Accounting for Digital Assets in Your Estate Plan

March 29, 2023 | Wendy Hoey Sheinberg | Stella Lellos | Privacy, Data & Cyber Law | Trusts & Estates

The beginning of March marked the collapse of crypto-focused Silvergate Bank. That same month, the bank shut down its Silvergate Exchange Network, which allowed clients with holdings in digital currency to move U.S. dollars from their own account to the bank accounts of other Silvergate customers.

Cryptocurrency, nonfungible tokens and other digital assets and emerging asset classes should be considered as part of the estate planning process. The laws governing the access and transfer of digital assets differ from those governing traditional assets, and special care must be taken to ensure that these assets can be accessed and managed following the incapacity or death of the owner.

Access to Digital Assets

Others cannot manage your digital assets or accounts on your behalf without access to them. Federal laws, state laws, and digital service providers terms of service (TOS) agreements may restrict or prevent access to digital assets by anyone other than the account owner. Account owners must review all online elections and the terms of their existing Will, Trust, or Power of Attorney, and take steps to affirmatively grant or withhold access to the digital assets and the accounts that contain them.

State and federal laws can also provide guidance for digital asset management and access. The New York Revised Uniform Fiduciary Access to Digital Assets Act provides rules for digital content (“Content”) and other digital assets (“Non-Content”). Non-Content is essentially a record of the communication, the name and e-mail address of the party who sent it as well as the time and date the communication was sent, but not the content of the communication or more detailed information about the account.

Conflicting directions in an online election, a Will, a Trust, or a Power of Attorney may result in unintended consequences. If a conflict is discovered, the account owner should take steps to clarify intended differences and eliminate the inadvertent ones.

Transferring Cryptocurrency and NFTs

The secrecy and privacy of cryptocurrency and NFTs can create unintended consequences following the owner’s death or incapacity. Most unclaimed financial assets are deposited with the applicable office of unclaimed funds after a certain period of dormancy and are recoverable by the owner, the owner’s fiduciary such as a trustee or agent under a power of attorney, or the executor of the owner’s estate. Cryptocurrency and NFTs, however, do not operate under the same rules. Unclaimed cryptocurrency and NFTs will not necessarily be deposited with unclaimed funds, and if they are, it is important to verify the platform’s policy. If a fiduciary is unaware of digital assets, the assets may be lost, so it is important to disclose ownership of digital assets to a fiduciary.

In addition, owners of digital assets must also take steps to ensure access to them. Access to cryptocurrency and NFTs is controlled by private keys or seed phrases, collectively known as keys. A private key is a string of random characters, like a password. A seed phrase is a string of words. These keys open digital wallets. Cryptocurrency and NFTs typically cannot be transferred without a key, but sharing a key can create a security issue. It is important to maintain keys securely while providing access to fiduciaries in the case of incapacity or death. An online search will reveal many ways to catalogue keys, each with its own set of benefits, risks, and potential unintended consequences.

Consideration should be given to identifying the parties that have the proper skills to manage the digital assets, including the designation of a particular person to advise the agent, executor, or trustee on the management of digital assets.

Estate Planning with Crypto and NFTs

Keys should not be included in a Will. A Will is submitted to the Surrogate’s Court for probate after the testator’s death, and then becomes a publicly available document. If keys are included in a Will, they can be accessed by anyone through the Surrogate’s Court records. While it may be possible to seek permission to redact the keys from the copy of the Will maintained in the public record, it is a problem best avoided.

Probate is a judicial process establishing the validity of a decedent’s Will. For good reason, there is no “instant probate.” While preliminary letters can help to access assets during the probate process, it does not happen overnight. Given the market volatility of cryptocurrency and NFTs, the lack of immediate access could result in substantial losses.

One option is to transfer individual ownership of digital assets to a trust or an LLC. This provides a mechanism for a successor trustee or successor manager (ideally someone who is well versed in digital asset management) to manage the assets without the assets going through probate.

The trust option is not without risks. Trustees of New York trusts are subject to the Prudent Investor Rule, which in short requires a trustee to invest trust assets consistent with the investments a prudent investor would make. It requires the trustee to act with reasonable skill, care, and caution. It also requires the trustee to appropriately consider and manage the risk level of any given portfolio. Clearly, digital assets increase the overall risk of an investment portfolio. The inclusion of specific language of setting forth the intent for the trust to include digital assets, and the express authority for the trustee to hold and manage these assets, can be helpful, but it would not necessarily alleviate the trustee from liability for losses.

A directed trust may be a useful vehicle for digital assets, depending on the trust’s legal home state. A directed trust is a trust where someone other than the trustee is responsible for investment decisions. The laws regarding directed trusts vary among states. In some states the laws delineate the duties of an advisor versus those of a trustee. Additionally, some state laws obligate the trustee to oversee the advisor, thus leaving the trustee liable for losses. Other states define the advisor’s role as independent, theoretically shielding the trustee from liability.

Another good option providing simplified access to digital assets is an LLC. Identifying and accessing digital assets is easier in an LLC, since the LLC manager will be managing the assets during the owner’s life. The LLC manager does not have the same fiduciary obligation as a trustee and would not be subject to the Prudent Investor Rule. While managers would still have the duties of care and fair dealing, these duties do not rise to the level of fiduciary duties and may be limited or even eliminated by the LLC’s operating agreement. Different states construe manager liability differently; a member-managed LLC can help to reduce the liability concerns. Once the LLC stops being member managed, the non-member manager should be someone with specific knowledge of digital markets, and they should have the ability to liquidate digital assets. A specific exoneration clause, however, might not protect the manager from liability.

The world of digital assets is evolving. Disclosure of the ownership and value of digital assets to the estate planning attorney is critical. Proper disclosure and planning can help to avoid or reduce issues inherent in the administration of digital assets or prevent the loss of those assets altogether.

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