Digital assets such as cryptocurrency are susceptible to several distinct estate planning pitfalls. By far, notes Michael Hackard, the worst is theft.
In an interview with ThinkAdvisor, Hackard, an estate and trust attorney, explains how financial advisors can help clients prevent costly mistakes while “navigating the digital frontier.”
“Right now, for the average investor, it’s still the digital Wild West,” argues Hackard, the founder of Hackard Law. “But the laws are going to change over the next few years. With the new administration, cryptocurrency is no longer the stepchild.”
As such, President Donald Trump recently signed an executive order to establish a strategic bitcoin reserve and a U.S. digital asset stockpile. He’s also revamping cryptocurrency regulations and tax policies.
Hackard, who focuses largely on the financial exploitation of older investors, maintains that advisors can offer value by recommending ways that clients can prevent the theft of their crypto assets.
That starts with identifying a highly trusted individual to know the assets’ otherwise secret electronic access codes, known as private keys. Why? Because when the client dies, that person would be able to access the funds. Otherwise, heirs couldn’t transfer them.
In the interview with Hackard, whose new book is “Inheritance Heists: Reclaim Your Family’s Legacy and Fight Back Against Financial Predators,” he relates a case in which an estate administrator made off with several million dollars’ worth of crypto from an ultra-high-net-worth decedent’s estate. Some of the currency has been recovered; the search for the remaining millions goes on.
Here are highlights of our conversation:
THINKADVISOR: What’s your view of the cryptocurrency market at present?
MICHAEL HACKARD: Right now, for the average investor, it’s still the digital Wild West.
But the laws are going to change over the next few years. With the new administration, crypto is no longer the stepchild.
They’re going to come up with appropriate rules and regulations to provide greater protections for crypto investments.
Why do you think crypto is becoming so popular?
Part of the reason is that it can be hidden, and so it’s a secret. Also, it’s volatile; and part of it might be that for people who like to gamble, it could provide some of the same emotional result.
How can financial advisors help clients regarding cryptocurrency in their estate planning?
Financial advisors can be helpful so that digital assets don’t get stolen.
They should study up about it and keep current on changes in the laws that will be coming.
They should educate themselves by taking a course in crypto so they’re knowledgeable about its terms and what it does. These courses often provide information as to what questions about crypto to ask clients.
First, they can ask whether the client has digital assets. If so, have they addressed it in their estate planning and in some secure fashion, indicated the electronic codes for access to it?
They should discuss the tax implications as well.
Advisors should warn clients to keep the codes a secret.
Shouldn’t a client even trust their advisor with the codes?
They probably have their own protocol as to whether they would accept a code. My guess is that the laws haven’t caught up with this yet.
Don’t indicate in your will or trust that you own cryptocurrency, you write. Why not?
Because they can become public documents. So anyone can see it.
The best practice is to put the codes in a home safe or a bank safe deposit box.
Maybe the banks can own the crypto for the client. They provide some greater level of protection.
Given all the secrecy, please discuss why it’s critical that you inform someone of the access codes for transferring crypto after your death?
In some cases, the crypto owner has hidden the codes in a so-called cold wallet, which looks like a smartphone. The only way to transfer the assets is through a series of codes.
Sometimes people won’t tell anyone they have crypto and are trying to hide the fact from the family or spouse. But then, when they pass away without directions about it, it’s hard to catch up with those assets.
Why do they hide crypto ownership?
It might be financial infidelity with their spouse. It might be that they want to hide it from the tax authorities so they don’t have to pay tax on it.
They might hide it because they stole it.
I have a case right now where a man died at 39 without a will. He had a fortune in digital assets, but the heirs to his estate — his parents — didn’t know he owned cryptocurrency and had no idea how to find it.
They nominated someone to administer the estate who was knowledgeable about crypto. He identified some of it — several million dollars’ worth — but not all of it.
He didn’t disclose the remainder. He took it himself.
To investigate, we brought in groups who have experience working with the CIA, FBI and the NSA to help search those assets down and try to find out where they are.
We’ve recovered millions of dollars, but there are still more millions to recover.
What’s another way that crypto can be stolen?
Let’s say you had $1 million in crypto and somebody impersonates someone you would normally trust and tells you they need the electronic codes in order to make your crypto secure. I know this has happened.
So you give them the codes. They immediately transfer the crypto offshore. And it’s gone.
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