Cryptocurrencies, such as Bitcoin and Ethereum, have been surging in popularity. As our colleagues have written here and here, they have raised a variety of unique considerations in the context of estate planning. However, the underlying technology in cryptocurrencies, blockchain, has given rise to a variety of digital tools beyond cryptocurrency. “Smart contracts” are one of these.
Broadly speaking, blockchain allows blocks of information about transactions to be recorded and stored on a distributed ledger. This article provides a more detailed overview of blockchain for those interested. Smart contracts are an extension of blockchain. They are programs stored on blockchain that run when certain pre-determined conditions are met, thus automating the execution of an agreement. Since the steps in a smart contract are hard coded, failure to fulfill conditions as agreed upon, prevents any progression. When conditions are fulfilled, the blockchain is updated and the agreement proceeds.
Two of the main attractions of these smart contracts is that they can serve to accelerate the transaction by removing middle-men and add a high degree of certainty to the performance of an agreement based upon the pre-established terms.
These benefits, however, should be approached with caution. The basis for the certainty arising from smart contracts is that they are hard coded, and the blockchains on which they are built rely on encryption to prevent fraud. The same certainty which is a strength can be a weakness though, as it makes changing the terms of an agreement difficult, if not impossible, in some circumstances.
Businesses advertising smart contracts in the context of estate planning are becoming more common. Potentially removing the need for executors, lawyers and other intermediaries in the administration of an estate can sound very appealing from a cost perspective.
Having said that, one should bear in mind that the law and factual matrix of an estate can and often does vary over time. Certainty can become fatal inflexibility in the face of change. A change in the law or conditions around an estate may prevent the performance of a smart contract where the coded preconditions require an impossible or illegal action.
New technologies are often exciting, and no doubt can bring positive change, but they also bring unknown risks. An abundance of caution would be well advised when using novel tools like smart contracts.
Thank you for reading and have a great day!
Suzana Popovic-Montag & Raphael Leitz
I tend to field a fair amount of questions regarding estate planning. Nowadays, as many of my friends have diversified portfolios that include novel investments such as cryptocurrency, I see more and more estate planning questions regarding such investments. While my friends who are reading this are still free to ask me directly, I thought I would use today’s blog to save them the trouble (and please note that this blog is not to be considered as legal advice).
Here are some cryptocurrency estate planning considerations as discussed in this Forbes article:
Security – one of the benefits of cryptocurrency is that it is considered highly secure since access is usually by way of private key, password, or seed phrase. Although this information must be shared with the estate trustee so that they can access the currency post death, it cannot be provided in a way which publicizes the information. The risk is that anyone who comes across this information can use the currency. Testators have to be careful to ensure that the information is shared confidentially and securely.
Value – cryptocurrency can fluctuate widely in value, even in the course of one day just like precious metals and other commodities. As such, the testator has to ensure that the estate trustee is ready to move following death. Any delays in acting by the estate trustee can put the value in jeopardy, and expose the estate trustee to claims by beneficiaries.
Estate Trustee Powers – it is unclear if cryptocurrency falls afoul of the prudent investor rule. If the testator knows that the estate trustee will be administering cryptocurrency, there should be specific provisions in the last will ensuring there is authority to do so.
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Coinbase co-founder and CEO Brian Armstrong recently blogged about the future of cryptocurrency, predicting that it will reach 1 billion users by the year 2030 (up from about 50 million at the start of this decade). With the anticipated increased uptake of cryptocurrency, we can expect that more and more people will hold these types of digital assets on their death. The question then arises: how should cryptocurrencies be dealt with in one’s estate plan?
By way of background, cryptocurrency is virtual currency that uses cryptography to verify financial transactions and control production of currency units in a decentralized, peer-to-peer exchange network. Cryptocurrency runs on Blockchain technology, which allows for blocks of information about transactions to be recorded and stored on a distributed ledger. When a transaction takes place, a block is added to the blockchain and there is a corresponding change in balance in the buyer and seller’s cryptocurrency wallets.
