Cryptocurrency has become a popular asset in the digital age due to its decentralized nature and freedom from regulation. With no governing body, customer support, or help desk to rely on, crypto appeals to those seeking financial independence. However, this lack of central control also poses significant challenges when incorporating cryptocurrency into estate plans.
If you hold cryptocurrency, planning for what happens to it after you pass away or become incapacitated is essential. Why? Because, unlike traditional assets, there’s no customer service department to assist in transitioning your cryptocurrency to your heirs. The saying “not your key, not your coin” is more than just a catchy phrase—it’s a real risk. Without proper planning, your digital assets could become inaccessible, leaving your loved ones with no way to retrieve them.
The Importance of Private Keys
Private keys are critical in accessing cryptocurrency. Without them, your assets are essentially lost. These keys are the equivalent of a password, and unless you make provisions for their secure transition, your cryptocurrency may become inaccessible upon your death or disability. Storing your private keys on a thumb drive, laptop, or even printing them on a piece of paper may seem convenient, but if you’re the only person who knows their location, those assets could disappear forever.
Creating a Secure Succession Plan
Estate planning with cryptocurrency requires a special focus on security and accessibility. Some individuals choose to implement a technology-based plan, utilizing various software tools to pass down their private keys. However, security becomes a major concern with this approach, as technological vulnerabilities can pose risks.
A more secure option involves third-party custody of the private keys. Unlike traditional custodians, digital asset custodians don’t store assets themselves; instead, they secure clients’ private keys, granting access to their funds. The downside? These custodians are often limited in the types of cryptocurrencies they can hold, and the fees can be significant.
An alternative strategy is to transfer your cryptocurrency into a legal entity that can manage both the holdings and encryption keys. Establishing an entity such as an LLC can make it easier to transfer ownership and provide anonymity. When crypto assets are owned by an LLC, ownership is vested in the company, not the individual. This makes it easier to transfer assets between LLC members, such as to a business partner or family member. However, it can be expensive to form and maintain an LLC, and you may have additional record-keeping requirements and insurance considerations.
Choosing the Right Fiduciary
When incorporating cryptocurrency into your estate plan, selecting the right fiduciary is crucial. A fiduciary is responsible for managing assets in your beneficiaries’ best interest. They are typically expected to maintain stability and preserve the value of your estate, which can be difficult with cryptocurrency. But when it comes to cryptocurrency, not all fiduciaries are equipped to handle the volatility or security challenges. Cryptocurrency is known for its fluctuating value, and most fiduciaries are not accustomed to managing such volatile assets. Furthermore, many fiduciaries lack the technical expertise to store and protect these assets securely.
This is why it’s essential to choose a fiduciary with the necessary knowledge—or one who can bring in experts with the technical skills needed to manage cryptocurrency securely.
Conclusion
Without proper planning, your cryptocurrency could be lost forever due to the unique challenges of storing and transferring private keys. By creating a secure succession plan, involving third-party custodians, and selecting the right fiduciaries, you can ensure your cryptocurrency is passed down safely to your loved ones.