Turn on the news or scroll through social media, and you will most definitely see words that would’ve looked like a foreign language not too long ago: blockchain technology, NFTs, cryptocurrency, bitcoin. While digital assets have been around for a while, they are certainly making headlines now — and creating new challenges as you plan your estate.
What do all these strange words mean?
Blockchain: This is the technology behind digital assets like cryptocurrency. According to IBM.com, “Blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network.” Using this kind of technology, you can trade assets with anyone around the world — even a complete stranger — without the use of an intermediary like a bank.
Cryptocurrency: Forbes.com defines cryptocurrency as “a digital currency that can be used to buy online goods and services.” According to CNBC, 11% of Americans currently invest in crypto assets, mostly because of the ease of making trades through an app. Cryptocurrency is backed by decentralized blockchain technology, stored in a digital wallet, and accessed through a private key (like a very intricate password) known only by the owner. Another term to know here is “seed phrase.” It’s a series of words that give you access to the currency associated with your digital wallet.
Bitcoin: This type of cryptocurrency created in 2009 is currently one of the most popular. Because no banks are used in these transitions, purchases — from hotel reservations to the newest XBox game — can be made anonymously. Of course most of the recent hype around bitcoin comes from mining bitcoin as an investment. Bitcoin isn’t the only type of cryptocurrency; ethereum is another popular type you might be hearing of.
NFT: An NFT, or non-fungible token, is a digital asset that can be purchased with cryptocurrency. NFTs represent real-life art, music, and videos, and they have been newsworthy lately because of their popularity in the digital art world. Unlike bitcoin, NFTs can’t be traded directly because each NFT is unique. They can, however, still be an important part of an investor’s digital portfolio.
Why is estate planning necessary with digital assets like cryptocurrency and NFTs?
First of all, because this type of asset is relatively new, not all estate laws have caught up, meaning in some ways, it’s like the Wild West. One of the benefits of cryptocurrency — the decentralization — also becomes one of the challenges when it comes to estate planning: there is no governing body overseeing cryptocurrency. This becomes dangerous if you die without a specific plan for these investments.
Furthermore, mistakes can be made even with traditional assets, and those risks are even higher when you’re including complex passwords, secret seed phrases, and constantly-evolving technology. To avoid that risk, it’s best to get help from the experts.
Perhaps most importantly, as we’ve already discussed, these assets are locked with your seed phrase and private key, meaning if you die and loved ones don’t have access to that information, your cryptocurrency will likely be lost. Sure, you can plan an Indiana Jones-esque treasure hunt, but your loved ones might not enjoy that as they grieve. Some investors choose to share pieces of their keys with several different loved ones, and others choose to give all to one trusted family member or friend. Whatever you choose, you need to make sure you aren’t the only holder of that essential information.
What will an estate planner suggest?
The best strategy for you will, of course, depend on the specifics of your situation. How much cryptocurrency do you have? What types? How does it compare to the value of the rest of your portfolio? An estate planner can help you determine the best course of action for efficiency and effectiveness.
Because a will becomes public after an individual’s death, trust planning when it comes to cryptocurrency might be necessary because it offers the strongest level of protection. A trust will also make sure your loved ones avoid probate after your death. Probate can take valuable time that might also affect the value of your cryptocurrency. With a trust, you can also name a loved one or a corporation as a trustee, making sure your digital assets are handled according to your wishes and giving you more control. For example, you could set specific guidelines that prevent a premature sale of your digital assets.
While buying and selling digital assets might provide an investment rush, it also comes with risks. Creating an estate plan that includes planning for digital assets and cryptocurrency will give you and your loved ones peace of mind as you add to your collection of NFTs.
The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Schromen Law, LLC and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.