Assets of the Crypto Kind — Part 2
Key Takeaways:
Delving deeper into the crypto realm, exploring its evolving nature and implications.
Unraveling market shifts, regulatory developments, and strategic considerations for crypto enthusiasts.
Staying informed and adaptable is key as the crypto landscape continues to shape the financial future.
Note: This is a two-part guide into the world of cryptocurrency as it pertains to custody solutions, South African digital asset estate planning and passing on that wealth to future generations.
Part Two – How do you deal with crypto assets in Estate Planning?
In our previous article, we established the following facts–
While the South African Reserve Bank does not recognise crypto assets as legal tender, they still hold value and as such are considered assets within your estate;
Keeping in mind the definitions of assets by SARS, GAAP and SAIPA, your crypto asset (due to it not having a physical substance) is considered an intangible asset within your estate;
Due to its classification as an intangible asset (and keeping in mind the definition of assets as per SARS i.e. (a) property of whatever nature, whether movable or immovable, corporeal or incorporeal, excluding any currency, but including any coin made mainly from gold or platinum) or incorporeal asset, it would be liable for and subject to the normal principles of income and capital gains tax (depending on the taxpayer’s intentions – again as per the definition of crypto assets by SARS),
It therefore stands to reason that a crypto asset would be treated as an intangible asset in your estate for both executor’s fees and estate duty purposes;
Turning to the Estate Duty Act 45 of 1955, at Section 3(2), - “an estate consists of all property and deemed property of a person at the date of death”. Property is defined (as set out by Old Mutual in their FISA presentation) as: “any right in or to property, movable or immovable, corporeal or incorporeal. Whether the asset is tangible or intangible and includes ownership and any other interest in or right in property, such as the right to use or occupation”, and
Estate duty will therefore be applicable on the value of the asset at the date of death of the crypto asset owner.
The legal practitioner who will be responsible for your estate planning (like the attorneys at Benaters) will therefore need to be made aware of the existence of crypto assets (if they are going to be sufficiently provided for during your estate planning process).
Further to the above and as illustrated in the article How to deal with cryptocurrencies in your estate planning, notifying your estate planner or financial planner of your crypto assets is crucial -
“Bearing in mind the anonymous nature of cryptocurrencies and the manner in which you hold ownership of the cryptocurrency, it would be virtually impossible for your executor to trace your holdings and properly account for them if they have not been brought to his or her attention. Furthermore, by not including your cryptocurrency in your estate plan, it will be likely that the liquidity calculations performed during estate planning will be inaccurate, thereby impacting on the estate administration process.
As the value of cryptocurrency, by its very nature, is volatile and not generally affected by the same events which affect traditional currencies, it will be difficult to calculate precisely what the effect on your estate will be, from a tax point of view. But this value should be assessed each time you meet with your financial planner, to determine the impact at that point”.
That said, the value of your digital wallet (or crypto currency wallet is defined by Bankrate as “an app that allows cryptocurrency users to store and retrieve their digital assets. As with conventional currency, you don’t need a wallet to spend your cash, but it certainly helps to keep it all in one place. When a user acquires cryptocurrency, such as bitcoins, she can store it in a cryptocurrency wallet and from there use it to make transactions”) must be taken into account when planning your estate.
At this point it is crucial to point out that (as set out by coinbase) “unlike a normal wallet, which can hold actual cash, crypto wallets technically don’t store your crypto. Your holdings live on the blockchain but can only be accessed using a private key. Your keys prove your ownership of your digital money and allow you to make transactions. If you lose your private keys, you lose access to your money. That’s why it’s important to keep your hardware wallet safe”.
In other words - if a private key (aka key) is lost or is no longer accessible, then, in essence, your investment is lost. And this point is crucial to keep in mind as we continue….
And lastly, how do you manage crypto assets in your Will?
As a starting point it is important to keep in mind that because your key grants you access to your crypto assets and is therefore crucial in order to spend your assets as well as transfer ownership of your crypto assets to another person, it is your key that will need to be protected and therefore dealt with (in a practical sense) by the Executor of your deceased estate (who will need to have access to your keys following your death).
Kyle Abrahams in his article How to deal with crypto assets in your will suggests a “two pronged approach” when dealing with crypto assets in your will –
“Include a clause in your will detailing how you want your crypto assets to be distributed.
Create a separate letter of directions to a nominated beneficiary and/or the executor of your estate which explains where and how to access your crypto assets”.
And we agree with that approach – especially since crypto currencies are not only a volatile asset but also because they are a relatively new concept in the asset space.
But, we caution you that it is (for fairly obvious reasons) not advisable to include the actual access details to your digital wallet in your Will (i.e. to give the details of your private key) but instead (and at the very least) include a clause noting the existence of these crypto investments (you should specify which crypto assets you possess and the number of shares you own in each) and your wishes around how you want them to be dealt with in your Estate i.e. what share will go to which beneficiary.
And this is where the separate letter of directions comes in. Your key details should be recorded in a separate document (the letter of directions) that must be stored in a secure place, only identified to your spouse, Executor, or other trusted person.
It is as simple as recording in your Will that a separate “directions document” has been created and who can be contacted to gain access to it.
As was stated in the article Crypto-Wills: How To Leave Cryptocurrency In Your Will -
“Including any cryptocurrency you own into your estate plan, such as a Will or Trust, is the only sure-fire way to ensure your beneficiaries will have access. This holds true for any other type of digital asset as well.
By using your estate plan, you will provide the legal right and necessary instructions so that your cryptocurrency and private key information will be transferred into the ownership of your beneficiaries. It’s a powerful tool to pass on your private key information upon your death, without compromising your security and privacy in the present”.
And that is really the crucial point here.
In closing
As we said in the beginning of this article – the way currency and therefore assets are viewed today has once again been changed. As it was during the Gold Rush.
We are no longer mining for gold in this modern era we are in, but instead for crypto currency.
And with this (almost) evolution in money, currency, assets and valuables, we need to take on a new approach to how we not only manage these assets and valuables while we are alive but how we account for them after we pass.
It is a moving target. Continuously changing and evolving as technology changes and evolves. And so too must your Estate Planning and your Will. You will need to change your Will and evolve your Estate Planning goals as you move through life acquiring new assets (which could very well include crypto assets).
Perhaps you have recently acquired some Bitcoin or have recently dabbled in the crypto asset market. And perhaps your existing Will does not cover these newly acquired modern age assets. And should (for all the reasons as set out throughout this article).
We would be happy to review your current Will or assist, advise and support you as you draft a new Will in order to ensure that you have not only nominated an Executor with whom you are not only comfortable with but also confident in to deal with crypto assets (but who also ensures that your wishes regarding these and other assets, are correctly reflected).
Get in touch
Get in touch with Benaters today and let’s see how we can assist you in revising your Will to ensure that all measures regarding your crypto assets are not only in place but that they can be practically implemented when your Deceased Estate is being would-up.