According to the Cremation Institute (opens in a new tab), nearly 90% of cryptocurrency owners worry about what will happen to their digital assets after they die. Turns out they have good reason to be concerned.
Currently, there are over 12,000 different cryptocurrencies in the world, which makes tracking them difficult, especially if the owner becomes incapacitated or dies. The number of cryptocurrency investors is also growing, and according to Blockchain.com, there are now over 83 million blockchain wallet users. This number is expected to increase, making it more likely than ever that you or someone in your family has digital currencies.
What are crypto assets?
Cryptocurrency is a type of digital currency that uses cryptography for strong security. Besides Bitcoin (BTC), cryptocurrencies you may have heard of include Ethereum (ETH), Litecoin (LTC), Cardano (ADA), and Dogecoin (DOGE), to name a few.
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Cryptocurrencies have had a rocky first half of 2022. Bitcoin is barely holding its head above $19,000, but investors don’t think its price will be depressed for long. A recent Deutsche Bank study found that around a quarter of bitcoin investors believe cryptocurrency prices will be above $110,000 in five years. Of those surveyed, over 70% said they plan to increase their crypto business over the next twelve months.
Crypto Assets Pose Challenges When Owner Dies
As the popularity and value of these assets increase, one area that is struggling to keep up is the area of estate planning, as currencies and digital assets create unique death challenges. Instead of being treated like cash in a bank account, they are considered assets. However, because these assets only exist in virtual form and are encrypted, they can be nearly impossible for surviving heirs to find.
According to Marc Zimmerman, an experienced trust, estate, and tax attorney at the law firm of Michael A. Zimmerman, “Traditional methods of writing a will and waiting for the named executor to find all the assets won’t work. not with bitcoin and other digital currencies. . While you’re still alive, one of the biggest advantages of a crypto wallet is that no one can access it. It’s not so great once you are dead.
Cryptocurrency is stored using a virtual wallet and a private key is required to open it. This private key is a string of random characters, essentially the password that allows access to the contents of the wallet. It’s like a physical key to open a safe. Of course, a bank can potentially access a vault if the physical key is lost, but not a wallet with a missing virtual key.
Zimmerman explains, “If you die without leaving your private key details with anyone, your cryptocurrency will become nearly impossible for your loved ones to access.” Although numbers are not readily available for many cryptocurrencies, Bitcoin estimates that approximately 4 million Bitcoins were lost due to owners deaths and missing private keys. It’s over $240 billion today.
Be mindful of who you end up leaving behind by giving your heirs access to your crypto assets. Many experts advise investors to write down the private key in your documents. However, Zimmerman warns that this is not always safe or viable. “Wills are public documents, and sharing private cryptographic keys is not ideal. Leaving a small piece of paper with the key presents additional risks. An unscrupulous family member who understands cryptography could walk away with the key. private key without anyone else knowing the crypto assets exist.A piece of paper can also be thrown away by a well-meaning friend helping to clean up the contents of the house.
“One option is to move your crypto to an exchange,” suggests Certified Financial Planner Avani Ramnani, Senior Advisor at Francis Financial (opens in a new tab). Exchanges and custodians like Coinbase offer a more traditional alternative, providing a vault that is essentially a physical vault for your private cryptographic key.
Additionally, Coinbase offers joint accounts, allowing for a smoother transfer of legacy crypto assets to heirs. If the custodian does not offer joint accounts, establish a beneficiary with the exchange holding your crypto investments. Ramnani warns investors to “review your custodian’s service policies to understand how they plan to handle post-mortem account management, ensuring your loved ones easily inherit your asset.”
An in-trust account is also an option. Zimmerman is working with a client to create such an account that owns the crypto. Zimmerman explains, “An in-trust account is advantageous because it avoids the probate process with easier possible transfer to heirs. The only issue with a trust owning crypto is that the estate attorney must make sure to put language in the documents to allow the trustee to buy and sell “risky” investments such as crypto.
Other digital assets
Cryptocurrency can be an extreme example, but Ramnani recommends providing instructions and access to your entire digital life to your beneficiaries. “Include information on how to access online banking accounts, frequent flyer miles and other rewards points, PayPal, Venmo, Google Wallet, Apple Wallet, and prepaid cards such as Starbucks or Uber.
Each of these accounts can hold large sums of money, and it’s important to make sure those dollars get through to your family. Password managers such as Keeper (opens in a new tab)Last pass (opens in a new tab) or Dashlane (opens in a new tab) allow you to create strong passwords and share them with family members as needed.
This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC (opens in a new tab) or with FINRA (opens in a new tab).