Cryptocurrency Estate Planning
Key Takeaways:
Cryptocurrency estate planning is crucial for safeguarding digital assets after your passing.
Clearly document holdings, private keys, and beneficiaries to prevent loss or disputes.
Seek professional advice to navigate the unique complexities of including cryptocurrencies in your estate plan.
“...a form of digital asset based on a network that is distributed across a large number of computers. This decentralized structure allows them to exist outside the control of governments and central authorities.”
Ever heard of Bitcoin?
“Leveraging opensource peer-to-peer technology, the transaction and issuance of Bitcoin is collectively managed by the network, effectively cutting out the middleman. Bitcoin has consistently dominated the crypto market since it became available to the public in 2009. Cryptocurrencies, including Bitcoin and Ethereum, are more volatile than traditional fiat currencies. Fiat currencies are declared to be legal tender by a government and are not backed by physical commodities.”
How do I know what my cryptocurrency is worth?
The value of your cryptocurrency is kept in what is called a “digital wallet”. A digital wallet is defined by Bankrate as -
“an app that allows cryptocurrency users to store and retrieve their digital assets. As with conventional currency, you don’t need a wallet to spend your cash, but it certainly helps to keep it all in one place. When a user acquires cryptocurrency, such as bitcoins, she can store it in a cryptocurrency wallet and from there use it to make transactions”.
Arguably the most valuable part of your digital wallet is the private key – an identifier that proves ownership of your digital money and allows you to make transactions. If you lose your private key, you lose access to your money and therefore your investment.
What are NFTs?
NFT’s refers to non-fungible tokens.
Fungibility according to Investopedia refers to something that has “the ability of a good or asset to be interchanged with other individual goods or assets of the same type”. Money in the form of cash or Bitcoin (crypto- currency) are perfect examples of things that are fungible or interchangeable.
Conversely, something that is non-fungible is a “cryptographic asset on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency”.
What are Digital assets?
In the simplest terms and according to merlinone, “a digital asset is content that’s stored digitally. That could mean images, photos, videos, files containing text, spreadsheets, or slide decks. New digital formats are constantly emerging – MP3s were unheard of before the 1990s, for instance – so the definition of a digital asset is always expanding. Rather than a definitive list of file formats that qualify as a digital asset, a digital asset can be any content, in any format, that is stored digitally and provides value to the company (or to the user or consumer)”.
And that would, on the face of it, include both cryptocurrency (Bitcoin) and NFTs.
How are cryptocurrencies dealt with in an Estate?
SARS, GAAP and SAIPA, define crypto assets (due to them not having a physical substance) as intangible assets within your estate. As such they are liable for and subject to the normal principles of income and capital gains tax. Therefore, crypto assets would be treated as intangible assets in your estate for both executor’s fees and estate duty purposes.
Turning to the Estate Duty Act 45 of 1955, at Section 3(2), - “an estate consists of all property and deemed property of a person at the date of death”.
Property is defined as: “any right in or to property, movable or immovable, corporeal or incorporeal. Whether the asset is tangible or intangible and includes ownership and any other interest in or right in property, such as the right to use or occupation”.
Estate duty will therefore be applicable on the value of the asset at the date of death of the crypto asset owner.
The legal practitioner who will be responsible for your estate planning (like the attorneys at Benaters) will therefore need to be made aware of the existence of crypto assets (if they are going to be sufficiently provided for during your estate planning process) and the value of your digital wallet must be taken into account when planning your estate.
How do you include cryptocurrency in your Estate?
It is your private key (as mentioned above) that grants you access to your crypto assets and is therefore crucial in order to transfer ownership thereof to another person (especially in the case of your death). Therefore, it is your key that will need to be protected and dealt with (in a practical sense) by the executor of your deceased estate (who will need to have access to your keys following your death).
As crypto currencies are a volatile asset and also a relatively new concept in the asset space, we agree with Kyle Abrahams, where he advises in his article How to deal with crypto assets in your will that a “two pronged approach” should be followed –
1. “Include a clause in your will detailing how you want your crypto assets to be distributed.
2. Create a separate letter of directions to a nominated beneficiary and/or the executor of your estate which explains where and how to access your crypto assets”.
By undertaking the above, you will ensure that your beneficiaries are able to inherit your crypto assets. And that is the biggest benefit that can come of including it in your will.
Any security measures you should be aware of when including crypto assets in your estate?
It is not advisable to include the actual access details to your digital wallet in your Will (i.e. to give the details of your private key) but instead (and at the very least) include a clause noting the existence of these crypto investments (you should specify which crypto assets you possess and the number of shares you own in each) and your wishes around how you want them to be dealt with in your Estate i.e. what share will go to which beneficiary.
And this is where the separate letter of directions comes in. Your key details should be recorded in a separate document (the letter of directions) that must be stored in a secure place, only identified to your spouse, executor, or other trusted person.
It is as simple as recording in your Will that a separate “directions document” has been created and who can be contacted to gain access to it.
Custody solutions?
Cryptocurrency custody solutions are, according to Investopedia,
“third party providers of storage and security services for cryptocurrencies. The solutions generally incorporate a combination of hot storage, or crypto custody with connection to the Internet, and cold storage, or crypto custody that is disconnected from the Internet. Both types of storage have benefits and drawbacks. For example, hot storage is connected to the Internet and, as a result, offers easier liquidity. But hot storage options may be prone to hacks due to online exposure. Cold storage solutions offer greater security. However, it may be difficult to generate liquidity from crypto holdings on short notice because of their offline nature. Vault storage is a combination of both types of cryptocurrency custody solutions in which the majority of funds are stored offline and can be accessed only using a private key”.
This is echoed by the World Economic Forum in their paper on Navigating Cryptocurrency Regulation.
The question as to whether one should choose a single custody cryptocurrency in their estate or a collaborative custody model, comes down to security vs ease of liquidity. As digital assets are volatile and are open to online exposure, it’s best to include a vault storage or collaborative custody model to ensure that there is both ease of liquidity for beneficiaries but with an added layer of security as well.
Are there any specific digital asset estate planning concerns?
The most important is notifying your executor that these digital assets exist and making the necessary plans during your estate planning process.
In addition, it must be kept in mind that the nature of the digital world and therefore digital assets is like a moving target. Continuously changing and evolving as technology changes and evolves. And so too must your Estate Planning and your Will. You will need to change your Will and evolve your Estate Planning goals as you move through life acquiring new assets (which could very well include crypto assets).
We would be happy to review your current Will or assist, advise and support you as you draft a new Will in order to ensure that you have not only nominated an executor with whom you are comfortable with and confident in (when dealing with crypto assets).
An introduction to digital assets
If you’re not 100% sure what a digital asset is and what could be classified as a digital asset or how digital assets work in South Africa, then these two introductory guides can help get you up to speed.
Contact us
Get in touch with Benaters today and let’s see how we can assist you in revising your Will to ensure that all measures regarding your crypto assets are not only in place but that they can be practically implemented when your Deceased Estate is being wound-up.