Money is a funny asset. As much as people yearn it throughout their lives, it is of a little use in the afterlife. Accordingly, passing it to an heir is a much more solid option. To do it, people usually write wills. Alternatively, it is the court that helps heirs get access to the inheritance.
Unfortunately, with cryptocurrency, it’s not the same. And it might actually end up in its owner’s grave, albeit in a metaphorical way.
After all, the transfer of cryptocurrency is highly complex and private in nature. If the heirs don’t have the private keys to the wallets, no one can access the assets. Sometimes they might not even know that there is money awaiting them in the first place. Consider this: according to the Financial Times, almost 2.3 million to 3.7 million Bitcoins have gone missing in the past. In a great many cases the death of the asset holders is to blame.
Retelling the Quadriga CX catastrophe
This story shook the crypto space. In December 2018, the exchange’s young founder Gerald W. Cotten unexpectedly passed away while on a trip to India.
Regrettably, Cotton’s death locked crypto assets worth $250 million somewhere in a cold storage. His widow, Jesse Powell, continues to claim that no one but him had access to the exchange’s cold wallet.
Some are still refusing to believe this fact. Recently, 115,000 investors have demanded to exhume his body to prove that he is actually dead.
Such incidents put enough emphasis on planning crypto inheritance.
How to plan crypto inheritance?
Before you plan the inheritance of your crypto assets, it is important that your legal heirs know about the existence of such asset class. Educating them about the basics will prove to be helpful in case of an unfortunate event.
That said, there are multiple ways of ensuring that your assets will be dispersed in the manner you choose.
Option 1: Mention your crypto assets in your will
To make sure your crypto assets are passed on to your loved ones, they must be mentioned in your will. It is obvious that you may not wish to disclose the PIN, passwords and private keys in your will. Thus, for the sake of security, digital asset legal experts advise the creation of a memorandum to a will. In it, one can mention all the critical information.
A prosecutor may hold the memorandum of your will. Additionally, you will have to elect its executor. S/he will hand over the memorandum with details of accessing your crypto assets.
Yet, there is a catch. For instance, in the USA digital account ownership is governed by the Revised Uniform Fiduciary Access to Digital Asset Act (RUFADAA). According to it, mentioning cryptocurrency in your will and appointing an executor is insufficient. Instead, the asset owner must sign the Terms of Service Agreement with an exchange. These contain the rules for account access in case of the owner’s death.
All in all, it is a tedious process.
Option 2: Inheritance focused projects
Multiple projects are now offering better-tailored solutions to cryptocurrency asset owners.
For example, Safe Haven is a project that is dedicatedly building solutions for digital inheritance. Earlier this year it announced the testing phase of SHIP (Safe Haven Inheritance Platform) V1.0. It works in a unique fashion. The owner is required to encrypt his/her private keys, seeds, and passphrases using SHIP in different shares. These shares are distributed to the stakeholders and one Validation Share is stored on the VeChainThor blockchain.
Once the owner’s decease is confirmed, the legal entity unlocks the Validation share. Subsequently, it combines all the remaining shares to unveil the passwords and private keys to the assets. Currently, the platform is in the testing phase.
Option 3: Use a dead man’s switch
This is a computer program that transfers cryptocurrency to the heir’s account in case of the owner’s death. The program emails the owner at regular intervals and waits for a fixed programmed duration. If there’s no reply (or a death certificate is found), a smart contract is triggered. And the assets are automatically moved to the account that has been mentioned while setting it up.
Last Will is one such platform for Bitcoin Cash (BCH) inheritance.
The downside, however, is that it is problematic. What if you simply don’t have the time to reply? Besides, the heirs must be well acquainted with cryptocurrencies so that they can access the assets from the wallet.
Option 4: Pick the exchange with the right provision
Exchanges like Coinbase have set up standard ownership transfer procedures to make crypto inheritance easy. To make sure the assets are passed on to a legal heir, the Coinbase team asks for numerous documents. For instance, the death certificate of the owner, his/her will, government-issued ID proof of the heir, etc.
Yet, it is not a completely full-proof method of gaining access to the crypto inheritance. Imposters can always find their way.
Does crypto inheritance attract tax?
Although IRS (US) and HMRC (UK) do not treat cryptocurrencies as traditional assets, according to both, it is subject to inheritance tax. The amount of tax the heir has to pay fully depends on how the asset was received and disposed of.