Over the last few years, my law firm’s tax, trusts, and estate practice has seen a significant increase in questions and issues related to cryptocurrencies and nonfungible tokens (NFT). (It is only a matter of time before someone asks about the best way to pass their Metaverse digital land holdings to their children!) While increased tax reporting for crypto is on the horizon, this article focuses on today’s most relevant questions of whether cryptocurrencies, NFTs and other digital assets are acceptable assets to be held and invested in by executors and trustees, and some planning steps that should be taken for clients that may want their future fiduciaries to significantly invest in these asset classes.
Tracking and Recording Digital Assets
Before discussing a fiduciary’s considerations in investing, there are some practical considerations for estates and trusts holding digital assets, and for planners assisting clients with them. First and foremost, estate planning attorneys need to ensure they have a method of capturing information regarding digital assets from their clients. This could be through questionnaires or through client discussion, and probably should be with both. Advisers and fiduciaries will need to know what digital assets exist, if hosted on an exchange, or if the private keys are held in one or more wallets. The advisor and fiduciary would also need to know which wallet the private keys are held in, and whether it is a hot (connected to the internet) wallet or a cold (held on a device not connected to the internet) wallet. They will also need to know the location of the seedphrase that can be used to regain access to wallets storing digital assets. This is incredibly important, as without the ability to access the wallet the executor or trustee would be unable to transfer the asset. This is dramatically different than a traditional securities account, where there are mechanisms in place to obtain control over the assets without the password. This is a major challenge for planning with digital assets, and planners should discuss this with the client and have a plan in place to ensure the client is able to securely transfer the information to the fiduciary. Another issue is that a meaningful percentage of exchanges and hot wallet providers do not allow trusts to hold title to assets stored on those exchanges. Advisors will need to determine if that applies with clients’ digital assets and draft a plan to deal with the issue.