“Digital asset” is a term that encompasses such wide-ranging holdings as websites, ebooks, multimedia, Youtube channels, computer programs, cryptocurrency, Steam game libraries, online accounts, and so on. It is no doubt that many people’s digital assets are worth substantial sums. Imagine if Jeff Bezos passed away with Amazon.com solely registered in his name. His family would certainly wish to receive control over the website because it has extraordinary value. While this is an outsize example, even if a person’s digital assets are more modest in nature, inheriting families may very well desire to gain control over the assets. I always consider the story of the son who still races the literal ghost car of his deceased father in an Xbox video game. While online video game save states may not have any monetary worth, the family may yet still find personal value in the digital asset.
Consider What May Happen To Your Digital Assets If You Do Not Plan Your Estate
Over half of the adults in the United States have no Will in place. Even less have a Trust. In the absence of any estate planning, assets that can be obtained by a third-party, such as a website, can then be handed over to the administrator of the decedent’s estate. In plain terms, upon your death your assets that can be handed over to the estate will be handed over even if you harbored intentions to the contrary.
Now there are some exceptions to this general rule. In states that have adopted some form of RUFADAA (the Revised Uniform Fiduciary Access to Digital Assets Act) if the account custodian has a digital “tool” to describe what happens in the event of the account holder’s death, then that tool takes precedence. A good example of this feature is Facebook’s digital tool that grants authority to control one’s Facebook page to another person in the event of one’s death. Many websites also have a tool that permits you to stipulate that no one should be given access to the account upon your death. If you stipulate such, then this designation will control.
In the event that no designation has been made with a digital tool, then the administrator of the estate will be granted access to the account/digital asset. If you have no estate planning in place, then the administrator will distribute the asset (and all of your other assets) according to the laws of descent and distribution within the state or country where you reside. Maybe its not your intention that your 90-year-old grandmother inherits your Steam library! But it is certainly a possibility.
What About Assets Not Held By a Custodian?
Of course, all of this presumes that the administrator can access and gain control over the digital asset. There are certain classes of digital assets, such as cryptocurrency, that are only accessible by the owner. In fact, this is often the general appeal of such assets. Cryptocurrency cannot be involuntarily handed over to the IRS for failure to pay taxes, it cannot be seized by a Bankruptcy Trustee, it cannot be locked up by the government in general. A prime example is cryptocurrency’s recent boom in Venezuela after the devaluation of Venezuela’s currency and the government crackdown on political opposition. Of course the downside is that if you pass away with the cryptocurrency wallet keys stashed away solely in your brain then your family will never see those assets again (for a great example, see the result of this gentleman’s failure to plan for his passing). The good news is that with the right planning, this can be completely avoided.
Faced with the possibility of losing untold millions, developers are coding up ingenious solutions to non-custodial digital assets’ problems. The following types of solutions are available today for cryptocurrencies:
A “Dead Man Switch” is a computer program that requires periodic input from the user. If input does not occur, a predefined action is taken. So for instance, if you’ve set up a dead man switch, you may receive an email once a month. Every month you will respond to the email. When you fail to do so, the computer program automatically transfers the contents of your Bitcoin wallet to your spouse. This solution is not ideal for a number of reasons. The first reason is that if an error occurs in the program and you do not receive an email, you may have all of your digital money sent to another person because you did not respond. This solution often requires inserting your private cryptocurrency wallet keys into the program. This makes your wallet susceptible to malicious third-parties. Additionally, if you are incapacitated for a month, say in a coma, and then come out of the coma, you will find all of your assets distributed. There is no good way yet to actually verify someone is deceased.
One larger issue is that the receiving party has to have his or her own cryptocurrency wallet to receive the assets and must be cryptocurrency-savvy. It is still extremely easy to lose the contents of a wallet due to user error. While solutions are being developed for this, tales still abound of digital loss. One good solution would be for a company to be created as a “Digital Receiver.” Such a party can have a public wallet that receives assets upon a person’s death via a dead man switch and then holds those assets until the decedent’s estate is administered. This is a service that does not exist yet, but may be on the horizon.
