Estate planning is left trailing as more crypto holders require assistance
The increased presence of crypto investment in the mainstream – including Fidelity Investments’ program to let retirement plan participants invest in Bitcoin, and the 700% increase in investor inflows into crypto and nonfungible tokens in 2021 – is creating a challenge for wealth planners.
According to a report by Jill R. Shah for Bloomberg News, the staid world of estate planning is still playing catch-up as more crypto investors require assistance structuring their fortunes. For an asset afflicted by volatility and at risk of being lost forever, experts are few and far between.
Other obstacles face those who are just getting started.
As a partner at Withers, Charles Kolstad, who has 42 years of expertise in the financial planning profession, currently leads a bitcoin practice group.
Founders of crypto exchanges and enterprises, token issuers, and artists who mint NFTs, which are digital certificates of authenticity for material, have all been represented by the firm. He's had to persuade crypto owners, whose natural desire is to keep their money hidden, to divulge basic information.
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.)
Cryptocurrency fortunes are more volatile than anything estate planners have ever seen. Both Bitcoin and Ether are down approximately 40% from their November highs and are trading below their one-year average.
Trustees, the traditional go-tos for wealth planning, find holding crypto distasteful because of such volatility. For the sake of beneficiaries, they must maintain a broadly diversified portfolio of assets.
Of course, selling is frowned upon in the crypto world, which preaches HODL, or "hang on for dear life." So firms have recommended clients to use directed trusts or put their holdings in limited liability corporations, or LLCs, which are then placed in trusts. Both allow someone other than trustees to manage investments.
According to Chris Duncan, counsel for Carey Olsen's trusts and private wealth business in the Cayman Islands, "big crypto holders have even founded their own private trust firms, which allows them to keep more control and custody over assets."
“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 investors may only require the bare minimum: a mechanism to share keys with beneficiaries in the future and a set of instructions for them to follow in order to move coin. More secure key sharing solutions are becoming available, including multisig (multisignature) technology from businesses like Casa and Unchained Capital.
Before transactions can be completed, multisig wallets require several approvals.These services should be used in combination with a lawyer and an estate plan, according to Costeloe.
