Future Returns: Protecting And Managing Digital Assets

For investors in digital assets like cryptocurrencies and non-fungible tokens (NFTs), it’s necessary to take special estate planning considerations into account. But a recent study conducted by the Northern Trust Institute suggests some investors are slow to adopt these measures, potentially putting their investments at risk after they die.

The Chicago-based wealth manager firm surveyed nearly 250 high-net-worth investors, uncovering critical estate planning gaps for digital assets, despite more than half of those surveyed owning crypto and NFTs. Only 42% of those surveyed said all their digital accounts and online management tools were incorporated into their estate plan. For 20%, none have been incorporated.

This survey, conducted last year for Northern Trust’s 2022 Wealth Planning Outlook suggests there are demographic differences among investors based on generation and estate size. When asked if their plan has a full accounting of traditional and digital wealth accounts, 78% of millennials said their plan did, compared to 59% of investors born before 1945. While 75% of those with estates of US$5-to-US$10 million have made this full accounting, the rate declines to 55% for those with US$50-million plus. Respondents with higher asset levels were also more likely to own investments in digital assets.

Without access to critical information or the assets themselves, heirs are left with the added burden of incomplete transparency—a particular challenge when settling complex estates.

One reason it’s critical to pay special attention to these assets is that the category continues to evolve. “The tax implications of digital assets like crypto and NFTs are also currently under debate and continued regulation is likely,” Northern Trust said in its report.

Jon Jackson, central region practice leader for estate settlement services at Northern Trust Wealth Management says it’s necessary to be proactive. “Especially for a rapidly evolving asset class such as digital assets, review your plan frequently to take advantage of the legislative and technical changes that are likely to occur with such assets.”

In a recent interview, Jackson shared with Penta how individuals and families can ensure peace of mind with their digital estates.

Create an Inventory and Paper Trail

“The first step is to start with an inventory,” Jackson says. This includes detailed records of assets, the digital wallets in which they’re stored, and any crypto keys. Private keys, the passwords used to manage and access cryptocurrencies, may be informally written down or memorized, which can cause access issues after an investor dies if not safely stored.

The survey suggests 59% of respondents have included only some of their digital accounts or none at all into their estate plan. Estate planners and fiduciaries can’t evaluate digital assets without necessary guidance to access them, which makes sharing this information critical.

“In the best case scenario, (not leaving information) could lead to extra time and expense to track down the information, and possibly even litigation to access the accounts,” Jackson says. In the worst, most extreme cases, he adds that “not having the right password could lead to losing the entire asset.”

Horror stories about lost crypto keys have made global headlines. New York blockchain data firm Chainalysis suggests that about one in five of existing Bitcoin—a figure they once valued at US$140 billion, but is likely less because of the currency’s falling value—are in lost or inaccessible wallets.

Lock in a Digital Fiduciary

Whenever a client enters a new asset class, Jackson says it’s necessary to consult with an attorney and estate-planning advisors. This ensures estate plans cover the assets and allow fiduciaries to properly control them and pass them to future beneficiaries, whether through probate, or where possible, using beneficiary designations or revocable trusts.

“Consider specific language for handling digital assets in your estate, including a digital fiduciary, rather than relying on more general provisions of estate assets,” he says. (It’s also important to check on the requirements for a digital assets fiduciary which can vary between jurisdictions.)

Northern Trust’s survey suggests the people set up to use online management tools post-death are spouses, children, or parents. The intended fiduciary needs to be “not only willing to take on the responsibilities of setting your estate, but also the responsibility of managing these types of complicated assets,” Jackson says. About 90% of fiduciaries have been informed, according to survey responses, yet of those informed only 89% have stated they are willing to act on the investor’s behalf in this critical role.

Prepare for Volatility and Tax Implications

Digital asset investors aren’t strangers to volatility, but this can create unique impacts on estates. “The volatility of the asset class, and the time it may take to access the asset, makes them riskier for administration purposes, more so than valuation issues,” says Jackson.

Due to constant price fluctuations, these assets can pose challenges to value for estate and gift tax purposes. If an investor’s net worth is above or near the federal estate tax exemption (US$12.06 million as of 2022), cryptocurrency investments must be closely monitored. Because the IRS treats crypto as property for tax purposes, there’s also the issue of assessing capital gains and losses.

“Because many cryptocurrencies are held and traded on exchanges, those types of digital assets aren’t necessarily hard to value for estate and gift purposes,” Jackson says.

Other types, such as NFTs for digital artwork, sports collectiles or digital real estate, require hiring a qualified appraiser. Given “the unique nature of the asset and limited market data,” digital assets like those are more complicated to value. Jackson likens them to rare paintings, in that both are subject to the professional opinions of appraisers and the IRS to determine value.