An M – N transfer is fairly straightforward. A cryptocurrency wallet is set up that requires a certain number of parties to sign the transfer before a transfer is made. So, for instance, you can name five people as signers for a transfer, and require that at least three of those people must sign a transfer before a transfer takes place. In such a scenario, if you have passed away, the five people can access the wallet and three in agreement can transfer out the assets. This is a good solution for cryptocurrencies/wallets that support a feature. However, it is possible that the people you have named may conspire against you without your knowledge and while you are still alive to drain your wallet of assets. Using such a scheme it is important to have substantial trust in the people you give access.
Perhaps the easiest solution for cryptocurrency transfers on death is to have a paper wallet or hardware wallet with access keys to the funds, that can be accessed upon your death. The paper wallet or hardware wallet can, for instance, be stored in a safe deposit box at your bank, with instructions that the contents can be accessed upon your death when your family presents a valid death certificate and letters of office (or small estate affidavit). Of course, this solution may not sit right with many people in the cryptocurrency community, who tend to look distrustfully upon banks. But until a better solution becomes available this may be the best option.
To the best of my knowledge, no cryptocurrency wallets have “transfer on death” provisions or beneficiary designations. This would be an interesting development and in my opinion one that will become necessary. The issue with digital assets, in general, is that, like a big wad of cash under the mattress, it is a probate asset that can trigger a probate court proceeding upon death if it is of sufficient value. In Illinois for instance, if you have more than $100,000 in cryptocurrency, a probate estate must be opened in court to determine the distribution of the cryptocurrency. It doesn’t matter if you have a dead man switch set up or some other mechanism. Technically speaking, the cryptocurrency is an asset of the estate and should be liquidated and used to first pay creditors, and then transferred according to the Will, Trust, or if none, the laws of descent and distribution of the State.
Consider how life insurance has a beneficiary designation. Such a designation permits it by law to avoid probate and instead transfer to the named person. Cryptocurrency wallets could conceivably have the same designation and then transfer accordingly. And if it can be done in unison with a dead man switch that checks public death records to verify death, the solution would be fast and efficient (even more efficient than beneficiary designations for life insurance or investment accounts). In my opinion these solutions must be baked into a cryptocurrency wallet or platform.
Assuming the decedent correctly set up a cryptocurrency transfer by some means, what should a person inheriting cryptocurrency do with it? It is often not easily spendable to purchase goods and services, so liquidation is generally a must. This brings us back to the Digital Receiver solution. If instead of you receiving cryptocurrency, the Digital Receiver receives the cryptocurrency on your behalf, the Digital Receiver can liquidate the cryptocurrency and send out cash to you. This prevents the risk of loss from novice cryptocurrency holders. It can also prevent mismanagement in multiple beneficiary scenarios.
As it currently stands, if you want to trade or sell cryptocurrency on an exchange, you must go through a Know Your Client (KYC) process mandated by the government. For a person looking to merely cash out an inheritance, this may be rather onerous and unnecessary. Instead, the Digital Receiver can perform all of the steps required to liquidate.
Granted, such a solution may not be right for everyone. For those inheriting cryptocurrency who wish to keep it as cryptocurrency, there is no need for a Digital Receiver. And for those who are cryptocurrency-savvy, there may be no benefit to having the Digital Receiver liquidate the assets. And let’s not forget those who are concerned with privacy. Those inheriting $1,000,000.00 in an untraceable cryptocurrency such as Monero (XMR) may wish to keep it there and hidden for illegal purposes (this is not a knock on Monero – I love the privacy features of Monero. But the privacy features do make it particularly attractive to those engaging in illegal activities).
While no ideal solution is yet available for estate planning with cryptocurrency, there is no doubt that many intrepid developers will create the necessary solutions. Those solutions will prove to be more efficient and less expensive than current, traditional banking solutions. And that is the whole point of cryptocurrency – to retire an expensive banking system in favor of a streamlined, automated computer program. That is the hope anyway.