PB Law Blog... Trusts and Stuff

This week we discover the vastly popular, yet elusive, world of cryptocurrency and how it relates to your estate plan.  Simply stated, cryptocurrency is a nontangible form of currency referred to as “tokens”.  Cryptocurrency emerged around 2008, when Satoshi Nakamoto created Bitcoin, establishing the first form of cryptocurrency (link).  The purpose behind this invention, was not to establish a new currency, but rather create a place for peer-to-peer transactions. The idea being that brick and mortar financial institutions would eventually become obsolete.  Bitcoin is one of the most popular cryptocurrency networks giving the cryptocurrency proponents some solid ground when it gained immense value in 2017.  Before we delve deeper into understanding this unicorn of the financial world, please know that this is a very simplified explanation of how the system works.  There are plenty of online resources available if you would like to learn about the technicalities involving cryptocurrency.  You can start by reading  here and here. 

The assets are secured by a process called cryptography (code writing).  These codes are extensive, complex and unique so that the chances of being hacked are slim to none.  After acquiring the cryptocurrency, the asset owner receives a personal “key”, giving exclusive access to the currency. Without this private key, there is no way to gain access to the asset if the key is lost.  Additionally, there is a public key/address given to other users (also created with complicated algorithms) who wish to send tokens (money) to another user. To learn more about private and public keys, read here.  Additionally, users will have a digital wallet storing the unique private key, essential to receive the tokens.  Therefore, if Jane sends tokens to Tom using Tom’s public key, Tom cannot receive those tokens until he accesses them with his private key (different code from the public key).   

Now that we have given a brief explanation of what cryptocurrencies are, you may be wondering what this has to do with estate planning?  Although, we are not trying to break into the world of innovating another type of cryptocurrency, understanding how cryptocurrencies work and how they could be relevant to everyday assets is a necessity for anyone in the business of financial planning.    As of today, there are over 1,600 types of cryptocurrencies, and because anyone can create them (literally anyone), that number will likely continue to grow.  Therefore, the probability of dealing with cryptocurrency in an estate plan becomes more likely every day. 

We incorporate our tangible assets into our estate plans, so why wouldn’t we incorporate those assets that are not yet tangible, but exist?  Since cryptocurrency is still pretty new and is not used as a main form of currency as of yet, we have not been able to see how it could directly affect an estate plan.  However, if you wish to incorporate into your estate plan, here are a few key things to think about: 

Have a good understanding of how cryptocurrency works before considering acquiring as part of your estate.  Additionally, familiarizing yourself with the various types of currencies and the different exchange forums will only refine your understanding of the current market conditions.  Unfortunately, due to its novelty and its unregulated nature, the cryptocurrency market can be volatile, and thus there is no real way to assess risk.  Consult with a financial advisor about market conditions and how to invest properly.

A cryptocurrency user may indeed include the acquired tokens into the asset pool and there are many creative ways in which an estate planning attorney can assist in doing this.  The most important element that must be met when dealing with cryptocurrency within an estate plan is that the private key be made accessible by the trustee and/or decision makers.  If the private key is lost, there is no way that the original user’s currency can be accessed.  Yes, that means that there could be copious amounts of money sitting in the technical ether and permanently untouchable (yikes!).Read Matthew Mellon’s story here.  The key cannot be replaced as there is no third party “holder” to compel assistance in deciphering the code or replicating the key.  Therefore, anyone wishing to incorporate their cryptocurrency into their trust may want to add a “Tech Plan” into their trust document listing the exchanges, currencies, access private keys, etc.

Depending on how complex and active your use is on the cryptocurrency exchange, it may require consistent updates to your tech plan reflecting accurate and up-to-date information (3,6,12 months).To emphasize, you do not want to leave outdated/inaccurate information concerning your cryptoassets!!

There are many ways to access your cryptocurrency.  Some users may prefer that their assets can only be accessed requiring multiple keys (Multi-Sig).Think of giving a key to 3 different people, and you may require that 2 of those keys are needed in order to open the “door”.  The problem with this is that it requires multiple people to agree before any access can be granted.  Also, if any of the keys are lost, it makes it that much riskier that the cryptoasset could be lost forever.  However, if you wish to keep someone from using the cryptocurrency but would like them to be able to access in the future, this may be a good idea to constrain use.

Remember, that cryptocurrency is still very new and therefore many of its abilities and negative effects are still unknown.  If you are interested in becoming a cryptocurrency user, or you already have acquired some cryptocurrency, and wish to add to your estate plan, consult with your estate planning attorney about how it could affect your estate and if it would be beneficial to add additional protections specifically for the cryptoassets.  It is hard to tell if cryptocurrency will become a more popular way of exchanging money or if it will decline and be replaced with another innovation.  However, it has most definitely impacted the way we use money and how we approach estate planning.  Staying in the know is essential for estate planning attorneys due to the quick and constant changes of innovative technology.  Happy trading!

-by Laura Bown, J.D. with Tiffany Ballenger Floyd, Esq. (Nevada & California Estate Planning Attorney), © 2018, Phillips Ballenger, PLLC

Photo by Behnam Norouzi on Unsplash