Crypto-rich puzzle over how to pass on high-risk wealth to heirs

J.W. Verret has a plan for his heirs to follow when he dies. And it’s unlike anything estate planners could have imagined just a decade ago.

That’s because the middle-aged law professor has spent two years building up various crypto holdings. To access that wealth, should he meet an untimely end, his three children may have to go through a 25-page document with details on websites to navigate, special wallets to download, web applications to connect and exchanges to cover.

“I tried to give the instructions as best I could, to have the websites and warn them about everything,” said Verret, an associate professor at George Mason University’s law school. “But it’s very possible either from user error or lack of understanding or from things changing in the interim, that they’ll need expert help.”

Verret’s scavenger hunt document may seem unusually challenging for an asset class that has ballooned to a nearly $2 trillion market. But it underscores that for all the wealth accumulated in the world of digital tokens in recent years, the best way to pass it along to the next generation is still very much a puzzle — even for the usual experts.

In 2021, investors poured more than $25 billion into crypto and nonfungible token startups, a 700% increase from the previous year, according to data provider CB Insights. The digital assets are increasingly going mainstream, with Fidelity Investments recently unveiling a product that will allow 401(k) plan participants to direct a portion of their savings into Bitcoin.

Yet as more crypto holders need help structuring their wealth, the staid world of estate planning is still playing catch up. Experts remain few and far between for an asset beset with volatility and at risk of being lost forever.

What wallet?

Those who are wading in encounter other hurdles. Charles Kolstad, who has 42 years of experience in the wealth planning industry, now heads a cryptocurrency practice group as a partner at Withers. The law firm has represented founders of crypto exchanges and companies, token issuers and artists who mint NFTs, which are digital certificates of authenticity for content.

And he’s had to convince crypto holders whose natural instinct is to keep their wealth anonymous and shielded to share basic details.

The challenge is “getting them to actually tell you all of the crypto they’ve got and where it is, and what wallets it’s in: Is it a hot wallet? A cold wallet? Is it on an exchange? Are there multiple exchanges?” said Kolstad, 68, who is based in Los Angeles. (A hot wallet is connected to the internet for transactions, whereas a cold wallet holds crypto offline.)

Fortunes built on crypto are more volatile than most anything estate planners have seen before. Bitcoin and Ether are both down about 40% from their peaks in November and trading below their one-year average.

Those kinds of swings make holding crypto unpalatable for trustees, the typical go-tos for wealth planning. They’re obligated to maintain a broadly diversified portfolio of assets in the interest of beneficiaries.

HODL mindset

Trustees “know very little, most of them, about crypto, and their natural inclination would be to sell, sell, sell,” Kolstad said.

Selling, of course, is an anathema in the world of crypto, which preaches HODL, or “hold on for dear life.” So firms have advised clients to use directed trusts or put their holdings in limited liability corporations, or LLCs, which are in turn put into trusts. Both give someone other than trustees control over how investments are managed.

Wyoming is becoming a popular place for trusts that hold crypto, according to Jonathan Mintz, founding partner at Evergreen Legacy Planning. The state has no income tax and it allows the formation of directed trusts.

In some cases, large crypto holders have even created their own private trust companies, which allows them to retain more control and custody over assets, said Chris Duncan, counsel for Carey Olsen’s trusts and private wealth practice in the Cayman Islands.

For clients who maintain a dizzying array of private wallets with esoteric assets in sole custody, lawyers like Duncan have had to write special provisions. In one recent case, he had a client who maintained assets on behalf of their trust and required approval from the trustee to transact. The Cayman team gamed out a scenario for a black swan event.

‘Fatal flaw’

“What if something happens that none of us have predicted?” Duncan said. “The client’s in London, say, and the trustee is in Cayman and there’s a five-hour, six-hour time difference. Trustees are in bed and the client sees some announcement on Twitter about a fatal flaw in the code of some project and has an opportunity to exit.”

They ended up working in a provision for urgent decisions, which allowed the client to proceed if they didn’t hear back from the Cayman trustee within a set period of time.

“There is a trade-off with holding your assets in a way that lets you do a lot with them very, very quickly, whether it’s yield farming, doing DeFi or buying NFTs,” said Geoff Costeloe, an associate at Lindsey MacCarthy in Canada. “You have to trade off between that and a system that is primed to distribute it to your beneficiaries in the event you die.”

Most crypto holders may just need the basics: a way to share keys with beneficiaries at some point in the future and a set of instructions for them to follow to move crypto then. More solutions are coming to market to support secure key sharing, including multisig technology by companies like Casa and Unchained Capital. Multisig wallets require multiple approvals before transactions can be made.

Costeloe recommends using these services in conjunction with a lawyer and an estate plan.

As for Verret and his 25-page document, he’s been teaching his three children, all under the age of 10, how to use wallets by putting their allowance in them. His instructions clearly indicate that his heirs must never share his seed phrase with anyone — or the crypto could be lost forever.

Like others in the crypto world, he’s wary of any conversations about his holdings.

“In our last half hour, no offence, I’ve assumed you’re trying to steal my money,” Verret said.

© 2022 Bloomberg