Attorney Christine Thomas focuses her practice on estate planning and represents a diverse range of clients from all walks of life. She is a principal at Naugatuck-based Burns Thomas, LLC. Contributed photo
Cryptocurrency has become a new wrinkle in development of an estate plan.
The secure nature of crypto assets results partially from the fact that there is no personally identifiable information associated with an individual crypto account. As a result, these types of assets might not be easily identifiable to heirs.
The only way for an heir or designated fiduciary to gain access to crypto accounts after the original owner’s death is to have the password or “private key.” Without that private key, there is no access. Without access, the cryptocurrency is gone. Worthless.
Safeguarding passwords, especially the so-called crypto “seed” phrases, is critical.
The “key” to a person’s cryptocurrency must never be solely in the owner’s brain: the owner must never be the only person who knows where the passwords are printed, stored on a hidden piece of paper, in a hard-to-find file on a thumb drive or laptop. At the same time, this vital information must be secure.
The first step it to make sure your estate planning attorney knows that your cryptocurrency actually exists.
To properly safeguarding seed phrases and other passwords for estate planning purposes, consider some of the following recommendations.
One of the most straightforward ways to store passwords and seed phrases is to write them down on a piece of paper and store the paper in a secure location, such as a safe or a safe deposit box with other estate planning documents. This ensures that loved ones will have access to those digital assets when it becomes necessary.
Using a password manager can be an important tool, as well. This is software that stores all of your passwords in an encrypted format. It allows you storage of secret seed phrases, passwords, and other sensitive information securely with access through a single master password.
Of course, it is important to select a reputable, highly rated password manager. There are a number of options on the market. Storing the master password in a secure location is critical as it can become extremely difficult to gain access to your information without it. Never store seed phrase or passwords with the cryptocurrency wallet address as this may give hackers a way to get to your wallet – and your assets.
Encrypting the information is a key step. Encryption is the process of converting plain text into a coded format that can only be deciphered using a decryption key. You can encrypt your seed phrases and passwords using encryption software, such as VeraCrypt or AxCrypt, and store the decryption key in a secure location.
It is essential to store this important information in a way that is secure from both physical and digital threats. A safe deposit box or a fireproof safe are two options. Consider giving a trusted friend or relative a way to access that stored information.
Of course, individuals also can provide a trusted friend or family member with the passwords and seed phrases themselves, as long as he or she can be trusted to be responsible and will not share the information with others, even accidentally.
As the security landscape changes, it is important to regularly update your passwords and seed phrases. This will ensure that your digital assets remain secure and that your loved ones have access to them, should you become incapacitated or you pass away.
By the way, it is important to recognize that the Internal Revenue Service treats cryptocurrency as personal property — not currency. That means the property transaction rules that apply to virtual currency are generally the same as they may apply to transfers of other types of property. There may be a tax consequence, for example, if there is a capital gain or loss. It would be wise to consult with a tax advisor familiar with these issues before finalizing plans for eventual distribution of these assets.
Properly safeguarding seed phrases and other passwords is an essential aspect of estate planning. You can ensure that your digital assets are properly managed and passed on to your loved ones after you pass away, without having to include sensitive information in a public document.
Attorney Christine Thomas focuses her practice on estate planning and represents a diverse range of clients from all walks of life. She is a principal at Naugatuck-based Burns Thomas, LLC, and can be reached at 203-723-9420. www.burnsthomas.com.