A cryptocurrency wallet or “crypto wallet” contains a person’s public and private keys – the former is used to receive cryptocurrency and the latter is used to spend/send cryptocurrencies to other wallet addresses. The crypto wallet is the only means of accessing one’s digital currency. There are different types of wallets that can be used to store and access digital currency, such as online accounts, mobile apps, external hard drives, or simply paper.
Because cryptocurrency is an intangible asset with little to no paper trail, special estate planning considerations should be made to ensure that the value of these digital assets is not lost on death and can be distributed to the intended beneficiaries.
First, the cryptocurrency owned by a person should be expressly referred to in their will to ensure that their executor is aware that these digital assets exist. A testator should then provide sufficient detail for their executor to be able to locate and access the testator’s crypto wallet. Specifically, the testator should describe what type of crypto wallet they have, where it is stored, and provide any other information that may be needed to access the crypto wallet. Instead of listing this sensitive information in the will itself, which becomes part of the public record through the probate process, a testator should include it in a memorandum to their will.
Thanks for reading!
The popularity of cryptocurrencies has heightened the world’s attention on the versatility of blockchain technology. An interesting development is the application of a blockchain solution for estate planning of crypto assets.
Generally speaking, a blockchain is a shared, real-time ledger of any type of information that can be recorded ranging from financial transactions to ownership of real property. Blockchain technology allows for blocks of information to be stored in a chain on a distributed peer-to-peer network.
The traditional method of estate planning, as we know it, involves hiring a lawyer to prepare a will, which appoints the executor(s) and lists the beneficiaries. When the testator passes away it is the responsibility of the executor to administer the estate in accordance with the will. This traditional method has created uncertainty for testators who own Bitcoin or other cryptocurrency and intend for their beneficiaries to receive them.
It is estimated that millions of Bitcoins have been lost as a result of testators not adequately factoring this type of asset into their estate plan. For testators that have considered their crypto assets, concerns still remain as to whether the executor has the technological ability to access and distribute a cryptocurrency holding.
One possible way for the testator to address this uncertainty is to author a plan with detailed instructions and provide the private key to the executor(s).
A start-up company in the United States has fostered a novel approach to this issue. The company’s product offering uses a blockchain-registered will also known as a “crypto-will” to enable digital assets to be transferred automatically. The idea behind the product is that once a testator’s death record appears in the Death Master File, a computer database of death records made available by the United States Social Security Office, the crypto-will is then activated and executes the wishes of the testator. This potential solution eliminates the need for an executor to administer this portion of an individual’s estate.
As the crypto-will is still very much in the development stage, many questions still remain. It will be interesting to discover how the concept of a crypto-will evolves in the near future.
Thank you for reading,
Ian M. Hull
As I write this, a single bitcoin is worth more than US$8,200. It will undoubtedly be worth a different amount by the time you read this, because the value of bitcoin can change quickly and dramatically.
No one can say with certainty whether this is a bubble that will burst or whether it’s a ground floor price that will rise even further. But what we can say with certainty is that cryptocurrencies today (whether it’s bitcoin or other digital currencies like ethereum or litecoin) have real value that can be used to buy things or be exchanged into hard currency.
If you are new to cryptocurrencies, and remain baffled by what they are, you are not alone. I love this simplified explanation of bitcoin – it can help wrap your mind around a very elusive concept.
For a step-by-step guide to investing in cryptocurrencies, this short article is a great primer that sets out the process and the risks. And for a more Canadian-specific take on investing in these currencies, this article highlights the process and the risks.
Make a plan – it’s an asset like any other
I’m not advocating an investment in cryptocurrencies – that’s for you and your financial advisor to decide. The issue from an estate planning perspective is that thousands of Canadians now own cryptocurrencies, and their value has increased by many multiples over the past year. There are, quite literally, millions of dollars tied up in cryptocurrencies in Canada. For many, an experimental hobby, dabbling in cryptocurrencies, has become a relatively sudden source of wealth.
My previous blog in 2014 highlighted the need to ensure that your estate specifically deals with digital access and the distribution of digital assets. This appears to be even more important today with the rise in value of cryptocurrencies.
This recent article sets out some estate planning tips that relate specifically to digital currencies. It’s well worth a read, especially if you’ve taken the plunge and own these currencies.
Thank you for reading … Have a great day!