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Got Cryptocurrency? Here is What You Need to Know About Estate Planning, Crypto Memorandums, and RUFADDA

Got Cryptocurrency? Here is What You Need to Know About Estate Planning,                                 Crypto Memorandums, and RUFADDA

 By Anthony Diosdi

Cryptocurrency and digital assets present complex challenges for purposes of estate planning. Many traditional estate planning methods are rendered obsolete in the realm of digital assets. This article will discuss both the challenges and importance of estate planning in the context of crypto assets. In particular, this article will talk about the three solid components of estate planning of cryptocurrency which includes custody, planning, and administration.

What is Cryptocurrency?

Cryptocurrency has grown in popularity and ubiquity in the past few years. Cryptocurrency is a type of digital or virtual currency that uses cryptography for security. Virtual currency is a digital representation of value that functions as:

1) A medium of exchange;

2) A unit of account; and

3) A store of value other than a representation of the United States dollar or a foreign currency. 

Cryptocurrency allows parties to transact directly without an intermediary using blockchain technology, a shared distributed ledger that verifies, records, and settles transactions on a secure, encrypted network. Although some major retainers accept cryptocurrencies like Bitcoin, cryptocurrency is not money. Money means coin and paper money that Congress declares is legal tender. Cryptocurrency is also unlikely to be a “security,” with the possible exception of security tokens and stablecoin (discussed below). However, cryptocurrency may be classified as a “commodity.” The Commodity Futures Trading Commission or CFTC has declared certain cryptocurrencies, including Bitcoin and Ethereum, as commodities, and bitcoin futures are traded on the Chicago Mercantile Exchange.

Cryptocurrencies are extremely volatile, especially compared with conventional financial instruments like stocks and bonds. That volatility plays a central role in the appeal of virtual currency. However, there is now a subset of cryptocurrencies known as stablecoins that are intended to be “stable” versus a fiat currency (Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it). Stablecoins are a type of cryptocurrency in which the issuer will often put high-quality liquid assets in reserve to ensure repayment of the virtual currency. The holder is typically entitled to redeem stablecoin on demand in exchange for a referenced asset. Common examples of stablecoin include Circle and Tether.

Overall goal of Crypto Estate Planning:

The overall goal of cryptocurrency estate planning is to create a plan that will allow cryptocurrency to be safely and efficiently passed on to the next generation. One of the reasons why estate planning is difficult is because cryptocurrency is a revolutionary new asset case. It has only been around about 12 years. However, for the most part, cryptocurrency and crypoassets have already seen astronautical growth. We have no idea what the future will look like. But if the last ten years are any indication, some investors in cryptocurrency can see staggering returns. With that said, the amount of virtual currency that is invertaly lost is staggering. It is estimated that four percent of the Bitcoin that gets minted every year gets lost. At today’s value that is about $240.5 Billion. See Decrypt.com. The goal of cryptocurrency estate is to leave these assets to the next generation so they will be able to fully benefit from them. A well drafted estate plan should ensure cryptocurrency is passed on to future generations. Below, we will discuss how cryptocurrency is lost and how a solid estate plan can prevent this from taking place.

Custody in the Context of Cryptocurrency

The first issue that needs to be examined in the context of cryptocurrency estate planning is custody. Custody refers to how cryptocurrency is stored. There are two principal threats or risks to cryptocurrency that can take place even when it is held in custody. The first are external threats. This includes a cryptocurrency holder’s account getting hacked, funds being frozen by a third party or levied by a government. The second category is self sabotage. This is when a holder of cryptocurrency loses a pin or password and then the cryptocurrency owner loses the ability to access his or her funds. We heard of horror stories of someone who had their cryptocurrency on a harddrive that died or lost their keys and could no longer find them. This can be illustrated in a well known story of an individual whose harddrive accidentally was taken to a landfill in Canada. The harddrive had hundreds and millions of dollars in Bitcoin on it. This individual has been begging the locality to excavate the landfill so he can access the accidentally discarded harddrive and gain access to his Bitcoin. Losing one’s access to cryptocurrency is a form of self sabotage. Self sabotage is a real risk when it comes to cryptocurrency. Thus, when it comes time to develop an estate plan, the first question should be how is the cryptocurrency being custodying so a plan can be developed to reduce these risks.

The Definition of a Wallet for Purposes of Cryptocurrency

When we discuss about custodying the cryptocurrency, we must talk about wallets. So what is a wallet for purposes of cryptocurrency? In the context of cryptocurrency, a wallet has two basic components. The first component of a wallet is a public key. This is the crypto investor’s  mailing address. This is where an investor’s crypto currency is sent. The second component of a wallet is a “private key.” This is a crypto holder’s digital signature. A private key allows a cryptocurrency owner’s ability to send crypto to a third party. A wallet stores a crypto holder’s private key. So, it is probably better to think of a wallet as a keychain and not necessarily as a wallet per se.

