I am beginning to see more and more requests from fellow fiduciaries, estate attorneys and accountants for help with trusts and estates that hold cryptocurrencies as part of their portfolio. There are very real questions about valuation, liquidity, transaction costs and risk. Some of those questions are not yet fully worked out in the courts, but a basic understanding of cryptocurrencies and how they work may help.
There is a lot of ground to cover, so I'm going to break this into three posts:
- A basic primer on cryptocurrencies and how they work (this post)
- The mechanics of how to buy, sell and store cryptocurrencies
- The role of cryptocurrencies in a trust portfolio
Most of us have heard of Bitcoin and Ethereum, but they are just the largest of cryptocurrencies. There are anywhere between 6,000 and 15,000 different cryptocurrencies (depending on how you count them), which is an indication of both how easy it is to create a cryptocurrency and how little most of them are used. As of December 2021, all cryptocurrencies combined are worth an estimated $2.3 trillion. That's a lot of money and it is beginning to show up in trusts and estates where you might not expect. That presents a challenge for trust administrators who need to professionally manage these assets.
| Cryptocurrency | Market Capitalization (USD Billions as of December 2021) |
| Bitcoin | 923.2 |
| Ethereum | 470.6 |
| Binance Coin | 88.6 |
| Tether | 77.4 |
| Solana | 56.0 |
| XRP | 46.6 |
| Cardano | 46.0 |
| USD Coin | 42.4 |
| Terra | 34.1 |
| Avalanche | 29.3 |
| Source: NerdWallet, December 23, 2021 |
Cryptocurrencies differ, but the important ones all share a couple of things in common: they are built on blockchain technology and they use cryptography to provide selective access to buy and sell the currency. That last bit is going to be crucial for anybody trying to manage that asset within a trust or estate.
A blockchain is simply a distributed ledger that is replicated and validated across multiple copies (or nodes). The ledger can be public or private but it makes it simple to verify transactions and values and difficult to corrupt or change (since it sits in multiple places and any change must be validated by all nodes in the network). Blockchain technology is being implemented for a number of use cases - cryptocurrency is only the most well-known.
All cryptocurrencies depend on some cryptographic scheme (hence, the name). Typically, they involve both a public address and a private key which must be stored in a safe place and without which the account is inaccessible.
Let's take the largest cryptocurrency, Bitcoin, as an example. An individual holds Bitcoin by storing it in a digital wallet, which is assigned a Bitcoin address. A Bitcoin address is similar to an e-mail address in that it is used as a destination to send Bitcoin. The wallet is secured by the use of a 64-digit private key, which is used to sign every transaction made by that particular wallet and is kept secret by the user.
Bitcoin’s anonymous design creates challenges for estate planning because
- There is no personally identifiable information associated with the Bitcoin
- Bitcoin is a virtual asset that may not be readily identifiable to the trustee
- All Bitcoin transactions require the individual’s private key
A Bitcoin wallet has a public address and a private key. A Bitcoin owner does not put his/her name or social security number on the wallet and there is no certificate of title, deed, or account statement that proves ownership of the Bitcoin. In the typical Revocable Living Trust estate plan, a person would transfer an asset in to the name of their Trust thereby allowing their successor trustee to control the asset after the settlor’s passing. This cannot be done with a Bitcoin wallet.
Further complicating the matter, Bitcoin is a virtual asset that can be stored on a USB thumb drive, a phone, a hard drive, or anything that is capable of storing data. This makes it very possible that a trustee will overlook Bitcoin assets because they will not know what they are looking at.
Lastly, and perhaps most importantly, the only way that transactions of Bitcoin can occur is through the use of the owner’s private key. This key is saved in the Bitcoin wallet and it is what allows someone to spend the Bitcoin. This presents a two-part challenge. First, the settlor will need to keep the private key absolutely secure while alive, while also providing a method for the trustee to learn of the private key once the settlor has passed away. Second, if the private key is lost there is no way to recover it and all the Bitcoin will be lost.
This last point is important because it could be potentially devastating to an estate plan. With most other assets there is a third party holding the asset that can be subject to Court jurisdiction. So, in the event an asset is left out of a Trust the mistake is generally fixed by filing a petition with the Probate Court. Not the ideal solution, but it is not catastrophic either. However, this option will not be available in the case of Bitcoin because no court order in the world is going to be able to recover the private key. The Bitcoin will be lost.
The key to passing on Bitcoin (or any cryptocurrency) in accordance with the estate plan is make sure that the estate plan provides for disclosure of the Bitcoin assets and provides for a secure method of transfer of the private key to the trustee. The solution may be as simple as a detailed letter of instruction to the successor trustee, which is placed in a safety deposit box along with your trust, or it may involve setting up a mechanical “deadman” switch that transfers your Bitcoin upon your failure to check in. The important thing is for the settlor to work with the estate planning attorney and the trustee to implement a solution that works.
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