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How to Avoid a “Boating Accident” – Crypto Assets and Estate Planning

Cryptocurrency and other digital assets have changed the way people invest and store wealth, but it also presents unique challenges when it comes to estate planning. Unlike traditional assets, crypto assets are decentralised, requiring private keys or passwords for access. Without careful planning, beneficiaries may struggle to retrieve these digital assets, leading to substantial losses. Given the purpose of effective estate planning is to ensure that your assets are distributed according to your wishes, going to the beneficiaries you choose, failing to make the necessary provisions for crypto assets makes things that much more difficult.

Lost Crypto – What the Data Says

Chainalysis, a blockchain analytics firm which specialises in tracking and investigating cryptocurrency transactions, estimates that over 20% of Bitcoin’s total supply has been permanently lost ⁽¹⁾. This may be due to lost private keys, forgotten passwords, and death of the owner etc. This highlights the importance of a well-documented plan and the need for estate planning strategies to prevent digital assets from being lost forever.

Given the market volatility that characterises crypto assets, it’s no surprise that the value of crypto assets can fluctuate during the probate process cryptocurrencies by 20-50%. Unclear or incomplete instructions in estate planning documents can lengthen the probate process and potentially result in a significant reduction in value to the estate as values change⁽²⁾.

Understanding Estate Planning Risks Concerning Crypto Assets

One of the key benefits of crypto assets is their decentralised nature, but this also poses risks when it comes to inheritance. Unlike traditional financial institutions that can facilitate asset transfers upon death, cryptocurrencies require specific access credentials. If these credentials are lost or unknown to beneficiaries, the assets become inaccessible.

A recent example is the case of Mircea Popescu, a Bitcoin investor who passed away in 2021, reportedly leaving behind a Bitcoin fortune worth US$2 billion that was rendered inaccessible. Such cases illustrate the need for a structured succession plan. Without a proper plan in place, crypto assets can be permanently lost, leading to unnecessary complications for the legal personal representative and beneficiaries of the estate.

Digital Asset Considerations for Your Estate Plan

1. Identifying and Documenting Crypto Assets

The first step in incorporating crypto assets into an estate plan is creating a comprehensive inventory. This should include:

• A list of all cryptocurrencies and tokens owned.
• The wallets, exchanges, or storage methods used.
• Any hardware or software required for access.

Maintaining an updated inventory ensures that the executor(s) know what exists and where to find it. However, due to security concerns, passwords and private keys should never be included in the Will itself, as it is a public document.

2. Creating a Secure Access Plan

An access plan is crucial to ensure crypto assets can be retrieved by beneficiaries and helpers. A well-structured access plan should include:

• Securely stored instructions on how to access the crypto assets, including private key and any seed phrases.
• A trusted executor or helper is tech-savvy and capable of assisting beneficiaries in navigating technical aspects of accessing the digital assets.
• A mechanism to keep passwords and keys confidential, such as a hardware wallet or an offline document stored securely.
• Consider establishing a “multi-sig” wallet, where the majority of parties involved need to verify any transaction. Upon death, the wallet can be accessed by the co-owners and one or more personal representatives, allowing a smooth transition.
• A “dead man’s switch” is another useful tool in transferring crypto assets upon death. It releases your private keys to a nominated recipient if you fail to verify that you are alive by performing a predetermined task such as accessing an email account. A key risk associated with this method is that you could potentially be alive but not complete the verification (e.g. you are without internet connection or unwell in the hospital without access to a computer), and your keys would be transferred to your nominee.

As a general rule, access plans should not be stored online or in a single document, reducing the risk of theft or loss.

3. Legal and Estate Planning Strategies

Crypto investors should work with legal and tax professionals to incorporate digital assets into their estate plan. Key considerations include:

• Appointing a knowledgeable executor who understands crypto assets to a reasonable level.
• Outlining clear instructions in an estate plan without exposing sensitive information.
• Addressing tax implications associated with crypto asset transfers. The good news is, there can be Capital Gains Tax (CGT) rollover relief available when crypto assets transfer from an Estate to the beneficiaries until such time as the crypto is disposed.⁽³⁾
• Consideration to jurisdictional issues if digital assets are held in foreign crypto currency exchanges.
• Being across the latest changes to legal and tax considerations that continue to evolve as seen in a number of recent cases regarding cryptocurrencies.⁽⁴⁾

Legal professionals are increasingly incorporating specific language in estate planning documents to ensure crypto assets are properly accounted for and transferred according to the owner’s wishes.

4. Identifying Trusted Helpers

Because crypto assets often require technical expertise to access, it is advisable to identify and inform trusted individuals who can assist with crypto-related estate planning. This could be a family member, financial adviser, or legal professional who understands how to access and manage digital wallets.

Crypto owners should ensure their trusted helpers are aware of their role and have the necessary knowledge to retrieve the assets when needed. Assigning the right people to fulfil the various roles can also provide an additional layer of security and contingency.

5. Managing the Holding and Distribution of Crypto Assets

Another critical component of estate planning for crypto assets is determining how digital assets will be managed and distributed upon death. Some key questions to consider include:

• Should the assets be liquidated immediately or held for future value?
• Should beneficiaries receive specific cryptocurrencies, or should they be converted to fiat currency?
• Who will oversee the transfer and ensure proper compliance with tax obligations?

By addressing these considerations in advance, crypto investors can prevent disputes among beneficiaries and ensure a seamless transition of assets.

What Now?

Estate planning for crypto assets requires careful thought and a structured approach. Without proper planning, these assets may become inaccessible, leading to unwelcome complexities in the estate execution process. Creating a secure access plan, working with legal professionals, and appointing trusted helpers are essential steps in ensuring that crypto assets are successfully transferred. Given the complexities involved, engaging a professional estate planner with experience in digital assets is highly recommended.

Legal and tax issues concerning crypto are always on the move, including recent cases Blockchain Tech Pty Ltd [2024] VSC 690 (12 November 2024) and CDPP v Wheatley. In this evolving landscape, we strongly recommend that you engage relevant professionals in estate planning, legal, and tax to secure your crypto assets for your chosen beneficiaries. For tailored advice on incorporating crypto assets into your estate plan, contact McKinley Plowman’s Estate & Succession Planning team at www.mckinleyplowman.com.au/contact-us or call (08) 9301 2200 or (08) 9325 2411 today.

Data From:

• https://www.chainalysis.com/blog/bitcoin-market-data-exchanges-trading/

• https://cmlaw.com.au/whats-new/the-digital-dilemma-handling-digital-assets-in-probate

• Division 128 of the Income Tax Assessment Act 1997. Any capital gain or loss made by a trustee of a deceased estate (or LPR) is disregarded under section 128-15 of the ITAA 1997 if an asset of the estate ‘passes’ to a beneficiary in accordance with section 128-20.

• Blockchain Tech Pty Ltd [2024] VSC 690 (12 November 2024) and CDPP v Wheatley (Victorian Magistrates’ Court)

written by:

Steven Lisle

Tax Manager Steven Lisle has been part of the McKinley Plowman team since 2007, and in that time has built his repertoire upon delivering industry leading, up-to-date international and Australian tax strategies and consulting services. Steve's clients enjoy the optimised tax outcomes he provides them, especially where complex structures could otherwise lead to significant tax obligations.