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Insights - January 25, 2022

Estate Planning Considerations for Cryptocurrency Investors

By William G. Smith, LL.M. and Brittany E. Cobb, LL.M.

Despite its volatile market, cryptocurrency investors are lured by its accessibility, skyrocketing gains, purchasing autonomy and anonymity, and the lack of governmental oversight. Particularly, the purchasing anonymity and lack of governmental oversight has led to major consequences for investors and their heirs and beneficiaries.

              When an owner of cryptocurrency dies without taking the appropriate steps to ensure
              their
virtual wealth is identified and transferred consistently with their estate plan, 
              the asset could die with the owner.

Given the novelty of cryptocurrency and the potential for such assets to represent a large part of an individual’s estate, it is increasingly important to understand how to properly list these assets to ensure that such property is accounted for and to give an executor or trustee the proper tools to successfully access, retain, and manage the cryptocurrency without extraneous liability.

Access to Digital Assets by Estate Fiduciaries

Cryptocurrency investors are notoriously picky about how they store their digital keys and access codes. Generally, an individual should not share their private key and account information with others because once a passcode is lost it is nearly impossible to recover.

When cryptocurrency is held in a trust or devised under a will, it is important to understand what information to include to ensure that the asset can be accessed and properly distributed.

Documentation & Storage

First, it is imperative to list any digital asset or cryptocurrency in an estate planning document. This will ensure that the fiduciary knows the assets exist and are included in the estate or trust. Without this information, a fiduciary may have difficulty accessing the digital wallet and ultimately, the cryptocurrency. If the fiduciary never gains access, the asset may be lost forever.

Second, the owner should prepare a separate document or a password-protected digital copy—such as a specialized USB flash drive—that contains detailed information about the cryptocurrency. This includes detailed access instructions, exchange accounts, and digital or hardware wallets, usernames, private keys, and passwords that will allow the fiduciary access to the digital asset.

Lastly, this information should be stored in a safe place, such as a safe deposit box, and the trustee should be provided with the location of the paper or digital copy of the documents and passwords.

Alternatively, if the cryptocurrency is stored on an online exchange platform, most online exchange platforms have procedures to transfer the assets to the beneficiary. To successfully transfer the cryptocurrency, the will should clearly state who the new owner of the cryptocurrency account is. Additionally, the will may also instruct a personal representative on how to distribute the cryptocurrency.

Considerations when Selecting a Trustee or Executor

Given the complexity of cryptocurrency, investors should carefully consider who should be appointed as fiduciary of an estate or trust that includes digital assets. The fiduciary’s knowledge of cryptocurrency investing and trading and their ability to administer trusts with cryptocurrency as assets are two primary concerns that should be discussed when choosing an appropriate trustee.

The Prudent Investor Rule

Under the prudent investor rule, a fiduciary has a duty to invest and manage investment assets as a prudent investor. As a prudent investor, any fiduciary should consider the investment portfolio and overall investment strategy of the entrusted assets. As a trustee, a fiduciary must evaluate whether the risk and return objectives are reasonably suited for the trust and its beneficiaries.

Cryptocurrency can be extremely volatile. Therefore, it is imperative that the executor of an estate or trustee of a trust take all the steps necessary to comply with the prudent investor rule to avoid breaching any fiduciary duties.

If an owner of cryptocurrency intends to have an executor or trustee manage cryptocurrency, the estate plan and trust documents must contain additional language granting the fiduciary discretion to hold, buy, and trade the cryptocurrency.

Conclusion

The market for defi coins and tokens, NFTs (non-fungible tokens), and cryptocurrency or blockchain exchange traded funds (ETFs) will continue to evolve and fluctuate. However, there is an urgency for investors to review their estate plans now to ensure that digital assets are adequately protected and accessible to their executors and trustees.

This article provides information for educational purposes. Jones Foster does not offer advisory or brokerage services, nor does it recommend specific investments, including stocks, securities, or cryptocurrencies.

About Jones Foster

Jones Foster is a commercial and private client law firm headquartered in West Palm Beach, Florida. Established in 1924, the Firm has served as an integral part of South Florida’s growth and prosperity for nearly a century. Through a relentless pursuit of excellence, Jones Foster delivers original legal solutions that help clients, colleagues, and the community to move forward. The Firm’s attorneys focus their practice in Real Estate, Litigation & Dispute Resolution, Private Wealth, Trusts & Estates, Corporate & Tax, and Land Use & Governmental. For more information, please visit www.jonesfoster.com.