As you start estate planning for clients, a home or physical possessions like family heirlooms and material objects with sentimental and monetary value, are often the pieces that come to mind when setting out to draft a will. However, in the increasingly digital world, it’s important to also prioritize (and understand how to include) digital assets as part of an estate plan.
To ensure you’re protecting digital assets in the plans you create, it’s always best to work with professionals who can assist with the nuts and bolts of the specific digital asset, but we’ll get you started by describing what digital assets are, how they are often stored, and what the process looks like for handling them in an estate administration.
What are Digital Assets and How Are They Stored?
Digital assets are becoming a top priority for many clients when preparing or updating their estate plans. Digital assets include everything from registered domain names, emails, and even the photos saved on your devices. But, the most common types of digital assets are cryptocurrency and non-fungible tokens (NFTs).
Cryptocurrency has been growing in popularity year over year. In fact, research shows that ownership of digital assets like cryptocurrency and NFTs is around 16% of Americans 18 and over, or about 41 million U.S. adults. And, between 2018 and 2019, the number of Americans owning digital currency has nearly doubled. The sheer rise of investments in crypto makes it more and more likely you’ll need to account for digital assets during estate planning.
How to Start Accounting for Digital Assets in Estate Planning?
Digital assets are the digital representations of value that can be invested, traded, exchanged, or used for payments. In this way, they can be thought of as any other asset your loved one may have owned, similar to their prized collection of baseball cards or collectible coins, the only difference is that because digital assets can be locked away with an encryption key, you’ll need to do your due diligence to ensure the named estate representatives have access and authority to manage the accounts when that estate planning client passes away.
How Are Digital Assets Stored (And Why Does it Matter)?
Due to the vulnerability of digital assets like cryptocurrency, you can almost guarantee they’ll be locked away safe and sound to ward off digital criminals looking for a fast payday. As such, access to assets like crypto currency may be stored in a decedent’s digital wallet.
A common misconception is that digital wallets hold digital assets, but actually digital wallets contain the necessary information like encryption keys that will give you access to the digital asset. These keys are either public or private encryption keys.
Further, digital wallets can either be hot or cold. A hot wallet is one that is connected to the internet, like Coinbase or Edge Wallets. Conversely, a cold wallet is not connected to the internet, like a hard drive or USB.
From an access standpoint, the decedent may have a custodial or non-custodial wallet. A custodial wallet means that a private key has been shared with the digital wallet company, whereas a non-custodial wallet means the private key has not been shared with the digital wallet company.
It is important to keep in mind that people who own digital assets can have more than one digital wallet, depending on how active and diversified they were with their digital currency. Digital wallets are used to track ownership of all digital assets including both cryptocurrency and NFTs.
Once I Have Access To A Decedent’s Digital Wallet, What Do I Need to Know For Estate Administration?
After gaining access to a decedent’s digital assets, it’s best to familiarize yourself with Prudent Investor Rules and check the Trust Agreement or Will document to see if you have any leeway to keep the positions in crypto if they are of significant value.
The Prudent Investor Rule requires a fiduciary to analyze the market and make sound investment decisions based on circumstances of the estate and economy. For example, with virtual currencies, even if the price is fluctuating at the moment, the executor or trustee must consider what each currency's worth would be in the future, given all historic context of cryptocurrency, and how ancillary factors like tax consequences might impact the overall investment strategy, and make the most strategic decision for the estate or trust.
Digital Assets In Estate Administration: FAQ
Common questions about digital assets in estate administration include:
- Do bitcoin investments qualify under prudent investor principles?: The short answer is yes. But, whether you can invest in Bitcoin in an estate or trust portfolio is more of an “it depends.” Though we typically view an investment question as more of an ongoing trust management question than an estate management or estate administration question, given the length of time an estate administration can take compared to the rapid fluctuations in value of cryptocurrency, estate executors should give great consideration to their handling of these assets during the estate administration process. As trustee or executor, you will need to conduct an analysis to determine how Bitcoin fits into your broader investment strategy and the language of the Will or Trust, and if it has an acceptable level or risk and return objectives. You will need to conduct periodic audits to ensure the cryptocurrency continues to satisfy the objective of the estate and/or trust’s strategy over the long-term.
- Can an estate keep digital assets, or does it have to convert to fiat or “regular money”?: While fiduciaries or trustees are not required to convert crypto, there are a handful of scenarios where it may be in your best interest. For example, if you need to convert the assets in order to cover estate expenses; or if after your trustee audits your situation, they deem it’s best to convert in order to diversify the decedent’s assets.
Best Practices for Adding Digital Assets into Estate Planning
Because digital assets are a relatively new conversation, you may want to be overly cautious in how you draft provisions in testamentary documents to ensure your clients are protected and that their trusted estate representatives are able to access all the information they will need after your client dies.
Please note it is NOT best practice to include specific digital asset information in a will or trust instrument. Wills often become public records, meaning you would be giving out sensitive information to the general public, and as a result giving anyone access to your digital assets. And, even though Trust Agreements are not always public records, sometimes access to the agreement can fall into the wrong hands as assets get retitled and accounts are processed.
Provisions and Drafting Considerations for Digital Assets
- Broad flexibility to handle and hold (or “hodl”) digital assets: It is best practice to give the fiduciaries broad flexibility to hold these digital assets so that they do not run afoul of that state’s adoption of the Prudent Investor Rule (discussed above), and are limited from liability in how they manage the digital assets.
- Appoint someone familiar with digital asset technologies to play a specific role within your estate (i.e., a “Digital Trustee”): Working with someone who is experienced in handling digital assets and who is technologically savvy can be beneficial, as you learn the intricacies of digital assets like cryptocurrency. Without understanding how to access or manage crypto-assets, you could be at risk of losing a significant amount of money. If your client does not feel comfortable having this person as your executor, personal representative, or trustee, you can always limit their role to specifically handling and closing out these digital accounts.
- Create a digital asset inventory: Keeping track of your digital assets includes documenting everything from the credentials to access digital accounts like email and social media, to access codes for more important information like financial records and cryptocurrency. There are a number of free and paid online tools including basic spreadsheets to help with this process, or you can use the old school method of a paper and pen. Either way, it’s essential to keep the inventory up to date, and if you opt to use a digital method, plan to encrypt it to reduce the risk of a hack.
- Tangible personal property: Because cryptocurrency can be stored online or offline, tangible personal property provisions should be considered. For example, perhaps your loved one stores their digital assets on the hard drive of a laptop. If you have a provision that disposes of tangible personal property, you need to be aware that while you can give away the laptop, the cryptocurrency could be on it. If you don’t intend to give the cryptocurrency away with the laptop, that should be clearly expressed in the language of your estate planning documents.
What If There Are No Provisions?
If you’re dealing with an existing estate that has crypto assets and there are no specific provisions in the relevant trust or will, you may want to consider getting agreements or releases from the family (i.e. a nonjudicial settlement agreement) for investing in cryptocurrency and revisit those agreements periodically. In states where nonjudicial settlements are not valid, consider decanting or reforming the will or trust instrument, if allowed.
If beneficiaries are divided between investing, holding on to digital assets and diversifying, you may want to split trusts according to state law so that you can invest differently for different beneficiaries. In the alternative, in many states you could give an advance of their bequest or distributive share to the beneficiary that wants the crypto and sell the remainder.
There is more than one tactic for you to consider. If you need help navigating the complexity of digital assets in an estate administration, there is help. Contact Trustate to learn how we can help.