Increasing Bitcoin Prices Driving Digital Currency Holders to Estate Planning
Traditionally, clients start on their estate plan before the birth of a child or a new marriage. Rising prices in cryptocurrencies, like Bitcoin, are introducing a new generation to estate planning.
As even small holdings have grown in value, it is increasingly important for digital currency owners to have an estate plan. There are complexities and rules specific to digital currencies that require extra care. One of those is known as a “dead man’s switch,” and, according to The Coin Telegraph’s recent article, “Lawyer Says Dead Man’s Switch Not Best Option for Digital Asset Inheritance,” it comes with a significant risk.
A dead man’s switch, where cryptocurrencies are automatically transferred to the heir’s account upon death, has been a popular solution for estate issues involving digital currency. However, this strategy requires all the heirs to be able to manage their private key. A private key is a secret number that allows bitcoins to be spent.
It is not possible to generate their private keys and give that to them. Just like a single physical key that opened one locked box, if the key is lost, it’s game over. The owner of the assets can make a new key for her heirs every time assets are bought, sold, or moved. If your heirs are well-versed in cryptocurrency, there’d be no problem. However, most people who will be inheriting digital assets are not ready to manage them.
Because activating a dead man’s switch requires the owner not to access the network for a certain period, it creates incentives for people to keep the owner from accessing the network. This is still new technology, and there’s no back-up or “do over” with cryptocurrency: it’s all based on algorithms. If you don’t have all the right pieces—like the right private key—you have no access to those assets.
Cryptocurrency transactions are non-reversible, and those assets, unlike funds in a bank, are impossible to recover.
Smart contract technology that enables automatic transfer of funds should be tested more thoroughly to be trusted with assets in estate planning.
Bitcoin, the oldest Blockchain-based cryptocurrency, debuted in 2009 and, according to the media, has only started to be considered as “going mainstream” this year.
If you own cryptocurrency and want to pass it along to heirs, you’ll need to make sure that your heirs know exactly what you have, which usually includes an updated inventory of your digital assets, and an education in how to access and manage cryptocurrency. Don’t assume they’ll know just because they are under age 30!
Reference: The Coin Telegraph (October 28, 2017) “Lawyer Says Dead Man’s Switch Not Best Option for Digital Asset.”