about accounts digitally in emails or in drives. This is fine as long as it doesn’t turn into “a detective story,” Baer said, alluding to the fact that finding these could be made even tougher by searching for passwords and through endless emails.

“I always advise clients to have a list of important accounts and information, and either tell your kids about it, or keep it in the safe deposit box. Too many times we encounter people trying to comb through filing cabinets or computer files and being at a loss,” he said.

Shell companies

What if a holder of crypto hasn’t set up a will?

The legal process of distributing a deceased person’s possessions can involve an appointed administrator in the absence of a will, and that’s another occasion crypto can throw up particular issues, Baer warned.

The probate process takes six to 10 months before a court appoints a fiduciary, Baer pointed out. In the interim, nobody has control of the assets, which can be problematic in the case of a highly volatile asset like crypto, where it pays to be nimble and able to sell quickly.

“There are things that we do to plan around that in the United States and New York specifically, where there are trusts that we create, and we set the trust up as transfer on death or current owners of the asset,” Baer said. “This allows the trustee of that trust to have access to it right away, at the snap of a finger after somebody dies. As opposed to having to wait for the court to come and step in and grant the authority to a different fiduciary.”

If liquidity is needed quickly or there is a market event that could be missed, it’s worth forming a limited liability company (LLC) as a shell, depositing the crypto, and then easily transferring it.

“It’s not the same thing if I have a cold storage wallet and want to transfer it to a trust,” Baer said. “This way, I just have to transfer the LLC to the trust. It’s easy to transact with, but the LLC will own the digital asset.”

An important point to remember is that in New York, a will becomes a public record once it is filed with the New York State Surrogate’s Court and enters the probate process. “So don’t put the actual encryption information within your will, because it’ll become public knowledge, and people could get that information,” Baer said.