Including Cryptocurrency in Your Will or Estate Plan

Introduction

Cryptocurrency has emerged as a disruptive force in the financial world, offering a new frontier for investment and wealth accumulation. As both businesses and private interests increasingly diversify their portfolios with digital assets, it becomes crucial to consider the incorporation of cryptocurrency into estate planning.

This article explores the complexities and considerations surrounding this innovative asset class, addressing what cryptocurrency is, the challenges in estate planning, storage and accessibility, as well as tax implications.

This article specifically addresses Western Australian legal requirements and considerations, with reference to relevant legislation including the Wills Act 1970 (WA), Administration Act 1903 (WA), and Trustees Act 1962 (WA). While the principles may apply more broadly, specific legal advice should be sought for estates in other jurisdictions.

1. What is Cryptocurrency?

1.1. Cryptocurrency is a digital (or virtual) form of currency. It relies on cryptographic techniques to secure transactions and control the creation of new units. The most well-known cryptocurrency is Bitcoin, but there are thousands of other digital currencies with distinct features and purposes.

1.2. Unlike traditional currencies issued by governments and central banks, cryptocurrencies are decentralised, operating on blockchain technology. This means that no single entity, like a central bank, controls the currency, making it both a revolutionary investment opportunity and a unique challenge for estate planning.

1.3. From a legal perspective in Australia, cryptocurrency is classified as property rather than currency. The Australian Taxation Office (ATO) treats cryptocurrency as an asset for capital gains tax purposes. This classification has significant implications for how cryptocurrency is handled in wills, during probate and in the administration of deceased estates.

2. Challenges in Estate Planning for Cryptocurrency

2.1. While once a novelty, in recent years it has become more common for deceased estates to include some form of cryptocurrency. Despite this increasing popularity, incorporating this asset class into an estate plan still requires careful consideration and proactive measures due to the number of inherent challenges.

2.2. Managing a deceased estate that includes cryptocurrency is more complex than administering an estate with only traditional assets. One of the challenges is that it is more difficult to prove ownership of cryptocurrency than it is traditional asset classes such as cash, shares and real estate. In fact, identifying the existence and ownership of a cryptocurrency asset is often the greatest challenge for executors of estates involving cryptocurrency.

2.3. Under Western Australian law, executors have duties prescribed by the Trustees Act 1962 (WA) to properly identify, secure and administer all estate assets. For cryptocurrency, this creates unique challenges that aren't addressed explicitly in legislation, but fall within the executor's general duties of care, diligence and prudence.

2.4. To help address these challenges, owners of cryptocurrency should:

a) Maintain detailed records of their holdings, wallet addresses and private keys

b) Store information securely during lifetime but make it accessible after death

c) Explicitly describe cryptocurrency holdings in legal documentation.

2.6. For Western Australian estates, the valuation date for probate purposes will typically be the date of death, creating challenges with volatile cryptocurrency assets:

a) The Supreme Court of Western Australia requires an inventory of assets and liabilities with the probate application

b) This necessitates a specific point-in-time valuation

c) Executors should document the methodology used for valuation

d) Expert assistance may be needed for substantial holdings.

3. Enduring Powers of Attorney (EPA) and Incapacity Planning

3.1. In addition to posthumous estate planning, Western Australians should consider how cryptocurrency will be managed in the event of incapacity. Under the Guardianship and Administration Act 1990 (WA), an enduring power of attorney (EPA) allows someone to make financial decisions on your behalf if you lose capacity.

3.2. Standard EPA forms don't specifically address digital assets.

Consider including specific clauses authorising your attorney to:

a) Access digital wallets, exchange accounts and private keys

b) Make decisions about holding or liquidating volatile assets

c) Execute security procedures, including two-factor authentication and recovery processes

d) Utilise multi-signature wallet arrangements that could include your attorney as a key holder.

3.3. Unlike traditional banking where institutions have established processes for recognising powers of attorney, cryptocurrency exchanges and platforms may have:

a) Varying policies regarding attorney access

b) Limited or no established procedures for incapacity situations

c) Requirements for additional documentation

d) Technical barriers that require pre-planning.

It is likely that your EPA will not be formally recognised by most exchanges.

Some platforms restrict access even with legal authority, which executors should be prepared for.

