Technology primarily connected us before. But now, it's also a medium to create and hold assets that don't exist in a physical form. Like other properties, individuals need to accommodate digital properties in their wills and estates. This becomes especially important as digital items like Bitcoin reach over $1 trillion in market capitalization.
In this article, we discuss the process of estate administration with digital assets such as cryptocurrencies, Non-Fungible Tokens (NFTs), and online accounts.
Cryptocurrencies are designed to work as a decentralized medium of exchange that's not controlled by any government. Owners hold them in digital wallets via online or offline storage systems like a third-party cloud service or USB keys.
The estate administration process treats cryptocurrencies like any other asset a person owns after they die. One can include it in their will as part of an estate plan. However, there are special precautions to take when managing this asset class.
Some may use brokerage accounts to purchase cryptocurrencies or financial products that derive their value from crypto. In these circumstances, the asset is treated like other securities such as a stock or bond. But coins held in a digital wallet get tricky.
Wallets usually require passwords or keys. Suppose beneficiaries and estate administrators don't know the wallet password or key. In that case, there's rarely a third party (like a bank in the case of securities) that can provide access to the cryptocurrency. As a result, the coins may be lost forever.
Some wallet systems even permanently destroy the coins after several failed password attempts. One Bitcoin owner lost hundreds of millions of dollars in unrealized cryptocurrency gains after forgetting the password to his digital wallet.
There are many ways to safeguard digital wallet passwords for the next generation. Keeping passwords in a safety deposit box or somewhere at home, such that they won't be misplaced, are examples. It's essential to ensure that people can find the passwords if the holder passes on.
You can also advise clients to create a memorandum affiliated with their will, in which they can keep the passwords and PINs to any wallets. The memo should also provide step-by-step instructions on how to access the assets. They shouldn't list this information on their will because wills may be publicized in certain instances, but memorandums remain private.
If a person doesn't list their crypto assets in their will, it ultimately falls into the remainder of their estate, similar to any other asset. Additionally, cryptocurrencies at one's death are subject to probate fees, capital gains tax, and creditor claims unless estate planning can prevent it.
NFTs are similar to cryptocurrencies as they're built on blockchain technology (in the case of NFTs, it's Ethereum blockchain, to be exact!) As a result, you can't physically hand someone an NFT. It's based on a key or password system. One would additionally pass NFTs through an estate or will similar to crypto coins. Again, NFTs are subject to probate fees, capital gains tax, and creditor claims when they reach a person's estate.
But what exactly is an NFT? Think of it as an expensive piece of art or collectible. "Non-fungible" means that it's unique and can't be replaced. This contrasts cryptocurrencies which are fungible and not unique. Anything from tweets to video clips can be turned into an NFT. It's commonly an opportunity for artists to create a new income stream whenever they create a piece of art — by turning it into an NFT and selling it on an online marketplace.
If a person owns an NFT, it could be worth a lot. Earlier this year, one NFT sold for $69 million. As uses for NFTs continue to grow, individuals and companies may link an NFT to physical properties like real estate or vehicles to prove ownership.
Thus, it's crucial to consider NFTs when planning a person's estate in 2021. And the password to access the NFT is of the utmost importance. Ultimately, a lost password is a lost NFT.
Online accounts don't generally hold value unless it's a bank account, which banks allow beneficiaries to access after an individual's death anyway. But our modern reliance on digital accounts has made creating a digital will or legacy a vital step in estate planning.
This doesn't mean giving someone's Facebook account to their beneficiary after they die. Moreso, it's creating a list of usernames and passwords for beneficiaries and estate administrators to access critical online spaces. A digital estate plan or digital legacy plan should make an inventory of these accounts to relieve loved ones from additional stressors relating to a death.
Access to the following could create part of your digital estate plan:
Without such a plan, estate administrators and beneficiaries could be scrambling to figure out how to access online accounts that they need for various reasons after a person is deceased.
Digital assets are gaining more traction and value than ever before. That's why it's essential to include them in the estate planning and administration process. Assets such as cryptocurrencies and NFTs could constitute sizeable portions of a person's estate, and losing track of them could result in losing millions of dollars in an estate's assets.