Fiduciary Guide to Cryptocurrency Digital Wallet

digital wallet

As a personal representative or trustee, it is your responsibility to manage your loved one’s assets and pass them on to their intended beneficiaries. When those assets take the form of cryptocurrency and other digital assets, there may be more to asset management and transfer than you realize. This fiduciary guide to a cryptocurrency digital wallet will help remove the mystery behind your loved one’s digital assets and help you satisfy your fiduciary duty.

Step 1: Know What Kind of Cryptocurrency You Have in Your Digital Wallet

The term “cryptocurrency” is actually a blanket term for a variety of digital wealth technologies. Identifying the digital assets within the estate is critical to (1) knowing how they should be distributed according to the Will and (2) properly managing the assets while they are in your care as a fiduciary. Work with your estate administration attorney to identify:

  • Software or access rights
  • Digital currencies, such as Bitcoin
  • Digital storage or wi-fi access
  • Non-fungible tokens
  • Asset-backed tokens (which have some tangible item they are connected to)
  • Utility or consumptive tokens

What ties all crypto assets together is decentralized authentication. The proof of these assets is not backed by a central authority (like a bank or government), but by a computer program held on thousands of users’ devices. This can make it difficult for fiduciaries to work with the cryptocurrencies in their trusts or estates, because there is no person to speak to when problems arise with the digital wallet.

Step 2: Get Access to Crypto Assets

A well-written, modern estate plan will often include a specific list of the decedent’s digital assets and instructions on how to access them. However, if the Will you are working with has not been updated since your loved one invested in cryptocurrency, you may have to work to get access to their various crypto assets. Similarly, if your loved one did not transfer the ownership of their digital wallet into their trust while they were alive, you may need to work with the Florida Probate Court and digital service providers to get access to those assets after their death.

In 2016, Florida passed the Fiduciary Access to Digital Assets Act. This law allows fiduciaries, including trustees and personal representatives, to access the digital assets of their grantor or decedent as if they were the account holder. The protections in this law apply to electronic service providers, like Google or Facebook. However, several of these service providers also have their own methods to identify and manage legacy digital assets. As a fiduciary, if you were not designated as a legacy contact by your loved one, you may need to take the matter to court to get access to those digital assets.

Accessing cryptocurrency in a digital wallet is even more difficult. Crypto access depends on the user entering a private key, which gives them access to the digital ledger stored on their device. Unlike other digital passwords, there is no way to recover a crypto key if it is lost. As a fiduciary, you will need to locate your loved one’s private key, which may be stored in the Cloud, on a USB device or hard drive, or even scrawled on a piece of paper, before you will be able to take over financial management for crypto assets.

Step 3: Digital Asset Management

The crypto market is incredibly volatile. Uncertainty about the market and perceptions of value compared to fiat currencies, or government-issued currency, can cause the value of a single Bitcoin or Litecoin to rise or plummet in days, or even hours. As the fiduciary of a cryptocurrency account, it is part of your fiduciary duty to decide how to respond to those fluctuations. Decisions about whether to invest trust assets or withdraw from the crypto market will depend on the specific circumstances of the estate or trust you are managing including:

  • When you anticipate distributing assets to beneficiaries or heirs
  • Your access to other liquid assets
  • Whether you will be able to pay the trust’s expenses directly using cryptocurrency
  • The risk tolerance of your beneficiaries
  • Predictions about when and how strongly the market will rebound

You will also need to be able to place a dollar value on the digital assets in your control. As a personal representative, you must create an inventory of the estate’s assets for the Florida Probate Court before you begin to distribute them. As a trustee, the trust’s documents may require periodic reporting about the trust’s assets to your beneficiaries. Even if you do decide to leave the estate’s investments in the cryptocurrency markets, if the value of those investments changes significantly, you may be asked to explain those choices.

Step 4: Explaining Cryptocurrency to Probate Courts and Beneficiaries

If you are a personal representative for an estate, the Florida probate court will oversee your work inventorying, managing, and distributing all your loved one’s assets to the intended beneficiaries. However, because cryptocurrencies are an emerging market, you may need to educate the court and judge assigned to your case about how crypto works.

The way Florida probate law deals with digital assets is often complicated and not what you would think. You should work closely with an estate administration attorney familiar with assets in a digital wallet to walk the courts and your family through what these assets are, how the law treats them, and what each digital asset is worth.

As a trustee, you will have less reason to work with the Florida probate courts than a personal representative. However, that could change if the trust beneficiaries believe you have breached your fiduciary duty in managing the trust’s digital assets. If that happens, you may be responsible for both educating the court about digital assets and justifying your choices to invest or withdraw trust assets from the volatile cryptocurrency market.

Step 5: Transferring Digital Assets to Beneficiaries

The last decision you will need to make as a fiduciary of an estate or trust is whether to transfer digital assets directly or to cash them out and give the beneficiaries the cash value. Transferring crypto assets can sometimes trigger capital gains taxes. Cashing them out always has tax implications. It is wise to discuss your choices with an accountant and your estate administration attorney before you start the process of transferring assets.

As a trust fiduciary, you will also be restricted by the terms of the trust itself. Carefully review the language of the trust document to see whether the beneficiaries should receive the cryptocurrency or its value. If you are given discretion, look at who the beneficiaries are, and understand their experience with alternative currencies. If an intended trust recipient would have difficulty managing the crypto assets, it may be worth the tax implications to give them their share of the assets in a form they are most comfortable with.

At Harrison Estate Law, our estate administration attorneys have the knowledge needed to manage Bitcoin and other types of cryptocurrency within our clients’ estates and trusts. We are happy to help fiduciaries understand the digital assets within the estates they manage, and ensure they are meeting their fiduciary duties to their trust beneficiaries or heirs. Please contact us online or via email or call 352-559-9828 to schedule a free consultation. If you don’t live close to Gainesville, we are happy to set up a phone or Zoom call.