What happens to your cryptocurrency’s private key when you die?
It is said that a golden key can open any door. That is certainly not the case with cryptocurrency, where only your “Private Key” can open the door.
Cryptocurrency, a digital or virtual currency that uses complex math to ensure security, is not issued by a government or bank, and its design shields against inference and tampering.
Crypto has become increasingly popular since its introduction, and with that popularity has come the need to include it in estate plans. If you own crypto, it is important to include it in your estate plan along with your other assets, and failing to do so can lead to expensive court proceedings (at best) or possibly the loss of your crypto altogether.
The security of crypto is akin to an unbreakable vault full of gold (some might say fool’s gold). This vault is under the digital eye of the world to prevent anyone from looting your vault. To open the vault, you need what’s called a Private Key. If you die without passing the Private Key along, the vault can never be opened again.
Private Keys are the digital codes to access your crypto assets. Kept in a wallet, it can be digital or physical. Many people have what’s called a “Hot Wallet,” meaning their crypto account is connected to the Internet. They act similarly to an online financial account and often have apps that make buying and selling crypto easier.
However, Hot Wallets are not viewed as the most secure way to keep a Private Key, and much like a real wallet, it’s not a great idea to keep a lot of crypto in them. Also, Hot Wallets are provided by a third-party company, and the same level of trust is given to them as to a bank.
A more secure method of storage is the “Cold Wallet,” which is often a small electronic device. Others choose a more analog approach and write their Private Key on a piece of paper or have it etched onto a metal card or coin.
Whichever type of wallet you choose, your estate plan can be used to pass the crypto on just as easily as other assets. The first step is to create an estate plan. A trust can give your trustee access to the Hot Wallet, which can be used to distribute the crypto according to your wishes. If you use a Cold Wallet, your estate plan can specify who gets the Cold Wallet and everything that goes with it.
The advantages of estate planning go even further when considering that if you are incapacitated, no one else may have access to your crypto wallet, and no one will be able to access your assets in an emergency. A properly drafted trust often directs a trustee to use assets to take care of you in the event you are incapacitated. Further, during your incapacity, a trustee can actively administer crypto, rather than letting it suffer potentially catastrophic losses.
While a proper estate plan is the surest method of properly transferring crypto when you die, each type of wallet has options. A few of the Hot Wallet services allow owners to name a death beneficiary or agent, but most do not.
With a Cold Wallet, your options are even more limited as physical possession of the Cold Wallet is required, along with the understanding of its purpose, and how to use it to access your crypto. However, the largest hurdle for passing a Cold Wallet might be its high level of security. Your loved ones may not even know it exists.
You may be able to remember a 64-character string of letters and numbers using your “brain wallet,” but if you want to pass along crypto when you die, you must leave something more tangible.
Many crypto experts warn against using password and data manager services because of the regular occurrence of data breaches. In such an event, a service provider is compromised and secure user information, such as Hot Wallet account information, makes its way into the hands of unauthorized hackers.
The worst thing to do is not plan at all. Even though some (not all) Hot Wallet service providers will accept the direction of a probate court, the value of your crypto becomes public knowledge and is subject to probate costs and attorney fees.
Albert Einstein said about education, “You don’t have to know everything. You just have to know where to find it.”
When planning for your cryptocurrency, your family doesn’t need to know everything, but your estate plan should tell them how to find it.
Jesse M. Hancox is an associate attorney with The Teresa Rhyne Law Group, a PC with offices in Riverside and Paso Robles. Jesse’s practice emphasizes estate planning, trust administration, business succession planning, and general business matters.