Custody- A Brief Overview of Wallets and Risks Associated With Different Type of Wallets

There really is a wide variety as to how cryptocurrency can be custodied. The first type of wallet is known as custodial wallets. Custodial wallets is when a crypto holder is giving custody of the virtual currency to someone else. Custodial wallets can be held on foreign and U.S. exchanges. A custodial wallet is when a cryptocurrency investor gives custody of the virtual currency to someone else. When a cryptocurrency investor sends their virtual currency to an exchange in a foreign country, the investor subjecting his or herself to a certain degree of risk. This is because there is not much of an enforcement mechanism available should the foreign exchange decide to keep the cryptocurrency.

There are also U.S. based online exchanges that will custody cryptocurrency. U.S. based exchanges are subject to regulation. Their offices can be visited and they can be sued in the United States should anything go wrong. U.S. based exchanges are less risky than foreign exchanges. However, the investor is still entrusting somebody else with their money and the cryptocurrency investor is subject to the U.S. exchanges rules. Furthermore, a cryptocurrency investor takes the risk that a U.S. based exchange can be hacked. Investors can also custody cryptocurrency themselves through a noncustodial wallet. A noncustodial wallet is when the cryptocurrency holder is keeping custody of him or herself. The problem with holding cryptocurrency through a noncustodial wallet is the probability of self sabotage increases. A number of noncustodial wallets are hardware wallets. Hardware wallets are devices that are plugged into a computer and an individual downloads software that allows the entering into transactions. Examples of hardware wallets are a USB memory stick, ledger, trezor, and keepKey. When someone is done using the device, it is unplugged from the internet to decrease the risk of hacking. 

How to Choose Wallet for Purposes of Estate Planning

Every person investing in cryptocurrency should do some self-evaluation to determine what is the perfect fit regarding the type of wallet they wish to hold their cryptocurrency. The factors to consider are:

1) How much is being invested in cryptocurrency. The higher the value of cryptocurrency the more secure the wallet should be and the investor may want to keep the wallet off the exchanges.

2) The next consideration is technical proficiency. How comfortable is the investor using some of these devices or moving money around themselves? In cases where the cryptocurrency investor is not typically proficient, they may not feel comfortable using devices or moving crypto assets on their own. In these situations, the individual may not feel comfortable self custodying cryptocurrency. In these situations, it might make sense to still use a third party to custody the cryptocurrency for the ease of use.

3) Finally is the timeline. The longer an individual intends to hold onto cryptocurrency into a noncustodial situation. If there is a short timeline it might make sense to leave the cryptocurrency on an exchange.

The type of wallet holding the cryptocurrency should be incorporated into the estate plan. Overall three basic guideposts should be followed when deciding how cryptocurrency should be custodied: 1) The crypto assets should be secure; 2) The overall strategy to hold crypto assets should be simple. If the plan is too complicated the risk of self sabotage increases. 3) Trying to memorize a seed phrase for a wallet is a terrible idea. Any passwords or pins should be kept somewhere accessible. One thing about hardware wallets is they have a pin which allows an investor to unlock the wallet. Most hardware wallets come with a seed phrase. This is like a backup to a wallet. Let’s say that you have a ledger with one Bitcoin on it and you lose it or it’s destroyed. As long as you have the seed phrase used to set up the wallet, a new ledger can be purchased, the seed phrase can be used to restore the wallet and the investor can access the cryptocurrency. This is one of the benefits of having a hardware wallet in that they come with a seed phrase. As an investor is thinking about custodying cryptocurrency, the seed phrase should be guarded. This is the most important part of this wallet and should be kept separate from the wallet.

The Crypto Asset Estate Plan

Once a custody plan is developed, it is time to put together an estate plan. An estate plan should create a specific bequest leaving the cryptocurrency to a specified person, persons, or organization. An estate plan should also name an executor or trustee which has executory powers.These are specific persons that executors and trustees need to have in order to have full access to cryptocurrency. Finally, a crypto memorandum is necessary in any cryptocurrency estate plan. This is a separate document that accompanies a will or trust. A crypto memorandum is a guide and instruction on how to find and access crypto once the investor has died or become incapacitated. It is kept separate from pins, passwords, and keys. It names a trusted or neutral third party that can be asked for assistance in obtaining cryptocurrency. These are the basic components of a crypto memorandum. If something were to happen to a crypto investor, a crypto memorandum is probably the only way a beneficiary can access cryptocurrency once the investor has died or become incapacitated.

