“HODL,” an abbreviation for “hold on for dear life,” has become a motto for a class of cryptocurrency enthusiasts who aren’t interested in selling.
But there comes a point for everyone – including crypto investors playing the long game – when dear life comes to an end.
A lot of crypto investors are not thinking about what might happen to their digital assets in the event of an untimely death, and the relatively young asset class is not typically an area of expertise for estate planners, according to industry specialists.
“I think it’s a pretty big problem,” said Leigh E. Furtado, an attorney and senior associate for the trust and estate groups at the Providence office of Day Pitney LLP.
Furtado and others say estate planning for crypto is complicated by the fact that, unlike traditional assets such as stocks and bank savings, ownership of cryptocurrencies such as bitcoin and ethereum are documented in a decentralized digital ledger that doesn’t record the name of the owner. The ability to access cryptocurrency involves wallet software and “cold wallet” hardware that are connected to the funds using passcodes, private keys or seed phrases, without an alternative means for recovery. And while banks and stock brokerages may offer beneficiary designation options, that’s not a function available through most cryptocurrency wallets.
“We might be seeing more and more cases where beneficiaries are unable to access what they know is a decedent’s estate,” Furtado said.
In the case that a beneficiary doesn’t have that key or seed phrase, those assets could basically die with the holder.
“It’s a real fear,” Furtado said. “There’s already been cases where the crypto assets have essentially been abandoned because the heirs had no knowledge or way of accessing the assets after the owner passed away.”
In 2018, Bloomberg reported on the case of Matthew Moody, who was an early adopter of cryptocurrency, owning three bitcoins worth about $100 each when he died in a plane crash nine years ago. One bitcoin peaked in value at about $64,000 last November, but Moody’s father was never able to gain access to the assets.
These issues persist as the public’s interest in trading cryptocurrency grows. According to a Pew Research Center survey released in November, 16% of U.S. adults said they personally invested in, traded or otherwise used cryptocurrency, up from 1% who bought or sold bitcoin in 2015. The entire crypto market has reached a market value of $1 trillion since its inception about a decade ago.
Furtado, who’s been in estate planning for seven years, said cryptocurrency holders still make up a small percentage of her clients. But since a bitcoin enthusiast client first came to her with questions about passing on his digital assets about two years ago, sparking her interest in the matter, estate planning for cryptocurrency is “slowly starting to become part” of her normal practice.
Furtado says it’s now important for estate planners to develop the knowledge to be able to craft a conveyance plan on behalf of clients, with clear instructions allowing trustees and beneficiaries to gain access to their crypto wallet.
“They have to have some direction on where to look after you pass away to access the assets and transfer them,” she said.
Furtado says there are new services that will help people protect their key or seed phrase – which is often written down on paper – from being misplaced. There are startup companies offering technology designed for crypto inheritance, such as a “dead man’s switch” that allows heirs to claim access to digital assets if the owner does not respond to an alert within a preset amount of time, with the presumption that the owner is dead or incapacitated.
“I think those things will develop. Right now, from our perspective, we have to tell the client this is something you really have to think about and plan around so you don’t lose the assets,” Furtado said.
Jessica Grande, a senior client adviser for Boston wealth management firm Levatus LLC, says another consideration for financial firms is how the volatility of cryptocurrency prices can impact the step-up in basis for capital gains taxes on inheritances.
A step-up in basis is a tax break on capital gains that resets the fair market value of an inherited asset to the time of death for the original owner. Grande says it’s not clear whether the federal tax code can provide a step-up in basis for crypto assets.
“That could bring up new challenges for estate planners or investment managers,” Grande said.
Furtado said at this point, “there’s not a lot” of specific guidance from the IRS or other federal agencies about how the government will treat cryptocurrencies in the estate planning process.
“We’re applying basic property law considerations to estate planning for crypto,” Furtado said. “But a lot of the federal and state agencies have set their sights on cryptocurrencies for the coming years. I’m expecting more regulations on how these assets will be taxed and handled at the time of death. We’re waiting to see. … It’s an area that clients are increasingly asking about. It’s an area that’s going to evolve over time.”
Marc Larocque is a PBN staff writer. Contact him at Larocque@PBN.com.