A digital legacy
The recent frenzy of investment in cryptocurrency and Non-Fungible Tokens (NFTs) means that most young people now have at least one 'hot wallet' on their phone or has sent funds to the wallet of an exchange platform. It is estimated around one fifth of the UK population now own digital assets.
The excitement of substantial gains has captured the imagination of the FIRE generation (Financial Independence Retire Early) who are pouring all surplus funds into this speculative digital gold-rush as a ticket to an early retirement. Indeed for some, the dream of their investment increasing 1000% or more (known as ‘mooning’) has become a reality.
A question these Gen-Z investors may not be too worried about right now is what happens to these digital assets when they die? For cryptocurrency and NTFs, the decentralised nature of the asset ownership means that there is no centrally controlled registry where your ownership and title to the asset is recorded. Unlike a share registrar or land registry the assets are essentially owned by whoever has the private key (an alphanumeric password used to access the digital wallet). In effect, whoever has the key is the putative owner and can deal with and transfer the asset.
The anonymous nature of the ownership creates problems if two people have the private key. Who is then the owner? On the face of it there is nothing to stop a 10 year old having the key and effective ownership. A key holder could declare they are holding the assets on trust for several others.
On death, unless the private key is known and the family beneficiaries know the details of the digital wallet, there is no way of accessing the assets, or proving ownership. Research suggest £23bn Bitcoin has been reported to be lost. So, what steps can be taken to mitigate the risks of these potentially lucrative (but intangible) assets becoming inaccessible on death?
The first step is to identify crypto assets and to make them known to advisers and/or executors. If the person who holds the assets is the only person who knew of their existence there will be a problem. It is going to be extremely important to keep this inventory up to date and to provide details of how to locate the private keys, the various wallets and exchange passwords. This in itself then becomes a very sensitive document and advice should be taken on how to preserve confidentiality, while allowing access in the event of death.
It is suggested by wallet providers that, in a seemingly unsecure and old-fashioned way, you should write down your private key and keep it somewhere safe. Some suggest that you should ‘split’ your private key and put half of the code in your safe and give half to e.g. your lawyer. This becomes a challenge when you have several keys and wallets and are regularly moving crypto between different wallets. When Gen-Z investors are elderly will they still have kept these pieces of paper safe? Will they still remember the codes? Part of the problem is that many will store all of the information on their phone, which is itself unsecure, easily lost and may well be obsolete by the time of death. That same phone may also act as the wallet itself.
Who knows whether NFT cryptographic art will simply be a curiosity for our grandchildren, or possibly worth billions? It is hard enough a task rummaging through boxes in our grandparents houses after they have died, wondering whether old trinkets might be worth taking on the Antiques Roadshow. Will a future Antiques Roadshow find people taking old flash-drives to computer experts asking them if they can help access a wallet to see if there is anything of value? The crypto-antique expert will presumably ask for the deceased’s private keys. Imagine the frustration if the grandchild can only say ‘I have half of it on this scrap of paper’.
After probate, a Will becomes a public document and so it not appropriate to include passwords and keys in the Will itself. Owners of digital assets should discuss with their lawyer who they wish to benefit from the assets on death. The Will can be drafted to include a bequest of the assets, provided the executors can access them to enable transfer to the beneficiary named in the Will, which might be family or even a charity.
It is common to create a trust in a Will. In that case there will need to be a mechanism for the trustees to have access to the single private key. The assets are incapable of being formally registered in the trustees’ collective names, or in the name of a company. Executors and trustees are in a fiduciary position and are obliged to carry out the deceased’s wishes under the Will trust. Crypto-assets are viewed as a high risk asset class, at present often described as a gamble more than an investment, and so trustees need to carefully consider their duties if such assets are to be retained, given high volatility and therefore potential for litigation from unhappy beneficiaries.
Executors of estates where the deceased held cryptocurrency or NFTs should take advice to avoid risk of criticism on how they should deal with these assets, particularly if there are ongoing trusts contained in the Will. Cryptocurrency is unlikely to be suitable investments for trustees and trust ownership of NFTs is a challenging concept. At present there is no inheritance Tax relief given if the value of the cryptocurrency falls after death, which could leave executors with a tax liability but no funds to pay it.
Some businesses are seeking to promote possible solutions to the problem of accessing the digital assets after death. Some businesses offer ‘multi-sig wallets’, which can give someone a ‘back-up key’ to be used to open their crypto wallets in the case of an emergency. The technology is said to allow the owner’s relatives to retrieve funds on the owner’s death or to allow a third party to do so on behalf of the Will beneficiaries.
The rise of cryptocurrencies and NFTs highlights the importance of taking advice and ensuring that your advisers are aware that you hold these assets so they can assist you in managing them. This will include advice on the taxation of the asset on transfer or death. Consideration should also be given to how the assets would be accessed in the event of mental incapacity where affairs can be handled by an attorney provided they are properly appointed. In all cases the nature of the assets are such that great care needs to be taken to ensure the assets can be passed on, but equally that ownership security is not compromised in the process.
This article first appears on Tatler.com in June 2021, as part of their experts corner. Hayden Bailey is a founding partner of the Tatler High Net Worth Address Book