Early March marked the collapse of crypto-focused Silvergate Bank. That same month, the bank shut down its Silvergate Exchange Network, which allowed customers with digital currency holdings to transfer US dollars from their own account to the bank accounts of other Silvergate customers.
Cryptocurrency, non-fungible tokens and other digital assets and new 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 for traditional assets, and special care must be taken to ensure that these assets can be accessed and managed after the incapacitation 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 and state laws, and Digital Service Provider Terms of Service (TOS) may restrict or prevent access to digital assets by anyone other than the account holder. Account holders must review any online choices and the terms of their existing will, trust, or power of attorney and take steps to grant or deny access to the digital assets and the accounts containing them.
State and federal laws may also provide guidance on how to manage and access digital assets. 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 email address of the party that sent it and the time and date the communication was sent, but not the content of the communication or more detailed Information about the account .
Conflicting instructions in an online election, will, trust, or power of attorney can lead to unintended consequences. If a conflict is discovered, the account holder should take steps to resolve intentional differences and eliminate unintentional ones.
Transfer of cryptocurrency and NFTs
The secrecy and privacy of cryptocurrency and NFTs can have unintended consequences upon the death or incapacity of the owner. Most unclaimed financial assets are deposited with the relevant Unclaimed Funds Office after a specified period of rest and may be confiscated by the owner, the owner’s trustee such as a trustee or authorized representative, or the owner’s executor. However, cryptocurrency and NFTs are not subject to the same rules. Unclaimed cryptocurrency and NFTs are not necessarily deposited with unclaimed funds and if they are, it is important to check the platform’s policies. If a trustee is ignorant of digital assets, the assets can be lost, so it is important to disclose ownership of digital assets to a trustee.
Additionally, 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 referred to as keys. A private key is a string of random characters, like a password. A seed phrase is a sequence 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 keep keys safe and allow trustees access in the event of disability or death. A search online will reveal many ways to catalog keys, each with their own benefits, risks, and potential unintended consequences.
Consideration should be given to identifying the parties who have the appropriate skills to manage the digital assets, including designating a specific person to advise the agent, executor or trustee on the management of digital assets.
Estate planning with crypto and NFTs
Keys don’t belong in a will. A will is submitted to the Surrogate’s Court for probate after the death of the testator and then becomes a public document. When keys are included in a will, anyone can access them through the surrogate’s court records. Although it may be possible to obtain permission to black out the keys from the copy of the will kept in the public records, this is a problem best avoided.
Probate is a judicial process to determine the validity of a testator’s will. There is no such thing as an “immediate report” for good reason. While preliminary writs can help access assets during the probate process, it doesn’t happen overnight. Given the market volatility of cryptocurrency and NFTs, lack of instant access could result in significant losses.
One option is to transfer individual ownership of digital assets to a trust or LLC. This provides a mechanism for a successor trustee or manager (ideally someone knowledgeable in managing digital assets) 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 equal to the investments that a prudent investor would make. It requires the trustee to act with reasonable skill, care and caution. It also requires that the trustee appropriately consider and manage the risk level of a particular portfolio. Digital assets clearly increase the overall risk of an investment portfolio. The inclusion of specific language to state the trust’s intention to hold digital assets and the trustee’s express authority to hold and manage those assets may help, but would not necessarily relieve the trustee of liability for losses.
A directed trust can be a useful vehicle for digital assets, depending on the legal home state of the trust. A directed trust is a trust where someone other than the trustee is responsible for making investment decisions. Laws regarding directed trusts vary between states. In some states, the laws separate the duties of an adviser from those of a fiduciary. In addition, some state laws require the trustee to supervise the adviser, making the trustee liable for losses. Other states define the advisor’s role as independent and theoretically shield the trustee from liability.
Another good option that offers simplified access to digital assets is an LLC. Identifying and accessing digital assets is easier in an LLC because the LLC manager manages the assets during the lifetime of the owner. The LLC manager does not have the same fiduciary obligation as a fiduciary and would not be subject to the Prudent Investor Rule. While managers still have 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 interpret manager liability differently; A member-managed LLC can help reduce liability issues. Once the LLC is no longer managed by members, the non-member manager should be someone with specific knowledge of digital markets and able to liquidate digital assets. However, a specific indemnity clause may not protect the manager from liability.
The world of digital assets is evolving. Disclosing the ownership and value of digital assets to the estate planning attorney is critical. Proper disclosure and planning can help prevent or reduce problems associated with managing digital assets, or prevent the loss of those assets altogether.
