Estate Planning Blog Articles

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How to Include Digital Assets in Your Estate Plan

While owning digital assets hasn’t changed the principles of estate planning, it has made the estate pre-planning process more complicated, according to the article “Estate planning and cryptocurrency: 5 tips for leaving your digital assets” from Bankrate. The hurdle is the information needed to retrieve digital assets, including passwords, keys and digital asset locations. There’s no one to call, and the stories of millions in digital assets lost forever are already legendary.

Here are five tips for cryptocurrency owners:

Know where the crypto is held. Cryptocurrency held with a traditional broker or crypto exchange can be handled like other investment accounts, if a beneficiary is named on the accounts or otherwise specified in a will or trust documents. An owner might try to hide the account. However, it generally can be found if the executor knows where the crypto is located.

If crypto assets are self-custodied in an off-chain wallet, and no one knows where the wallet is or its existence, crypto can be hidden and may not be retrievable. A title or probate search will not reveal them; it may be gone forever without the password, private key, or seed phrases.

Understand crypto can easily be lost permanently. Anyone holding crypto on an encrypted hard drive could lose the asset forever, if no one but the owner knows where it is or how to access it. If a hard drive is lost, destroyed, or stolen, or if the key is lost, the crypto is gone.

Provide access to crypto accounts. Whether it’s traditional brokerage accounts or crypto on a hard drive, you’ll need to provide the means and info for your executor or heirs to access these assets upon your passing. The challenge is balancing access with the security of the accounts. There are ways to set up a centralized location to secure all known seed phrases, keys and passphrases and then locate them in the most secure place available. For example, a hard copy list may be stored with other important documents in a fire and waterproof safe.

Another problem is that if your executor is unfamiliar with digital assets, they may not know anything about how digital assets work, making accessing the accounts challenging. You may need to bring them into the digital world as part of your estate planning process.

Protect access to accounts with best practices. If crypto is sent to another person, it’s basically unrecoverable. Don’t include this information in your will, as it becomes a public document upon going through probate. It may be better to secure digital vaults or use reliable, reputable third-party services to store access information. Be careful about providing access to family members who may take advantage of their digital fluency before the estate plan is settled.

Don’t forget cryptocurrency is taxable. Any realized capital gain is taxable, and so are purchases using crypto when the value of the goods is worth more than the purchase price of the crypto. If the estate is over the federal or state exemption level, it can owe estate taxes, even when the crypto is hidden. Tax implications, including tracking the cost basis and gain and loss metrics, are especially important during the asset transition phase. Executors dealing with crypto must be careful to declare the estate’s taxable gains and losses. The estate must meet all tax obligations, crypto and traditional assets included.

Speak with an experienced estate planning attorney about how your state’s laws govern cryptocurrency and digital assets as part of a comprehensive estate plan.

Reference: Bankrate (September 5, 2023) “Estate planning and cryptocurrency: 5 tips for leaving your digital assets”

Protecting Digital Assets in Estate Planning

The highly secure nature of crypto assets results largely from the lack of personally identifiable information associated with crypto accounts. Unfortunately, this makes identifying crypto assets impossible for heirs or executors, who must be made aware of their existence or provided with the information needed to access these new assets.

The only way to access crypto accounts after the original owner’s death, as reported in the recent article “Today’s Business: Cryptocurrency and estate planning” from CT Insider, is to have the password, or “private key.” Without the private key, there is no access, and the cryptocurrency is worthless. At the same time, safeguarding passwords, especially the “seed” phrases, is critical.

The key to the cryptocurrency should be more than just known to the owner. The owner must never be the only person who knows where the passwords are printed, stored on a secreted scrap of paper, on a deliberately hard-to-find thumb drive, or encrypted on a laptop with only the owner’s knowledge of how to access the information.

At the same time, this information must be kept secure to protect it from theft. How can you accomplish both?

