Cryptocurrencies and estate planning
When a person dies having made a will, their personal estate is transferred to their personal representatives and thereafter to the person, or people, who have been named as beneficiaries, once the administration of their estate is complete.
If a will has not been prepared, the deceased’s personal estate is distributed among their surviving relatives pursuant to the terms of the Succession Act 1974, subsequent to the administration of their estate being complete.
Bermuda’s Wills Act 1988 defines “personal estate” to include leasehold estates, company shares, and chattels, among other forms of assets, and “all other property whatsoever which by law devolves upon an executor or administrator”.
But, how are crypto assets to be treated?
They are not tangible and hence not capable of being things in possession.
However, they do hold value that an individual has a right to possess and transfer.
As property evolves, such as with crypto assets, so must the methods used to preserve them and pass them on upon one’s death.
The primary concern with leaving crypto assets in a will is ensuring that they can be accessed and transferred to the designated beneficiaries.
Crypto assets may be stored in a variety of ways.
For example, cryptocurrencies like bitcoin can be held in crypto wallets, each of which has an address with a 30-plus character alphanumeric identity that acts as a pseudonym for the actual owner's identity.
The most common types are hot and cold wallets.
Hot wallets are described as online cryptocurrency storage software, but because they are online they can be susceptible to cyber attacks.
Cold wallets are offline storage devices, and therefore tend to be more secure.
However a crypto asset is stored, an individual needs an access key code in order to access it.
Two high-profile cases demonstrate how crypto assets have been lost.
In 2018, the CEO of Canadian crypto exchange QuadrigaCX, Gerald Cotten, died unexpectedly at age 30.
His $190 million worth of crypto assets were inaccessible because he was the sole holder of the private keys and cold wallets for the company – and had not shared those details with anyone.
In the same year, Mathew Mellon died at 54, but his $500 million worth of cryptocurrencies was lost, too.
Mr Mellon had stored the private keys to his crypto assets in cold wallets distributed in various banks, but he had not told anyone their whereabouts.
These examples show how easy it is to lose access to cryptocurrencies and highlights the importance of creating a plan for executors and beneficiaries to follow when handling an estate, particularly where crypto assets are concerned.
When drafting a will, special attention must be given to the instructions on how to gain access to the crypto assets so that they may be transferred to the intended beneficiaries.
Most importantly, beneficiaries should be provided with clear instructions on how to access the crypto assets.
In Bermuda, a will becomes a public document once it is probated.
It is therefore not advisable to note the wallet address and/or access key code in a will, as no one would want this sensitive information to become available to anyone other than the intended beneficiaries of the crypto assets.
In order to ensure that crypto assets are kept safe and available for transfer to estate beneficiaries, individuals should provide a detailed plan about how their crypto assets are held during their lifetime and how they are to become accessible to the beneficiaries of their estate upon their death.
For example, a cryptocurrency bank can hold crypto wallets and their access key codes on behalf of individuals.
Instructions can be left with the bank to grant access to executors and beneficiaries. In this way, wallet details and private key codes remain private, and are only released to individuals entitled to them.
Another way to pass on crypto assets involves holding cryptocurrency in a cold wallet offline, and storing the private access key information in a safe-deposit box, while ensuring that detailed instructions are left about how to access the safe deposit box and the wallet.
As more individuals begin to diversify their portfolios with crypto assets, they should ensure that they have a detailed plan to preserve and pass on these assets, upon their death.
They should also consider seeking advice on whether they should set up a trust or hire a custodian to hold their crypto assets on their behalf.
In any event, owners of crypto assets should carefully consider their estate planning to ensure that their assets, and more particularly their crypto assets, can be securely passed on to their beneficiaries.
Caljonah Smith is a senior associate in the Private Client & Trusts department and Karim Creary is a trainee in the Corporate department at Appleby. A copy of this column is available on the firm’s web site at www.applebyglobal.com.
This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.