If you are merely dipping your toe in cryptocurrencies, it can be hard to imagine your digital assets as something worth talking to an estate lawyer about.
But that $100 in fun money could grow to a significant percentage of your total investments, sometimes overnight. Sorry to be a downer, but you only live once – so make a plan for your digital assets in the event you die.
Cryptocurrency accounts are not similar to traditional investment accounts. They can be more vulnerable to security issues, and you generally cannot name a beneficiary.
For example, if you store your cryptocurrency on a physical device at home and a few friends know your key – a password of sorts that grants access to a crypto wallet – one of those so-called friends could wander into your house and steal your cryptocurrency as easily as they could walk off with your great-grandmother’s diamond earrings. Or, if you shared the keys with no one, your cryptocurrency is lost forever.
It is important to understand how to safely store your cryptocurrency and communicate your wishes with your loved ones, as you would with any other valuable asset.
Know how your cryptocurrency is stored
You trade and store cryptocurrency in wallets, but not the leather kind. Cryptocurrency wallets can either be digital and managed on an app or website, or something physical such as a thumb drive. The kind you choose depends on what you intend to do with your digital currency.
Hot wallets: These are used for trading and purchasing cryptocurrency. The upside is they are typically free and convenient but the downside is they are less secure because they are always connected to the internet.
Cold wallets: These are used to store cryptocurrency for a longer period of time. Think of it in terms of putting your cryptocurrency in a freezer.
The hot wallet is like a current account – with money moving in and out – while the cold wallet is more like a savings account, where you park money for a longer time. You can have both at the same time.
founder and managing laweyer at James River Law
Whoever holds the keys – that is, who maintains custody of a password of randomly generated numbers and letters – has access to your cryptocurrency. It could be you, a third-party cryptocurrency exchange or a hybrid of both.
“Do not keep more than you are willing to lose on a third-party exchange as a long-term solution,” says Alex Mejias, founder of James River Law in Richmond, Virginia. “You do not control the keys. They could freeze your funds or get attacked.”
Mr Mejias recommends a self-custody or hybrid option as the value of your cryptocurrency grows.
Keep your cryptocurrency secure, yet accessible
A cold wallet can be a small physical storage device that is easy to misplace. Your cold wallet requires a PIN for access, plus you set up a recovery phrase as a backup in case you lose your key.
According to Mr Mejias, a fireproof safe at home or a safety deposit box at a bank is a must, but do not store your cold wallet in the same place as the note containing your key, PIN and recovery phrase. If someone finds all of those items together, it is bye-bye Bitcoin.
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Above all, design a storage method that makes sense. “Don’t get so cute that you make some complicated system that you cannot remember,” Mr Mejias says.
He has heard of people writing down their keys and cutting the paper into three pieces, hiding each piece in a separate location.
“It sounds like a good idea but it is a horrible idea. If you lose one of those three, it is gone forever. You have tripled your risk.”
Make a detailed plan for loved ones
Name a beneficiary in your will and add a document to your estate plan that lists your cryptocurrency assets and any passwords, PINs, keys and instructions to find your cold wallet.
If you have an account at a cryptocurrency exchange, your beneficiary can contact customer support to notify them of your death.
According to a Coinbase representative, there is a process in place to guide next of kin, including one-on-one assistance from a Coinbase analyst.
Cryptocurrency exchange Gemini requires a death certificate and power of attorney to initiate a transfer out of a deceased person’s account.
“We hope to simplify this process in the future, so we are working to add account beneficiaries functionality to our platform,” a Gemini representative said.
Update your plan and your wallet
Ensure that your assets will go to the right people by keeping your estate plan updated, especially after a life change such as marriage or divorce. Provide up-to-date instructions so beneficiaries can have access your assets.
Cold wallets need maintenance, too, in the form of periodic firmware updates. This can help lessen the burden on your loved ones and, hopefully, prevent fights as they settle your estate after your death.
“Crypto has the potential to be a very explosive thing because the value can be so huge so quickly,” Mr Mejias says. “When you think about five, 10 years from now, we are potentially talking about a whole lot of money.”
Associated Press
