Estate Planning Issues For Cryptocurrency Owners

• Published date: 18 May 2022
• Subject Matter: Family and Matrimonial, Technology, Wills/ Intestacy/ Estate Planning, Fin Tech
• Law Firm: Matheson
• Author: Mr John Gill and Maeve Lochrie

The past two years have seen spectacular growth in the adoption of cryptocurrencies.

This has been underpinned by institutional endorsement and payment firms, including PayPal, Venmo and Revolut, actively adding cryptocurrencies to their offering. Generational shifts also played a key role as younger investors flocked to cryptocurrency rather than the more traditional investments such as gold or stocks.

The rise of cryptocurrencies, and the role they will come to play in client portfolios for an increasingly mainstream cohort of investors, will inevitably mean that tax and estate planning advisors will need to carefully consider how this particular asset class operates from both a legal and tax perspective.

In this article, we try to identify and consider some of the key estate planning issues that might emerge.

What are cryptocurrencies and how do you store them?

Unlike fiat currencies - government issued currencies- cryptocurrencies are decentralised, digital representations of value, which are underpinned by the distributed ledger technology known as blockchain.

Cryptocurrencies are stored in a digital wallet. The digital wallet can be stored online, commonly referred to as a hot wallet, or stored offline in a hardware device, commonly referred to as a cold wallet. Every wallet contains the owner's private keys, without which an owner would not be able to access their cryptocurrency. An article published by the New York Times in January 2021 noted that "of the existing 18.5 million Bitcoin, around 20 percent - currently worth around $140 billion - appear to be in lost or otherwise stranded wallets, according to cryptocurrency data firm Chainalysis" ¹.

What is the biggest challenge of owning cryptocurrency from an estate planning perspective?

If a cryptocurrency owner dies without having an appropriate succession plan in place in relation to the succession of their cryptocurrency - including very specific and clear instructions for their executors / heirs with regard to access to online exchanges, digital wallets and private keys - there is an almost certain risk that valuable assets could be lost forever on the death of that individual.

Further, owners of cryptocurrencies should think about trusted third parties to assist their executors / heirs with accessing and dealing with their cryptocurrencies after their death. It may well be the case that the nominated executors / heirs have a detailed knowledge about the workings of cryptocurrencies, but...