4. Cryptocurrency Storage Solutions

4.1. Estate planning with cryptocurrency necessitates the establishment of secure storage solutions and clear instructions for executors. Common storage options include:

a) Offline hardware wallets

b) Paper wallets

c) Online wallets or exchange accounts

d) Multi-signature arrangements.

4.2. If using hardware wallets, ensure your executor knows:

a) The physical location of the hardware wallet

b) The PIN required for access

c) The recovery seed phrase

d) Instructions for using the device.

4.3. For paper wallets, provide:

a) The location of the paper wallet

b) Instructions for accessing funds

c) Security precautions for handling private key information

d) Backup locations if applicable.

4.4. With online wallets or exchange accounts, document:

a) Account details and login credentials

b) Two-factor authentication procedures

c) Email recovery access

d) Customer service contact information.

4.5. Advanced security options that may be appropriate for estate planning include:

a) Multi-signature wallets requiring multiple keys for transactions

i) These potentially allow executors partial access during your lifetime

ii) They provide additional security against unauthorised access

b) Time-locked transactions that could implement a phased inheritance strategy.

Smart contracts programmed to transfer assets upon certain conditions and "Dead man's switch" mechanisms that can automate transfers after periods of inactivity may bypass probate which could cause unintended legal consequences.

5. Probate and Administration Procedures

5.1. In Western Australia, the administration of a deceased estate requires a grant of probate or letters of administration from the Supreme Court before most significant assets can be dealt with. Under the Administration Act 1903 (WA), the personal representative must:

a) Disclose all assets, including cryptocurrency, in the Form 6 Inventory of Assets and Liabilities

b) Provide a reasonable valuation of all assets at the date of death

c) Pay relevant probate fees based on the total estate value

d) Pay debts and distribute the estate according to the will or intestacy rules.

5.2. For cryptocurrency specifically, executors should:

a) Promptly secure access to digital assets following death

b) Prevent unauthorised access or theft

c) Document all cryptocurrency holdings discovered

d) Determine the most appropriate method for valuation.

5.3. The practical steps for transferring cryptocurrency after probate include:

a) Verifying the executor's authority with exchanges or platforms

i) This may require providing the grant of probate document

ii) Exchanges may have different verification requirements

b) Complying with anti-money laundering (AML) and know-your-customer (KYC) requirements

c) Creating new wallets in the beneficiaries' names if distributing cryptocurrency in kind

d) Liquidating to fiat currency if specified in the will or if more practical for distribution

e) Documenting all transactions for estate accounting purposes.

6. Tax Implications

6.1. Cryptocurrency's tax implications are complex and can significantly impact your estate plan. The ATO has issued specific guidance on cryptocurrency taxation, including Taxation Determination TD 2014/26 and subsequent rulings.

6.2. Key considerations for Western Australian estates include:

a) Capital gains tax events occur when cryptocurrency is disposed of, including when transferred to beneficiaries

b) Cost base calculations for inherited cryptocurrency typically use the deceased's original acquisition costs

c) Record-keeping requirements for cryptocurrency transactions must be maintained by executors

d) Potential foreign tax implications exist for cryptocurrency held on overseas exchanges

e) GST considerations may apply for business-related cryptocurrency holdings.

6.3. For substantial cryptocurrency holdings, a testamentary trust structure in your will may provide tax advantages:

a) Particularly beneficial for minor beneficiaries

b) Can provide income splitting opportunities

c) Offers protection against relationship breakdowns or creditors

d) Allows for controlled distribution over time.

6.4. The Trustees Act 1962 (WA) governs trustee investments, and while it doesn't specifically mention cryptocurrency, trustees should consider whether volatile digital assets align with their duty of prudent investment.

7. Family Provision Considerations

7.1. Western Australia's Family Provision Act 1972 allows eligible persons to make claims against an estate if they believe adequate provision hasn't been made for them. Cryptocurrency presents unique challenges in this context:

a) The potential for hidden or undisclosed assets due to cryptocurrency's pseudonymous nature

b) Difficulties in asset discovery during contested estate proceedings

c) Valuation challenges when assessing the adequacy of provision

d) Questions of ownership where cryptocurrency might be held in joint wallets or shared keys.

7.2. To minimise family provision risks:

a) Ensure your will clearly addresses cryptocurrency holdings

b) Document the rationale for their distribution

c) Consider whether equal division by value rather than by asset type is appropriate

d) Include clear instructions regarding valuation methods.