A crypto memorandum is a guide and instruction on how to find and access crypto once the investor has died or become incapacitated. It is kept separate from pins, passwords, and keys. It names a trusted or neutral third party that can be asked for assistance in obtaining cryptocurrency. These are the basic components of a crypto memorandum. If something were to happen to a crypto investor, a crypto memorandum is probably the only way a beneficiary can access cryptocurrency once the investor has died or become incapacitated.

A crypto memorandum should be nothing more than a simple letter that the cryptocurrency investor writes for their heirs advising them of their crypoholderings. The letter should put the recipients of the cryptocurrency on notice as to the ways these assets could be lost or stolen.

The crypto memorandum should be:

1) Written by hand;

2) Placed in a tamper-evident sealed envelope;

3) Include an inventory of the cryptocurrency and where they are located;

4) Document where to find the cryptocurrency and how to access the cryptocurrency.

Although a crypto memorandum should detail where beneficiaries may locate crypto assets, a crypto memorandum should not contain any crypto keys, seeds, or access codes. This information (and a backup copy of a crypto memorandum) should be stored separately in a secure location. However, a crypto mememradum may be referred to in a will or trust. If an individual holding cryptocurrency becomes mentally disabled, a power of attorney with language providing selected individuals with authority over the cryptocurrency and instructions for managing the crypto assets is critical.

A crypto memorandum should not specifically provide for any distributions. A will or trust provides those instructions. Likewise, a will should not discuss any crypto passwords, pins, or seed phrases since wills become a matter of public record. Including such information will greatly increase the probability of crypto assets being stolen or hacked.
Finally, although a will is better than nothing, a revocable living trust is a far better vehicle for transferring crypto assets where security and privacy are paramount.

Another thing to keep in mind is the modern estate plan does not just plan for death. It also plans for incapacity.  This is something to consider now with the prevalence of covid. Even without covid concerns, people get sick. The cryptocurrency market is pretty volatile. A cryptotrader does not want to lose the opportunity for a potential windfall because he or she is incapacitated. This is why it is so important to have executory powers and a crypto memorandum.

Estate Administration

The estate administration involves a period of marshaling which is a period immediately after someone pases away in which the named executor and administrator is tasked with collecting all assets both intangible or tangible and notifying financial instruction or other institutions of assets are owned by the decedent. These individuals have fiduciary powers and duties.

Various laws may govern a crypt transfer’s cryptocurrency and complicate how they are handled after an individual’s death. It is important to understand these laws. As in most states, in California, a digital executor can be named. This is someone that can be expressly named in an estate plan that will grant these individuals the ability to handle digital assets such as cryptocurrency. They are also held accountable as a fiduciary. This means the executor must avoid self-dealing, they have a duty of confidentiality, they have a duty to manage the estate appropriately, and maximize the estate to the best of their ability and maintain the funds of the estate. These powers are delineated in the Revised Uniform Fiduciary Access to Digital Accounts Act or RUFADDA.

RUFADDA was drafted in order to help fiduciaries to deal with digital assets such as cryptocurrency more effectively. RUFADDA also puts a process in place to protect certain information from a decedent such as communication and to set a hierarchy as to determine the rights and liabilities of digital assets. Because of RUFADDA some U.S. exchanges (but not all exchanges) are allowing for beneficiary designations just like any other financial institution. This designation trumps any bequest or gift in a will or trust.
If the estate administrator, trustee, or digital administrator determines there are no named beneficiaries through any exchange, the cryptocurrency goes through an estate plan. In these cases, a will or trust may be the controlling for purposes of distributing cryptocurrency.

In the absence of any directive or estate plan, then the terms of service are going to be controlling as to how cryptocurrency is going to be transferred. It is important to understand that even under RUFADDA just having possession or control does not mean ownership. A service agreement with an exchange must be analyzed. A service agreement can become extremely important in a cryptocurrency context. A good way to think about this is iTunes purchased from Apple. Let’s assume any individual acquires an iTunes song. This individual does not own the song downloaded. Instead, he or she has a lease for life in the song purchased from the Apple App store. Holding cryptocurrency on an exchange is similar in that once the account holder dies, his or her rights the the crypto assets held on the exchange may terminate. Thus, just because an individual may have possession of a now deceased crypto investor’s key does not mean this individual has ownership of the cryptocurrency. This is why a crypto memorandum is so important as an estate plan. This may be effectively the only way to transfer cryptocurrency without running into issues or having to be at the liberty of a service agreement.

Below, please see Illustration 1, Illustration 2, and Illustration 3 which discuss hypotheticals that come up with the transfer of cryptocurrency at death of an investor.

Illustration 1.

Tom is a resident of San Francisco, California. Tom is a crypto enthusiast who started buying Bitcoin and various cryptocurrency on U.S. and Non-U.S. online exchanges in 2018. He is married. However, Tom’s wife is not very tech savvy and has no idea how crypto works. Tom’s crypto trading has yielded him crypto holdings worth over $500,000.

