This is an opinion piece by Jenna Bunnell, Head of Content Marketing at Dialpad.
Whatever your views on bitcoin, it’s obvious that it’s here to stay and will continue to grow.
As a peer-to-peer virtual currency, bitcoin has become widely accepted in many countries. You can sell your bitcoins for cash or trade them with peers on different networks and use them to invest in anything from art to real estate.
However, since it is a virtual currency, the question arises; What happens when we die? Although it’s a morbid thought, it’s important to plan ahead for your family and loved ones. So what happens to bitcoin when you die and how do you include BTC in inheritance plans? Is it a simple process to include BTC in a will like you would with tangible assets such as your home and bank accounts?
What is bitcoin?
Bitcoin’s origins date back to 2008 when a white paper was published titled “Bitcoin: a peer-to-peer electronic payment system” written by Satoshi Nakamoto (a name assumed to be a pseudonym, possibly even belonging to more than one person). The idea behind the white paper was to create an all-digital currency that would exist outside the normal centralized controls of banks and governments.
At its core are peer-to-peer software and the use of high levels of encryption (based on the SHA-256 algorithm designed by the US National Security Agency). All transactions are recorded in publicly accessible ledgers on servers around the world and anyone with a computer can set up one of these servers, called nodes.
Each time a transaction occurs, it is broadcast throughout the network and shared between nodes. These transactions are collected, approximately every 10 minutes, in a block and added to the blockchain.
People often have the misconception that they have to buy whole units, but BTC can actually be subdivided up to seven decimal places, creating smaller, more affordable units – sats.
Once you buy (or mine) bitcoins, you keep them in a digital wallet that you can access using special software. Since these coins don’t exist in real life and ownership is based on an agreement between members of the network, how do you decide what happens to bitcoin when you die? Also, since many BTC owners memorize their wallet key and keep no other records, what if they suddenly die?
It’s not the most pleasant thing to talk about or think about, but death is inevitable. Less than 50% of adults in the United States have ever made a will, although this figure of course varies by age group – over 75% of people over 65 have made one while only 20% of people under 30 have made a will.
From a legal perspective in the United States, this can be quite confusing. The IRS does not consider cryptocurrencies as currencies but rather as negotiable goods which can be taxed by the competent authorities. Yet we also treat them as assets and therefore must have some form of legal control over inheritance.
This control or oversight stems from the Revised Uniform Trust Access to Digital Assets Act (RUFADAA). This law was crafted to provide affected parties (such as lawyers or trustees) with clarity and a legal way to deal with any digital asset held by the estate of a deceased person (or even where a person is struck incapacity).
The law was drafted by the Uniform Law Commission (ULC) so that states could then review and adopt it. As of 2021, 47 states have enacted the law. So, for the United States at least, there is a framework that governs the management of digital assets, which will come as a relief to many who were previously unsure.
How does RUFADAA work?
You must first consider that there are three groups of people who have a vested interest in what is happening:
- The owner of digital assets who may want a level of privacy.
- The custodian of these assets (companies that manufacture, store or sell assets online).
- The trustee or attorney handling the estate.
The main hurdle the law faced was that, unlike physical assets, there has always been a degree of secrecy around digital assets. At first, no law clarified access to these digital files and wallets in the event of death or incapacity. If the original owner of digital assets hadn’t left a note on how to access those assets, the sad reality is that they could be lost forever.
It is important to note that RUFADAA does not only focus on cryptocurrencies, but on all digital and online assets. This includes things like Facebook or Google accounts. Custodians have certain rights as to what they may disclose or whether they seek a court order to release access and/or information. In the case of things like Facebook accounts, the Custodian can also decide what is “reasonably necessary” when it comes to disclosing information.
RUFADDA and Bitcoin
RUFADAA only applies if the original owner has authorized access to their bitcoin. This may be through documents signed with and held by the custodian or it may take the form of a legal document such as a power of attorney, will or trust document.
A custodian may also limit your fiduciary’s access, generally to include only those aspects that allow them to fulfill their responsibilities. The Custodian is also entitled to collect administrative fees for any access it provides. This can be important information if you are trying to decide what will happen to bitcoin when you die.
One of the main benefits of RUFADAA is that it clarifies the legal hierarchy when it comes to documenting – and further distributing – your digital assets. The custodian (or online management system) is considered by RUFADAA to be the highest authority when it comes to ownership of a cryptocurrency account.
This effectively means that if you have made Person A the beneficiary of your digital assets in a document with your custodian, then that document takes precedence over other legal avenues such as wills, powers of attorney or trusts. If you don’t have a beneficiary agreement with your custodian, the property will go to whoever is named in these normal inheritance documents.
If a scenario arises where there are none of the normal agreements or a custodian agreement, then any transfer of ownership or fiduciary responsibility may be established by the custodian’s own terms and conditions.
What should you do?
You have two main choices when thinking about what happens to bitcoin when you die.
You can either ask your custodian if they have specific tools or a framework for naming a beneficiary on your account, which would only apply if you held your bitcoin on an exchange – a practice discouraged. Your other choice is to go the traditional route and name any beneficiary of your BTC in a will, trust document, power of attorney, or estate documents.
If your estate includes BTC (or any other cryptocurrency), you should consider a plan that includes all aspects of your digital assets. This means having a way to pass all details such as account details, keys and access to all hardware wallets to the person you want to inherit those assets from or your trustee/lawyer.
In any will or similar document, you must include guidelines for the transmission of all data, especially the most sensitive data associated with the account. Simply passing on the hardware device being used is probably not enough for the recipient to gain control of the account.
Despite its growth, many people still wonder if BTC is a real currency. Still, the growth and the numbers show very well that it’s something that’s here to stay.
You should consider any bitcoin you own as an asset; it may not be physical like your house or your car, but it still has real value. You must therefore think carefully about what you want to happen to your bitcoin in the event of your death or incapacity. Knowing the steps to follow and what happens to bitcoin when you die means that your assets can be passed on to the beneficiaries of your choice.
This is a guest post by Jenna Bunnell. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.