Cryptocurrencies: How Not to Take Them to the Grave

In the global super-rich league, investment in cryptocurrency has created 182 centi-millionaires — those who hold over USD 100 million in crypto assets, according to the inaugural Crypto Wealth Report, the first of its kind worldwide. Crypto centi-millionaires excel at making their fortune from trading cryptocurrencies while keeping their financial interests confidential. Now, what happens to their crypto assets when they pass away? How can the transfer of digital wealth to the next generation be ensured? And what is the relevant value to consider? This article provides a rough guideline on how to handle cryptocurrencies in estate planning and how to avoid digital wealth getting lost upon one’s death.

What happens to cryptocurrencies upon their holder’s death?

Cryptocurrencies are virtual currencies that are secured by encryption technology and organized in a distributed manner. Their purpose is to enable cashless payment transactions without the need for third parties such as banks and other financial intermediaries. Many national laws have not yet conclusively qualified the nature and value of cryptocurrencies. It is a fact, however, that they form part of one’s estate and are bequeathed as per the applicable national inheritance laws or by last will and testament.

When planning an estate, the kind of wallet the cryptocurrencies are kept in is of foremost importance. The wallet may be a hardware wallet accessible by a PIN, or a software wallet with a password. Both are secured with a seed phrase (a random binary password consisting of 12 to 24 words) in the sense of a backup. If it happens that the wallet can no longer be found or the stored data has been deleted, access to the cryptocurrencies can only be restored with the seed phrase. The wallet may be managed either by a third party such as a crypto bank with sole access to the cryptocurrencies (a so-called ‘custodial wallet’), or, more often, the user may choose to manage the wallet themselves, so that they alone hold access (using a ‘non-custodial wallet’).

How can digital wealth be transferred?

The essence of cryptocurrency is that it is concealed. Crypto centi-millionaires may have talked about having a digital currency investment. However, they most likely would never share the access details with their associates or even loved ones. At the same time, centi-millionaires aim to pass on their wealth to the next generation. 

The heirs or beneficiaries, on the other hand, may neither be familiar with cryptocurrencies themselves nor with how to gain access to the digital assets. As such, it would be crucial for them to learn about the existence of and their access to the cryptocurrencies.

Thus, crypto centi-millionaires should above all guarantee that their heirs and beneficiaries learn of the digital assets upon their death. In contrast to a bank vault, which can be broken into, knowledge of the cryptocurrencies’ existence alone is not sufficient — the heirs must also learn how to access them. While it is true that the person who has access to the wallet (by knowing the PIN, password, or seed phrase) can in fact dispose of the cryptocurrencies, it must be ascertained that the cryptocurrencies are bequeathed not only to the right heir or beneficiary but also that the access information reaches the intended heir(s) in a secured manner. This security measure is to avoid unauthorized parties from being able to misuse the information to their advantage and transfer the cryptocurrencies irreversibly to their own wallets.

How do custodial wallets work? 

If the custodial wallet is managed by a crypto bank, only the bank has access to the cryptocurrencies. Like a contract with a regular bank, the centi-millionaire holder alone can authorize the transactions.

Having said that, diligent estate planners should ensure that the heirs or beneficiaries of the estate are aware of the contractual relationship with the crypto bank. Apart from that, no crypto-specific particularities need to be considered. In principle, the heirs or beneficiaries are entitled to obtain any information from the crypto bank, subject to national disclosure rules and information rights.

How do non-custodial wallets work?

Contrarily, if the cryptocurrencies are kept in a non-custodial wallet to which only the crypto centi-millionaire has access, estate planning is crucial. In practice, the access data itself is usually unknown to the heirs; and if it is known, the heirs typically do not know how to use it. In such a case, the heirs would have neither a bank, private body, nor public authority to reach out to for information. They would be completely left on their own and the risk that the cryptocurrencies would be lost forever is extremely high.

Therefore, crypto centi-millionaires should ensure that their heirs or beneficiaries have access to the non-custodial wallet, as well as the PIN, password, or seed phrase to restore access if necessary. There are various ways to plan for this transfer of information. Firstly, crypto holders are advised to draw up a ‘crypto access plan,’ which, in addition to a list of the existing cryptocurrencies and wallets (‘crypto assets inventory’), contains the location of the wallet PIN or password and the seed phrase. The crypto access plan must be kept separately from the wallet and the seed phrase so that unauthorised access can be avoided as much as possible.

Secondly, in the last will and testament, only the location of the crypto access plan should be indicated, but under no circumstances should the access data (that is, the PIN, password, or seed phrase) be shared. The risk is too high that a well-versed heir, beneficiary, the executor of the estate, or a personal representative or third party would seize the cryptocurrencies and transfer them to their own wallet. Because there is no financial intermediary, access to the wallet can neither be controlled nor the transaction reversed.

To counteract the risk of abuse by an unauthorized third party, crypto centi-millionaires have various technical and estate planning options, such as multi-signature wallets, where all the stated heirs must each sign to execute any transaction, or Shamir's Secret Sharing Scheme, where the password for the wallet can be cut into various parts, which are then distributed to all heirs and/or the executor during the crypto holder’s lifetime. Ultimately, it is advisable to appoint a crypto-savvy executor or personal representative to support the heirs.

How are cryptocurrencies valued?

When planning an estate and calculating shares for the future heirs, particularly in countries that apply forced heirship rules, one may ask how to value the cryptocurrencies, since they have no market value due to decentralized trading.

The respective country of residence or citizenship may have established rules. In Switzerland, for example, cryptocurrencies are to be treated like foreign currencies (as recommended at the 2016 Swiss Tax Conference). The Swiss Federal Tax Administration has been calculating a value for wealth tax purposes by averaging various exchanges at the year end. Considering the well-known fragmented trading and the considerable daily exchange rate differences, each of the highest and lowest exchange rates are eliminated. It may happen that the price is based on one or two randomly selected exchanges with enormous daily price differences.

In our view, it would make sense to rather base the valuation on the average (death or division) daily prices obtained from as many of the most common stock exchanges as possible, or on the daily price of the trading platform through which the deceased usually carried out their transactions. Testators may consider adding respective guidelines in the last will and testament.

Prudent estate planning tailored to the type of wallet and securing the heirs' access to the cryptocurrencies is vital for crypto centi-millionaires who wish to transfer their wealth to the next generation instead of taking it to the grave.