One day while riding his motorcycle to San Jose, California, Tom gets into an accident and dies. Tom does have a will. Tom also did not establish a trust to hold his cryptocurrency which is on the exchanges and on a hardware wallet. How will Tom’s cryptocurrency be distributed?

Answer to Illustration #1

Assuming that Tom’s wife knew about his cryptocurrency investments, Tom’s wife will need to quickly learn about cryptocurrency and how to access Tom’s cryptocurrency. Tom’s wife will need to contact the U.S. exchanges that hold Tom’s cryptocurrency. If the U.S. exchanges allow a cryptotrader to name a beneficiary, Tom’s  wife can probably present a death certificate to the applicable U.S. exchanges to get access to Tom’s cryptocurrency. Tom’s wife will need to carefully review the service agreement of the domestic exchanges custodying Tom’s cryptocurrency. If the U.S. exchange does not provide terms for beneficiaries, Tom’s wife could provide documentation (which may not exist in this case) of his accounts to attempt to gain access to Tom’s cryptocurrency.

Unfortunately, RUFADDA does not change the results in this case. Under RUFADDA, Tom’s wife will be subject to the terms of the U.S. based exchange. RUFADDA will also not assist Tom’s wife in her attempts in obtaining the cryptocurrency held on the non-U.S. exchange. Given Tom’s wife’s lack of ability to legally compel the foreign exchanges to turn over Tom’s cryptocurrency, there is a good chance the crypto currency held on the foreign exchange could be lost. In regards to the cryptocurrency on the hardware wallet, Tom’s wife will have to figure out how the wallet works and download the software. To attempt to obtain the cryptocurrency, Tom’s wife will need to file to be an administer of the estate. Once Tom’s wife obtains a certificate to administer the estate, she can submit the certificate along with a death certificate to the financial institutions and exchanges. Hopefully, Tom’s wife can obtain the cryptocurrency subject to the terms and conditions of the agreement. Then, Tom’s wife will need to figure out how the wallet works and convert the cryptocurrency into U.S. dollars. 

Illustration #2

Matt and Kim lived in San Francisco, California. They were married in 2020. They decided not to spend a lot of money on an estate plan and use Legal Zoom to draft a basic will. The will did not include any provisions related to the access of digital assets or provide information about cryptocurrency. Later that year, Matt began investing in cryptocurrency and had about $500,000 of crypto on Coinbase, a U.S. based exchange. He held another $500,000 worth of Bitcoin on a ledger hardware wallet. Kim was not involved in the trades, but was aware Matt had a large amount of money in crypto. One day while rock-climbing in Yosemite, Matt fell off a cliff and died. What happens to his crypto assets?

Answer to Illustration #2

At first glance it seems that Kim is in a better place than John’s wife. Unfortunately, Kim is in the same place as John’s wife. There is no crypto memorandum or no direct bequest of the crypto currency. There are no powers granted under RUFADDA. Thus, Matt’s cryptocurrency will fall under the terms of the service agreements of the U.S. exchanges.

Illustration 3.

Sally, a resident of Danville, California heard about cryptocurrency from a friend and purchased some crypto assets in 2019. She purchased the crypto assets on a China-based exchange where it was held for over a year. In late 2020, Sally moved her cryptocurrency onto a hardware wallet and had a tax attorney draft a cryptocurrency memorandum with it. The crypto memorandum provided the location of the coins, instructions, and named a neutral third party to assist in obtaining the crypto assets. Sally also properly established a living trust. In 2021 Sally passed away. Sally’s husband knew nothing about cryptocurrency. What happens to Salley’s crypto assets?

Answer to Illustration 3.

In this scenario, Sally provided her husband with all the right powers. Sally also moved her crypto assets from a risky exchange to a hardware wallet with instructions to her loved ones. Salley de risked her estate. Sally’s husband will be able to access the cryptocurrency. 


As demonstrated in this article, without proper planning, a crypto investor’s entire cryptocurrency portfolio could be lost. Cryptocurrency estate planning is difficult but should be undertaken as early as possible to avoid a devastating financial loss. 
Cryptocurrency Investors should seek guidance from an experienced attorney.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony Diosdi focuses a part of his practice on criminal tax enforcement, broad-based civil tax compliance and white collar matters generally. He also advises clients on the IRS voluntary disclosure program, with particular focus on disclosure related to offshore banking accounts.

Anthony Diosdi is a frequent speaker at international tax seminars. Anthony Diosdi is admitted to the California and Florida bars.

Diosdi Ching & Liu, LLP has offices in San Francisco, California, Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises throughout the United States. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.