The rise of bitcoin as well as other virtual currencies associated with blockchain technology (known as cryptocurrencies) has created a number of new millionaires and raises new questions in the legal community when it comes to addressing cryptocurrencies in estate plans.
The Internal Revenue Service classifies cryptocurrencies as property for tax purposes, so owners of cryptocurrency may stipulate the disposition of their cryptocurrencies in their estate planning documents. However, the difficulty lies in determining how to enable the transfer of cryptocurrencies after the testator’s death without putting the security of the cryptocurrency holdings at risk during that person’s lifetime.
Cryptocurrencies are effectively bearer instruments that are accounted for in “wallets” on a decentralized blockchain. A cryptocurrency wallet is a software program that stores access credentials and interacts with blockchains to enable users to send and receive virtual currencies and monitor balances. Therefore, whoever knows a wallet’s access credentials (the private key) has access to the cryptocurrency in the wallet and can transfer the cryptocurrency to themselves. However, if no one knows a wallet’s access credentials, its contents are permanently lost, so it would be unable to be accessed by heirs after the wallet owner’s death.