Podcast Transcription:
WRVO Producer Mark Lavonier:
This podcast is part of the series Estate Planning Pro Tips, hosted by attorney Tim Crisafulli of Crisafulli Estate Planning and Elder Law, P.C. —an estate planning, probate, and elder law firm serving clients throughout Central New York. A former schoolteacher, Tim explains complex legal subjects in an easy-to-understand way. The commentaries focus on essential aspects of estate planning, such as wills, trusts, asset protection, long-term care, and probate. And now here's Tim.
Tim Crisafulli:
You cannot run. You cannot hide. Bitcoin, Ethereum—Cryptocurrency—it’s here, it seems to say! Can you believe cryptocurrency has been with us since 2009? Of course, as time goes by, owners of this asset do what everyone does: they get sued, they get old and need long-term care, they die.
So, a podcast exploring estate planning as it relates to cryptocurrency makes sense.
First, let’s talk about what it is: Cryptocurrency is digital or virtual currency. For estate planning purposes, it’s really just like any other asset. If you get sued, you may have to use it to pay a judgment. If you need a nursing home, it is among the items that you may have to spend down to qualify. If you die, the default is that it passes through your estate. If you successfully designated a beneficiary to receive it at death, that person receives it; probate is not necessary. If you successfully transferred it into a lifetime trust while alive, then the terms of that trust control—and the asset gets where it’s going without having to pass through the probate process. So far, no big surprises—so far, cryptocurrency is like any other asset.
Here’s where it gets interesting, though—access. How do you demonstrate ownership? Well, there are two different ways to own cryptocurrency: through a custodian or independently.
If you own it through a custodian, this means that a third party administers it for you. Just like a custodian (think Fidelity, for example) can administer shares of stock, give you statements, and report on the stock value… so, too, can a custodian (like Fidelity) do these things for cryptocurrency. Another well-known cryptocurrency custodian is Coinbase. Hence, if you want to sell custodian-administered cryptocurrency, you call the custodian, give instructions to cash it in, and you get your resulting proceeds. If you die, then your executor or administrator works with the custodian to liquidate or transfer the cryptocurrency as part of the estate administration. As far as designating a transfer-on-death beneficiary or transferring the cryptocurrency into a lifetime trust—be it for probate avoidance or asset protection—beware that some custodians allow that, and some do not.
Now, things get really interesting—and that’s where people own cryptocurrency independently, without any custodian. Conceptually, think of it like keeping a gold bar in a safe in your basement. The gold bar is the thing of value, and the combination to the safe is the way you get to the valuable gold bar. Owning cryptocurrency without a custodian is a little like that in that you have two things: the “Wallet” and the “Seed phrase.” The Wallet is a tangible, physical thing on which the cryptocurrency exists—like a hard drive or a thumb drive. The seed phrase is like a safe combination. You simply enter the seed phrase into the wallet and boom—you have access to your cryptocurrency. Of course, herein lies the problem: if either cannot be found, the asset is lost. Just… lost... forever!
You see, if you lose the combination to a safe, the gold bar is still in there. Whether by locksmith or stick of dynamite, you can get into the safe to get at the gold bar. By contrast, that’s just not possible with cryptocurrency. Lose the wallet, it’s gone forever—no backup. Lose the seed phrase, it’s gone forever—no backup.
Perhaps the best-known story is that of the gentleman who accidentally threw away a laptop hard drive containing bitcoin. To the landfill it went. He tried everything to get it back out of the landfill but, alas, could not. The loss: in excess of $600 million. Ouch.
As for owning cryptocurrency without a custodian goes, legal clarity is sparse. It is a developing area of the law. That said, it seems like it should function like a bar of gold. Is it vulnerable if you’re sued? Yes. Is it vulnerable if you need long-term care in a nursing home? Yes. Does it pass through probate when you die? Yes. Are you able to transfer it into a lifetime trust? Probably—by use of a written assignment.
One thing is for sure: owners of cryptocurrency need to ensure that this asset is properly aligned with their overall estate plan. And if you do hold cryptocurrency without a custodian, DO NOT lose your wallet and DO NOT lose your seed phrase.
