Understanding Cryptocurrency Inheritance
Should you know someone with cryptocurrency assets that you might inherit, it is essential to hone your treasure-hunting skills, as this may be required to secure those holdings. Conversely, if you are the one possessing cryptocurrencies, it is crucial to realise that these funds could easily be lost upon your passing.
In the United States, cryptocurrencies are classified as digital assets rather than money for succession law purposes. Unlike cash or physical assets, where one can simply fill out a beneficiary designation form and create a succession plan or will specifying who receives what upon death, digital assets present a unique challenge. The law does not automatically assume that a deceased individual wished for their private materials—ranging from emails to photographs—to be handed over to someone else unless explicitly stated. This places cryptocurrencies in a precarious position.
When it comes to arranging the transfer of cryptocurrencies following an individual’s death or incapacity, there are two primary categories to consider: whether the assets are held by a custodian or stored in a non-custodial wallet.
Exploring Custodial and Non-Custodial Wallets
A custodial wallet means that a third party, such as a bank or a cryptocurrency platform, stores and manages the assets on your behalf. Generally, transferring assets after death is significantly more straightforward when a custodian is involved, particularly if it is a bank.
On the other hand, non-custodial wallets eliminate the intermediary, allowing individuals to retain direct control over their assets. For cryptocurrency enthusiasts who are drawn to digital currency out of a disdain for traditional banking systems, non-custodial wallets embody the core principles of this technology.
These wallets can be software-based, hardware devices, or even a piece of paper detailing the instructions and passwords necessary to access the cryptocurrency. The term “password” here refers broadly to any combination of letters, numbers, and characters required for accessing someone’s cryptocurrency. Regardless of the type of non-custodial wallet you choose, a ‘do it yourself’ solution will be necessary for transferring your assets.
Benefits and Drawbacks of Custodial Wallets
When opting for a third party to manage your cryptocurrency, you can select one that offers a beneficiary designation process. Well-known financial institutions like Charles Schwab and Chase provide cryptocurrency services and possess experience in asset transfer after death. For instance, Schwab incorporates its cryptocurrency services into brokerage accounts, meaning signing a beneficiary form for a brokerage account also applies to the cryptocurrency account, streamlining the process.
Another advantage of using a bank is that at least three entities— the bank, the government, and credit reporting agencies—are aware of your account. There are established avenues for locating funds deposited in banks belonging to deceased individuals, a scenario that does not apply in the case of non-custodial wallets.
Additionally, should you find yourself locked out of your online banking account, you can visit a bank branch with your identification to regain access. Most importantly for your heirs, it does not matter if you were unable to access the online portal at the time of your death; this does not affect the account or the beneficiaries’ ability to receive funds. This is not the case with non-custodial wallets.
It is important to note that cryptocurrency accounts, even those maintained through a bank, are not insured by the FDIC.
Other custodians include cryptocurrency platforms like Coinbase and peer-to-peer payment services such as PayPal. However, neither Coinbase nor PayPal had beneficiary forms available at the time of writing, although both have clear processes for demonstrating that an individual is entitled to a deceased person’s account. In both instances, you must possess legal documentation proving that you are the estate executor (in the case of PayPal) or have the right to inherit the account (in the case of Coinbase), as well as a death certificate and additional paperwork. Thus, while the process may be somewhat cumbersome and requires prior planning, it remains relatively straightforward.
Weighing the Pros and Cons of Non-Custodial Wallets
The primary advantage of a non-custodial wallet lies in the complete control it affords you. You directly own the assets and are responsible for knowing and safeguarding the information required to access them. Furthermore, you must devise a plan to inform your beneficiaries of the existence of your cryptocurrency account and ensure they can access it.
However, a significant concern is that if you lose access while still alive, that could be the end. “If you lose your cryptographic key, there is no company you can turn to,” remarks Benjamin Orzeske, Chief Legal Officer of the Uniform Law Commission and attorney for the Revised Uniform Fiduciary Access to Digital Assets Act, the legislation governing digital inheritance management in most states.
In the case of a hardware key, damage or loss due to fire or theft could also permanently and irreversibly deprive both you and your heirs of your cryptocurrencies.
Another considerable hurdle is that your fiduciary must be aware of the existence of the cryptocurrencies. No government agency or credit reporting agency has record of your account ownership; only those you inform will know.
Planning for Secure Access to Cryptocurrency
Turning to procedural aspects, due to the workings of blockchain technology, you must find a secure way to provide instructions to your heirs on how to access the assets. Your system needs to be secure, as there are no backups or protective mechanisms unless you create them. Moreover, testing your system to ensure it works before your passing will require a significant degree of trust.
Suggestions from Reddit users on how to create a system for passing on cryptocurrencies include “dead man’s switches” via email, printed instructions handed to a trusted person, and splitting instructions between two individuals who must coordinate to gain access. While these solutions could work, they come with evident flaws, such as email system failures or a trusted person’s unexpected passing, among other issues.
A potentially better approach might involve including most of the instructions in your succession plan, naming your designated fiduciary while omitting any passwords. As Catherine Hodder, Senior Legal Editor at FindLaw, explains: “The will is a public document,” and names or passwords should never be included in it.
A secure location for storing your password might be a safe deposit box at a bank, which should also be noted in your will. Some cryptocurrency owners have suggested engraving the password on a metal plate, an idea that could be prudent if you doubt that ink and paper will outlast you.
Nonetheless, a remaining drawback is that you cannot test to ensure your system works unless you place complete trust in your fiduciary. A simple requirement, such as needing your fingerprint to unlock a device, could undermine your entire plan.
Some ardent anti-capitalist investors may argue that by including your cryptocurrencies in your succession plan, you are returning them to the realm of traditional law and governance. Yet, what does it matter? You’ll be gone.