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Dealing with your cryptocurrency on death- some essential information

What are cryptocurrencies?

Cryptocurrencies are digital assets used for investments, purchases, and payments. As their popularity increases, it's essential to consider what happens to them when you pass away. Including cryptocurrencies in your estate planning ensures your digital wealth is managed and distributed according to your wishes. This article explores the intricacies of handling cryptocurrencies in estate planning, including accessibility, taxation, and practical steps to secure these assets for your beneficiaries.

Cryptocurrencies are digital or virtual currencies that use cryptography for security, making them difficult to counterfeit. Unlike traditional currencies, cryptocurrencies operate on decentralised networks based on blockchain technology. This decentralised nature means they are not controlled by any government or financial institution. In South Africa they are considered assets or property. Therefore, their distribution can be governed by South Africa’s laws of succession, depending on a number of factors.

Estate Planning and Cryptocurrencies

Including cryptocurrencies in your estate planning is essential because, unlike physical assets, digital assets require specific knowledge and access details to be transferred. Without proper planning, your beneficiaries might face significant challenges in accessing and managing these assets.

Proper documentation is crucial to ensure the smooth transfer of your cryptocurrency holdings. This involves more than just listing these assets in your will; it includes providing detailed instructions on how to access them. Clearly state in your will that you own cryptocurrencies and specify how you want them to be distributed. This ensures that your intentions are legally documented. A letter of directions is a separate document that provides detailed instructions on how to access your cryptocurrency holdings. This includes information on where your private keys are stored and how to access any digital wallets or accounts.

Store your private keys and other sensitive information in a secure location, such as an external hard drive, a safety deposit box, or a digital password manager. Ensure that your executor and beneficiaries know where to find this information. As you acquire new cryptocurrencies or change how they are stored, update your will and letter of directions accordingly. This ensures that your documentation remains accurate and up-to-date.

The accessibility and security of your cryptocurrencies depend on the availability of private keys. Private keys are cryptographic codes that allow you to access and manage your cryptocurrency holdings. Without these keys, it is impossible to transfer ownership or spend the assets. Multi-signature wallets require multiple private keys to authorise a transaction. This adds an extra layer of security and can be useful in estate planning, as it allows you to distribute keys among trusted individuals.

Hardware wallets are physical devices that store private keys offline. They are less susceptible to hacking and provide a secure way to store your keys. Make sure your beneficiaries know how to use these devices. Regularly back up your private keys and store these backups in different secure locations. This ensures that your keys are not lost due to hardware failure or other unforeseen events. Ensure that your beneficiaries understand how to access and manage cryptocurrencies. This includes providing them with resources and guidance on using wallets, exchanges, and other tools.

But what if your cryptocurrency is stored on a foreign platform?

When planning for the inheritance of your cryptocurrencies, it is crucial to also consider the situs, or location, of the exchange where your assets are held. If the exchange is based in a different country, this can complicate the transfer process due to differing legal jurisdictions and regulations. South African exchange control regulations require residents to report foreign-held assets, including cryptocurrencies. Additionally, the executor of your estate must deal with the legal requirements of both South Africa and the country where the exchange is located to transfer ownership to your beneficiaries. This can involve tax implications, compliance with foreign regulations, and potential delays. Consulting with an attorney experienced in international estate planning and exchange control regulations can help ensure that your digital assets are managed and transferred smoothly across borders. Again, keeping a good record of where assets are stored is essential to ensure you do not lose access to your wallet.

How do we deal with it in South Africa?

In South Africa, cryptocurrencies are treated as intangible assets for tax purposes. This means they are subject to income tax or capital gains tax, depending on how they are used and for how long. Understanding the tax implications is critical for both you and your beneficiaries. If you are an active trader in cryptocurrencies, the profits from your trades will likely be taxed as income. This applies if you regularly buy and sell cryptocurrencies with the intention of making a profit, and will continue t apply in your estate (and if your income is mainly sourced in another jurisdiction, don't forget about the potential cross-border taxation issues).

If you hold cryptocurrencies as a long-term investment, any gains from their sale will be subject to capital gains tax. Estate duty is calculated on the value of all property and deemed property in your estate at the date of your death. This includes cryptocurrencies.

It is essential to report all cryptocurrency transactions to the South African Revenue Service (SARS). This includes gains or losses from trading, mining, or any other activity involving cryptocurrencies. Failure to report these transactions can result in penalties and interest. But what happens if you, as the family or executor, don't know about the cryptocurrencies owned by the deceased?

The executor of your estate plays a critical role in managing and distributing your cryptocurrency holdings according to your will. In the absence of a will, your estate will devolve in terms of intestate succession. The executor, if aware of the assets, would locate all cryptocurrency holdings and gain access to them if possible. This requires knowledge of where private keys and other relevant information are stored. The executor must then determine the value of the cryptocurrencies at the time of your death. This can be challenging due to the volatile nature of cryptocurrency prices. It may involve consulting with experts or using online valuation tools. Unfortunately, sometimes access to cryptocurrency wallets is not possible if the key to the wallets are lost.

The executor is responsible for ensuring that all tax obligations related to the cryptocurrencies are met. This includes filing necessary tax returns and paying any due taxes. The executor must distribute the cryptocurrencies according to the instructions in your will alternatively in terms of intestate succession. This may involve transferring the assets to your beneficiaries’ wallets or selling them and distributing the proceeds. The executor must take steps to secure the digital assets during the estate administration process. This includes protecting private keys and ensuring that the assets are not lost or stolen.

What if I am a beneficiary of cryptocurrencies?

If you are a beneficiary of cryptocurrencies (instead of receiving cash), there are several steps you should take to ensure you can access and manage these assets effectively. Familiarise yourself with cryptocurrencies and how they work. This includes understanding blockchain technology, digital wallets, and private keys. Once you gain access to the cryptocurrencies, secure them in a wallet that you control. Consider using a hardware wallet or other secure storage solution.

Handling cryptocurrencies in estate planning presents several challenges, but with proper planning and foresight, these can be effectively managed. The security of private keys is paramount. Use multi-signature wallets, hardware wallets, and other security measures to protect your assets. Ensure that your executor and beneficiaries are aware of these security measures as well as how to access them in the event of your death (without sharing keys during your lifetime).

Cryptocurrencies are still a relatively new asset class, and regulatory frameworks are evolving. Stay informed about changes in regulations that may affect how cryptocurrencies are treated in your estate. The technical aspects of managing cryptocurrencies can be daunting. Provide your executor and beneficiaries with clear instructions and resources to help them deal with them.

If you need assistance with any complex estate planning issues, contact Spence Attorneys. Our team of experienced professionals are here to help you deal with the complexities of estate planning and ensure your wishes are carried out effectively. Email for assistance or to book a consultation.

This article is for informational purposes only and does not constitute legal or financial advice. Consult with a professional advisor to address your specific circumstances and ensure compliance with applicable laws and regulations.

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