One of the straightforward ways to store passwords and seed phrases is to write them down on a piece of paper and keep the paper in a secure location, such as a safe or safe deposit box. However, the safe deposit box may not be accessible in the event of the owner’s death.

Some people use password managers, a software tool for password storage. The information is encrypted, and a single master password is all your executor needs to gain access to secret seed phrases, passwords and other stored information. However, storing the master password in a secure location becomes challenging, as information cannot be retrieved if lost.

You should also never store seed phrases or passwords with the cryptocurrency wallet address, which makes crypto assets extremely vulnerable to theft.

This information needs to be stored in a way that is secure from physical and digital threats. Consider giving your executor, a trusted friend, or relative directions on retrieving this stored information.

Another option is to provide your executor or trusted person with the passwords and seed phrases, as long as they can be trusted to safeguard the information and are not likely to share it accidentally.

Passwords and seed phrases should be regularly updated and occasionally changed to ensure that digital assets remain secure. If you’ve shared the information, share the updates as well.

A side note on digital assets: the IRS now treats cryptocurrency as personal property, not currency. The property transaction rules applying to virtual currency are generally the same as they apply to traditional types of property transfers. There may be tax consequences if there is a capital gain or loss.

Properly safeguarding seed phrases and other passwords is essential to estate planning. Include digital assets in your estate plan just as a traditional asset.

Reference: CT Insider (March 18, 2023) “Today’s Business: Cryptocurrency and estate planning”

digital asset law

Digital Asset Law Passes in Pennsylvania, Joining Most States

More and more of our lives are lived online. However, what happens when we become disabled or die and our executor or a fiduciary needs to access these accounts? Pennsylvania recently joined many states that have passed a law intended to make accessing these accounts easier, reports the Pittsburgh Post-Gazette in the article “New Pa. law recognizes digital assets in estates.”

The official name of the law is the Revised Uniform Fiduciary Access to Digital Assets Act, or RUFADAA. Pennsylvania is one of the last states in the nation—48th—to adopt this type of legislation, with the passage of Act 72 of 2020. Until now, the Keystone state didn’t allow concrete authority to access digital information to fiduciaries. The problem: the ability to access the information is still subject to the agreement that the user has with the online provider. That’s the “yes” we give automatically, when presented with terms of service agreement every time we open a new app on our phones.

Online service providers give deference to “legacy” contacts that a user can name, if authority to a third party to access their accounts is given. However, most people don’t name a successor to have access, and most apps don’t have a way to do this.

It’s worse than dying without a will. If you die with no will, the state has a process to identify legal heirs and distribute your estate. However, with digital assets, first you have to locate the person’s digital assets (and chances are good you’ll miss a few). There’s no shoebox of old receipts, or letters and bills coming in the mail to identify digital property. The custodians of the online information (Facebook, Instagram, TikTok, Google, etc.) still rely on those contracts between the user and the digital platform.

However, with the adoption of the new law, if the user does not make use of the online tool to name a successor, or if one is not offered, then the user can dictate the terms of access or non-access to the online accounts through estate planning documents, including a will, trust or power of attorney.

Here are some tips to clarify your wishes to disclose (or not) digital assets:

Make a list of all your online accounts, their URL address, usernames and passwords. Share the list only with someone you trust. You will be surprised at just how many you have.

Review the terms of service for each account to see if you have the ability to provide a name for a person who is authorized to access the account on your behalf.

Make sure your estate planning documents are aligned with your service contract preferences. Does your Power of Attorney mention access to your digital accounts? Depending on the potential value, sentimental and otherwise, of your digital assets, you may need to revise your estate plan.

Remember to never put anything in your will, like account numbers, URLs, usernames or passwords, since your will becomes a public document once it is probated. Your estate planning attorney will know how to best accomplish documenting your digital assets, while protecting them.

Reference: Pittsburgh Post-Gazette (Aug. 24, 2020) “New Pa. law recognizes digital assets in estates.”

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