This is an opinion piece by Jenna Bunnell, senior manager for content marketing at Dialpad.
No matter what your views on bitcoin are, it goes without saying that it is here to stay and will continue to grow in use.
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 colleagues on different networks and use them to invest in anything from art to property.
However, being a virtual currency, the question arises; What happens when you die? Although it is a morbid thought, it is 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 any inheritance plan? Is it a simple process to include BTC in a will like you would with tangible assets like your home and bank accounts?
What is Bitcoin?
Bitcoin’s origins date back to 2008, when a white paper titled “Bitcoin: a peer-to-peer electronic cash system” written by Satoshi Nakamoto (a name presumed to be a pseudonym, possibly even belonging to more than one person). The idea behind the white paper was to create a fully digital currency that would exist outside the normal centralized controls of banks and governments.
Inside are peer-to-peer software and the use of high levels of encryption (based on the SHA-256 algorithm designed by the United States National Security Agency). All transactions are recorded in publicly available logs on servers around the world, and anyone with a computer can set up one of these servers, known as nodes.
Whenever a transaction occurs, it is broadcast to the entire network and shared between the nodes. These transactions are collected, roughly every 10 minutes, in a block and added to the blockchain.
People often have the misconception that they need to buy entire units, but BTC can actually be broken down to seven decimal places, creating smaller and more affordable units – sats.
Once you’ve bought (or mined) 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 the agreement between the members of the network, how do you decide what happens to bitcoin when you die? Also, since many BTC owners store 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 already made wills, although, of course, this figure varies by age group: over 75% of people over 65 have made one while only 20% of people under the age of 30 years he made a will.
From a legal standpoint in the United States, it can be quite confusing. The IRS doesn’t see cryptocurrencies as currencies, but rather as tradable commodities that can be taxed by the relevant authorities. Yet we also treat them as assets and therefore we must have some form of legal control when it comes to inheritance.
That control or supervision comes from Revised Uniform Trust Access Act to Digital Assets (RUFADAA). This law was developed to provide relevant parties (such as lawyers or trustees) with clarity and a legal way of dealing with any digital asset held by a deceased person’s estate (or even when a person is incapable).
The law was written since Uniform Law Commission (ULC) so that states could then review and adopt it. By 2021, 47 states had enacted the law. So, for the United States at least, there is a framework governing digital asset management, something that will be of 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 happens:
- The owner of the digital assets who may want a level of privacy.
- The custodian of those goods (companies that manufacture, store or sell goods online).
- The trustee or attorney dealing with the inheritance.
The main hurdle the law has faced has been that, unlike physical assets, there has always been some degree of secrecy around digital assets. In the beginning, there were no laws clarifying access to those digital files and wallets in the event of death or incapacity. If the original owner of the 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 focus solely on cryptocurrencies, but on all digital and online assets. This includes things like Facebook or Google accounts. Depositaries have certain rights over what they can release or whether they require a court order for the delivery of 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 releasing any information.
RUFADDA AND Bitcoin
RUFADAA only applies if the original owner has authorized access to their bitcoin. This can be through documents signed and held by the custodian or it could take the form of a legal document such as a power of attorney, will, or trust document.
A custodian can also limit the amount of access your trustee has, usually to only include aspects that allow them to carry out their responsibilities. The custodian also has the right to impose administrative burdens for any access provided. This can be important information if you are trying to decide 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 documentation – and subsequent distribution – of your digital assets. The custodian (or online management system) is regarded by RUFADAA as the highest authority when it comes to ownership of a cryptocurrency account.
This actually means that if you have made Person A a beneficiary of your digital assets in a document with your custodian, that document takes precedence over other legal avenues such as wills, POAs, or trusts. If you don’t have a beneficiary agreement with your custodian, the property will go to whoever is named in those regular inheritance papers.
If a scenario arises where there is no normal arrangement or custody agreement, any transfer of ownership or fiduciary responsibility may be established by the terms and conditions of the depositary.
What should you do?
You have two main choices when thinking about what happens to bitcoin when you die.
You can ask your custodian if they have specific tools or a facility to name a payee on your account, which would only apply if you kept your bitcoin in an exchange, which is not recommended. The other choice is to go the traditional route and name any beneficiary of your BTC in a will, trust document, POA, or probate documents.
If your property 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 the details like account details, keys and access to any hardware wallet to the person you wish to inherit those assets or to your trustee / attorney.
In any will or similar document, you must include guidelines for the transmission of any data, especially the more sensitive data associated with the account. It is likely that just passing the hardware device used will not be sufficient to allow the beneficiary to take control of the account.
Despite its growth, many people still wonder if BTC is a real currency. Yet the growth and the figures show a lot that it is something that is here to stay.
You should think of any bitcoin you own as an asset; it may not be as physical as your home or car, but it still has real value. Hence, you should carefully consider what you want to happen to your bitcoin in case of death or disability. Knowing the steps to take and what happens to bitcoin when you die means that your assets can be transferred to the beneficiaries you want.
This is a guest post by Jenna Bunnell. The views expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.