On April Fool’s Day in 2013, the price of one bitcoin reached $100.00 USD for the first time ever. But this so-called “cryptocurrency” was no joke. By December 17, 2017, you would have to part with $19,783.06 to acquire that one bitcoin, and though the price has come down since that historic peak, the interest in this new technology has remained high in the public conscience.
Current estimates hold that there are 4,000 different cryptocurrencies in existence. Of these, Bitcoin is the oldest and most-well-known, so it will be used as a general stand-in for those other cryptocurrencies. A detailed analysis of the similarities and differences between these virtual currencies is beyond the scope of this article, and though we could choose from innumerable angles to approach this topic, for our purposes as estate planning lawyers, what we really want to know is, What happens if I die owning a bitcoin?To explain that (and more importantly, what oughtto happen when you die owning a bitcoin), this post will first explain the basics of blockchain and bitcoin, then some basic tenets of good estate planning, and then will merge those topics together to recommend to clients what should be done with their virtual currency.
Basics of Bitcoin
Blockchain is the technological basis of bitcoin, so our examination will have to start there. (We are attorneys, not computer scientists or software developers, so this discussion is going to be approached from a high level.) Blockchain is a structure for recording not just the value of a piece of currency transferred, but also the entire history of that currency’s existence. It may be seen as an investment now, but bitcoin powered by blockchain started as a cash system: a way for users to transact monetary exchanges on the internet without the validation, facilitation, or interference of traditional third-party intermediaries like banks, credit card companies, and other payment processors. It was envisioned by its early advocates as a democratizing technological force, and its technology formed the foundation of this hope.
In blockchain, each individual block contains a timestamp of when the transaction in question occurred, transaction data, and a “hash pointer,” which is a link to the previous block. Since each block contains this information about the block which came before it, all blocks in any given chain are inseparably linked to one another, and the whole chain of blocks cannot be broken. I conceptualize it like a dollar bill you carry in your wallet, which somehow contains, on its face, a ledger noting its day of creation, and then every time it was exchanged for a good or service, down to the millisecond, and what its value was in that transaction. The record is unalterable except by those who transact with it, and they can only add to it, not delete or modify what came before it. The legitimacy of the bitcoin is validated by its impermeable record, not by, say, the government or central bank which issued it.
That’s the ideological, socio-political basis of bitcoin. The practical aspect of it that most people will interact through is a digital “wallet” which holds one’s bitcoins, and allows them to transmit them to other users in exchange for goods or services, just like good old-fashioned cash. Wallets have both a “public key” and a “private key.” Both use 256-bit encryption. The public key is like your account number at the bank: you give it to people so they can remit payment to you, or vice versa. The private key is like your email password, but way, way more secure than “password12345,” or your kid’s birthday. It is your ONLY access to the bitcoin in your wallet. There is no password reset, no recovery sent to your email—once it’s gone, it’s gone, and the bitcoin can never be used again by anyone. This is what makes it so unique (and secure). It’s also the feature which provides us with the most importance for estate planning. We need to make sure your heirs have access to that key.
Basics of Estate Planning
If a person dies with a bank account in their name alone, and no named beneficiary, we have a mechanism to get the funds in that account to the deceased person’s survivors. It is called “probate,” and it is a jurisdiction of the court designed to allow access to the assets of a person who can no longer manage them themselves, whether because of death or disability. Probate has a bad reputation, but really, it’s in place to make sure an incapacitated person’s assets are only used lawfully by trusted people for that incapacitated person’s benefit, and to make sure a deceased person’s assets go to the right people. But the point is, we have something in place to make sure this happens. The bank account will get to the right beneficiaries. The process may be onerous and expensive, but it’ll get to the right people.
We have no such legal safety net with bitcoin.
If you die and nobody knows your private key, that bitcoin is gone for eternity, and your family will not receive it. If you’re in a coma from a car wreck and your family needs to use your bitcoin to pay your medical bills (don’t laugh—it wasn’t so long ago that you had to write checks to your doctors to pay for their work, now you go online, enter 16 digits from your debit card, and your bank account is magically tapped—technology moves faster than almost any of us predict), if your family doesn’t have your private key, they’re not able to use the virtual currency to pay for your care, or ever recover it.
Combining Bitcoin and Estate Planning
So what’s the solution? As with almost everything in life, and which is especially the case with estate planning since the stakes are so high, a little bit of preparation while you’re alive and well goes a long way to make sure your assets are secure, and can be used by your loved ones as needed. We at Stock Legal urge our clients to copy their private key and keep it in a safe location, where they store other valuable items. The copy can be saved on a USB flash drive, or written on an actual piece of paper with an actual pen, but either way, we want your trusted family members to be able to find it if something terrible happens to you. Safe-deposit boxes, fireproof safes, office file cabinets—wherever you keep the deed to your home and child’s birth certificate, that’s where we want your private key recorded.
It is not presently clear whether transferring your bitcoin to a living trust is a good course of action, since this area of the law is still so brand new. There may be adverse tax consequences that you should avoid. Even though it’s often described as “virtual currency,” bitcoin is treated by the IRS as property, not as currency. This means it has basis and can accumulate capital gains like any other type of property, from stocks, to collector’s items, to real estate.
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Ultimately, Bitcoin may not be around in 50, 25, or even 10 years, but some form of cryptocurrency surely will. The digital and computing revolution that has swept through basically every other facet of our economy, society, and culture, will continue to alter even our conception of money itself. And frankly, too much money can be saved by cutting out the middlemen of banks and other payment processors. A pure peer-to-peer version of electronic cash has too much promise to not be utilized, in some form or another. Estate planning, like other areas of the law, will have to deal with this sea change. Fortunately, the principals that make for effective estate planning now—forethought, preparation, and open communication with one’s family members—will be just as important in the future, with whatever virtual currency becomes the go-to method of payment in our time.