8. Superannuation and Cryptocurrency

8.1. For Western Australians with self-managed superannuation funds (SMSFs) that include cryptocurrency investments, additional considerations apply:

a) SMSF investments in cryptocurrency must comply with:

i) The sole purpose test

ii) Investment strategy requirements under the Superannuation Industry (Supervision) Act 1993 (Cth)

b) Binding death benefit nominations (BDBNs)

c) SMSF trust deeds should be reviewed to ensure they adequately address cryptocurrency holdings

d) Trustee succession planning should include provisions for accessing and managing cryptocurrency.

8.2. Unlike conventional assets within superannuation, cryptocurrency doesn't automatically form part of your estate, making clear BDBN documentation essential.

9. Business Succession Planning

9.1. For Western Australian business owners with cryptocurrency holdings as part of their business assets, specific considerations include:

a) Partnership and shareholder agreements should explicitly address:

i) Ownership of cryptocurrency assets

ii) Succession planning for digital assets

iii) Access protocols following death or incapacity

b) Buy-sell agreements might be structured to:

i) Use cryptocurrency as funding

ii) Address valuation methodologies for cryptocurrency business assets

c) Business continuity planning should include protocols for accessing business cryptocurrency in emergency situations

d) Key person insurance arrangements may need adjustment to account for cryptocurrency holdings.

9.2. Under the Partnership Act 1895 (WA), partnership property would include cryptocurrency used in the business. Clear documentation can prevent disputes about whether digital assets are personal or partnership property.

10. International Considerations

10.1. Many Western Australians holding cryptocurrency may have connections to exchanges, platforms, or wallets in other jurisdictions, raising complex legal issues:

a) Conflict of laws questions regarding which jurisdiction's laws apply to cryptocurrency assets

b) Recognition of Australian grants of probate in foreign jurisdictions under the Foreign Judgments Act 1991 (Cth)

c) Compliance with foreign exchange control regulations when transferring cryptocurrency across borders

d) Tax treaty implications for cryptocurrency holdings deemed located in multiple jurisdictions.

10.2. For substantial international cryptocurrency holdings, consider whether a separate will specific to those assets might be appropriate, particularly if held in jurisdictions with significantly different legal approaches to digital assets.

11. Practical Checklist for Western Australian Cryptocurrency Holders

11.1. Inventory all cryptocurrency holdings, including:

a) Types of cryptocurrency owned

b) Approximate values (with regular updates)

c) Storage locations (exchanges, hardware wallets, etc.)

d) Access credentials and recovery information.

11.2. Create a secure "in case of death" file containing:

a) Wallet addresses and public keys (safe to store openly)

b) Instructions for accessing private keys or seed phrases (store securely)

c) Two-factor authentication recovery codes

d) Contact information for trusted cryptocurrency advisors.

11.3. Update your will to specifically address:

a) Cryptocurrency as a specific asset class

b) Whether to liquidate or transfer in kind

c) Special executor powers regarding digital assets

d) Technical assistance provisions if needed.

11.4. Update your enduring power of attorney to:

a) Include specific digital asset management powers

b) Provide technical guidance for attorneys

c) Address volatile asset management strategies

d) Consider staged access protocols.

11.5. Consider multi-person security protocols:

a) Trusted advisor with partial key information

b) Multi-signature wallet arrangements

c) Split knowledge approaches to security

d) Tiered access based on circumstances.

12. Conclusion

12.1. If you own cryptocurrency, it is important to think about how to incorporate this asset into your estate planning. Cryptocurrency's decentralised nature and its potential for growth make it a valuable asset class, but it also introduces unique challenges in estate planning.

12.2. To address these challenges effectively:

a) Educate your chosen executor on cryptocurrency

b) Establish secure storage and accessibility procedures

c) Understand the tax implications associated with digital assets

d) Seek guidance from experts in the field.

12.3. For Western Australian residents, ensuring your cryptocurrency estate plan aligns with local legislation is essential. The evolving legal landscape surrounding digital assets means that regular reviews of your estate planning documents are necessary to maintain their effectiveness as both technology and regulation continue to develop.

This is general information only and you should obtain professional advice relevant to your circumstances. If you or someone you know wants more information or needs help or advice, please contact us on 0421 145 637 or email val@crystallawyers.com.au