Cryptocurrency is a hot topic in tech circles. And, while Bitcoin has been a trendsetter – earning a reputation as the de facto standard for cryptocurrencies – it’s not the only player in the market. Litecoin, Ethereum, Zcash, Dash, Ripple, Monero and Dogecoin are also making a splash in the digital money world.
But what exactly is cryptocurrency and how could it impact future inheritances?
Put simply, cryptocurrency is digital cash. Software-based, it is stored in an electronic file and traded online. Cryptocurrency has a ledger, balances, passwords and account numbers, so it’s a bit like online banking without the central bank. It also comes with inbuilt virtual wallets where you can store your cryptocurrency as you would with a real wallet.
Designed to be cheaper and more reliable than standard currency, cryptocurrency removes the middleman. But, perhaps more revolutionary, ownership of cryptocurrency can be pseudonymous. And that has implications for estate planning.
For example, if someone owns cryptocurrency pseudonymously, there is no way of knowing unless they tell you. And to gain access to this digital money you need the relevant access keys. In fact, without this information cryptocurrency wealth is unreachable. As such, it’s vital that anyone who owns cryptocurrency puts adequate provisions in their Will. If not, the cryptocurrency will lie dormant.
Understandably, however, many owners are unwilling to reveal their private key while they are still alive. Let’s face it, you wouldn’t hand over your online banking password information so why should this be any different? What’s more, in line with The Law Society’s official guidance, many solicitors decline to take possession of passwords.
Helping to address this issue, some cryptocurrency exchanges have already established policies to transfer funds to the next of kin when someone dies. Also, in an increasingly online world, many trust and estate practitioners are now helping clients to create online vaults where they can store details of their digital assets, such as their cryptocurrency access information.
Another issue is that, while cryptocurrency isn’t an official currency of any country, that doesn’t mean it isn’t liable for Inheritance Tax. In fact, cryptocurrency needs to be included as part of the usual probate process. As such, the value needs to be reported, and any tax paid to HMRC as part of the standard Inheritance Tax process. As such, cryptocurrency must be considered seriously during the estate planning process to avoid hefty Inheritance Tax bills.
Furthermore, it pays to be aware that cryptocurrency values have been volatile. So even if someone thinks they are leaving a particular amount to a beneficiary, this might not be the case. For trust and estate professionals and estate administrators, the changeable value of cryptocurrency comes with an added concern, because, if the value falls dramatically due to an unjustified delay in selling, beneficiaries may seek reparation for any losses.
