This is an editorial by Gina Bonnell, Dialpad’s Director of Content Marketing.
Regardless of your opinions about bitcoin, it is clear that it is 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 bitcoin for cash, or trade it with peers across different networks and use it to invest in anything from art to property.
However, since it is a virtual currency, the question arises; What happens when we die? Although it is a disturbing thought, it is important to plan ahead for your family and loved ones. So, what happens to bitcoin when you die and how can you include BTC in any inheritance plans? Is it as simple a process to include bitcoin in a will as you would tangible assets like your home and bank accounts?
What is bitcoin?
Bitcoin’s origins go back to 2008 when a white paper titled “Bitcoin: a peer-to-peer electronic cash system” Written by Satoshi Nakamoto (a name assumed to be a pseudonym, possibly belonging to more than one person). The idea behind the white paper was to create an entirely digital currency that would exist outside the normal central controls of banks and governments.
At its core lies the peer-to-peer program 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 available ledgers on servers around the world and anyone with a computer can set up one of these servers, known as nodes.
Every time a transaction occurs, it is broadcast to the entire network and shared between nodes. These transactions, approximately every 10 minutes, are collected in a block and added to the blockchain.
People often have the misconception that they need to buy whole units, but BTC can actually be divided into seven decimal places, creating smaller and more affordable units – SATs.
Once you buy (or mine) bitcoins, you keep them in a digital wallet that you can access using special software. Given that these coins do not exist in real life, and ownership is based on agreement among network members, how do you decide what happens to bitcoin when it dies? Moreover, since many BTC owners keep the key of their wallet and don’t keep any other records, what happens if they suddenly die?
It’s not the most fun thing to talk about or think about, but death is inevitable. less than 50% of adults in the US have already made a will, although of course this number varies across age groups – over 75% of people over 65 have made a will while only 20% of people under 30 have.
From a legal perspective in the United States, it can be very confusing. The IRS does not view cryptocurrencies as currencies, but rather as tradable goods that can be taxed by the relevant authorities. However, we treat them as assets too, and therefore they should have some form of legal control when it comes to inheritance.
This control or supervision comes from Revised Uniform Credit Access to Digital Assets Act (RUFADAA). This law was developed to provide relevant parties (such as attorneys or trustees) with clarity and the legal way to handle any digital assets in the possession of a deceased person (or indeed when the person is incapacitated).
The law was written by Uniform Law Commission (ULC) So that states can then examine and adopt it. As of 2021, 47 states have enacted law. So, for the US at least, there is a framework governing digital asset management, something that will comfort many who were previously unsure.
How does RUFADAA work?
First you have to keep in mind 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.
- Custodian of those assets (companies that manufacture, store, or sell assets online).
- The agent or agent who deals with the estate.
The main obstacle the law faced was that, unlike physical assets, there was always a degree of secrecy around digital assets. In the early days, there were no laws explaining access to those digital files and wallets in the event of death or disability. If the original owner of the digital assets does not leave a note on how to access those assets, the sad truth is that they can be lost forever.
It is important to note that RUFADAA does not focus solely on cryptocurrencies, but on all digital and online assets. It includes things like Facebook or Google accounts. Guardians have certain rights as to what they can release or whether to request a court order to hand over access and/or information. In the case of things like Facebook accounts, the trustee can also determine what is “reasonably necessary” when it comes to releasing any information.
RUFADDA and Bitcoin
RUFADAA only applies if the original owner has authorized access to their bitcoin. This may be through documents signed and kept with a trustee or it can take the form of a legal document such as a power of attorney, will or trust document.
A trustee can also limit your agent’s fiduciary access, usually to only those aspects that allow them to carry out their responsibilities. The custodian is also entitled to charge an administration fee for any access it provides. This can be important information if you are trying to determine what happens to bitcoin when you die.
One of the main benefits of RUFADAA is that it clarifies the legal hierarchy when it comes to the documentation – and subsequent distribution – of your digital assets. RUFADAA views the custodian (or online management system) as the highest authority when it comes to cryptocurrency account ownership.
What that actually means is that if you make Person A the beneficiary of your digital assets in a document with your custodian, that document takes precedence over other legal avenues such as wills, powers of attorney, or powers of attorney. If you do not have a beneficiary agreement with your trustee, the property will pass to whoever is named in the normal inheritance documents.
In the event of a scenario where none of the normal or custodian agreements exist, any transfer of ownership or fiduciary liability could be determined by the custodian’s terms and conditions.
What should you do?
You have two main options when considering 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 for your account, which will only apply if you are holding your bitcoin on an exchange – which is not a recommended practice. Your other option is to go the traditional route and designate any beneficiary of your BTC in a will, trust document, power of attorney, or inheritance documents.
If your holdings include BTC (or any other cryptocurrency), then you should consider a plan that includes all aspects of your digital assets. This means that there is a way to pass all the details like account details, keys and access to any hardware wallets to the person you want to inherit these assets or to the agent/lawyer.
In any will or similar document, you need to include directions to pass on any data, especially the most sensitive data associated with the account. It is likely that simply swiping the used device will not be enough for the beneficiary to take control of the account.
Despite its growth, many people are still wondering if BTC is a real currency. However, the growth and numbers pretty much show that it is something that is here to stay.
You should consider any bitcoin you own as an asset; It might not be something physical like your house or car, but it still has real value. Therefore, you should think carefully about what you want to happen to your bitcoin in the event of death or disability. Knowing what steps to take and what happens to bitcoin when you die means that your assets can be passed on to the beneficiaries you want.
This is a guest post by Gina Bonnell. The opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.