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

JW Verret has a plan for his successors to follow when he dies. And it’s unlike anything estate planners envisioned just a decade ago.

This is because the middle-aged law professor has spent two years building various crypto holdings. To use that money, if he meets an untimely end, his three children have to navigate through a 25-page document detailing on websites, download special wallets, to connect. Web application and cover may need to be exchanged.

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

Veret’s scavenger hunt document may seem unusually daunting for an asset class that has spanned a nearly $2 trillion market. But it underscores that for all the wealth that has accumulated in the digital token world in recent years, the best way to pass it on to the next generation is still an enigma – even for ordinary experts.

According to data provider CB Insights, in 2021, investors invested more than $25 billion in crypto and non-fungible token startups, a 700% increase from the previous year. With digital assets rapidly going mainstream, Fidelity Investments recently unveiled 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 stagnant world of estate planning is still taking hold. Experts are few and far between for an asset fraught with volatility and the risk of being lost forever.

what wallet?

Those who are moving forward face other obstacles. 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, token issuers and actors of crypto exchanges and companies that mine NFTs, which are digital certificates of authenticity for content.

And he had to convince crypto holders, whose natural tendency is to keep their money anonymous and shielded from sharing basic details.

The challenge is to “let them really tell you about all the crypto they have and where it is, and what wallet is it in: is this a hot wallet? A cold wallet? Is it on the exchange? Are there multiple exchanges.” Are there?” said Kolstad, 68, who is based in Los Angeles. (A hot wallet is connected to the Internet for transactions, while a cold wallet keeps crypto offline.)

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

These types of swings have made crypto inaccessible to trustees, which is typical of wealth planning. They are bound to maintain a widely diversified portfolio of assets in the interest of the beneficiaries.

HODL mindset

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

Of course, selling is a curse in the crypto world, preaching HODL, or “hold for dear life.” Firms therefore advise clients to use directed trusts or to hold their stake in limited liability corporations, or LLCs, which in turn are put into trusts. Both give control over how investments are managed to someone other than the trustees.

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

In some cases, large crypto holders have even created their own private trust companies, which allows them to maintain greater control and custody of assets, said Chris Duncan, an attorney for Kerry 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 a recent case, he had a client who retained assets on behalf of his trust and the transaction required approval from the trustee. The Cayman team designed a scenario for the Black Swan event.

‘fatal flaw’

“What if something happens that none of us have predicted?” Duncan said. “The client is in, say, London, and the trustee is in the Caymans and there’s a time difference of five hours, six hours. The trustees are in bed and the client sees some announcement on Twitter about a fatal flaw in some project’s code and sees it Opportunity to get out.

They ended up operating in the Provision for Immediate Judgments, which allowed the client to proceed if they did not hear back from the Cayman Trustee within a stipulated period.

Geoff Costello, an associate at Lindsey McCarthy in Canada, said, “There’s a trade-off with keeping your assets in a way that lets you do very, very quickly with them, whether it’s cultivating produce, defying or Want to buy NFTs.” , “You have to trade between that and a system that is primary for distributing your beneficiaries in case you die.”

Most crypto holders may only need the basics: a way to share keys with beneficiaries at some point in the future and a set of instructions for them to transfer the crypto. More solutions are coming to market to support secure key sharing, including multisig technology by companies such as Casa and Unchained Capital. Multisig Wallet requires multiple approvals before transacting.

Costello recommends using these services in conjunction with an attorney and an estate plan.

As far as Verett and his 25-page document are concerned, he is teaching his three children, all under the age of 10, how to use a wallet by putting his allowance on them. His instructions clearly indicate that his successors should never share their seed phrase with anyone – or the crypto could be lost forever.

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

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

© 2022 Bloomberg

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