Private/Life

Kate Jackson, Senior Associate, Residential Property

Emily will need to set up her own hardware wallet to receive the crypto assets from her uncle. Whilst it is clearly very advantageous for Emily to have been gifted such large sums, she will need to be able to demonstrate to her conveyancing solicitor the source of these funds. As they have been gifted to her by her uncle, he will also have to provide evidence of his identity to her conveyancing solicitor.

Her solicitor will also wish to contact her uncle and make clear to him the following:

1. that they are not acting for him
2. that they are treating the sums as a gift
3. that the sums are not being protected in any way that would enable them to be repaid to him in the future.

As she is buying a property for £4m and has crypto assets valued at £9m, we can assume that she is not obtaining a mortgage and therefore we do not have to comply with any lender requirements with regards to the gift.

Follow the (crypto) money

The process for confirming source of funds can take time.

When it comes to crypto assets, the requirements are essentially the same as any asset. We will need to see evidence of the realised assets being converted from a bank account to the crypto asset.  

Traditionally, we would be looking at following the source of funds for money held in a bank account. We would need to see the paper documentation confirming the release of funds and the associated deposit into the client’s bank account, for example:

1. salary, you would want to see confirmation of employment, pay slips and bank statements showing salary entering that account
2. share/asset sales – we would need to see evidence of the sale and evidence of funds entering the client’s bank account
3. inheritance – we would need to see evidence from the estate solicitor of the release of funds and then show them entering the client’s bank account.

If funds are in the form of a cryptocurrency then you would want to see evidence of the funds being placed onto an On-Ramp exchange such as Binance, Coinbase or Kraken to name a few. On Ramp being fiat money being converted in cryptocurrency.

Cryptocurrencies are unique when comparing them to traditional money. They make use of a technology called 'blockchain'. This is, in short, a distributed ledger of all transactions. What this means is that all the transactions ever made for each cryptocurrency are recorded on a single blockchain, holding its entire history.

The ledger provides full transparency and can be viewed just like a bank statement. You can view every transaction together with a record of any appreciation in value of the crypto currency.

Beverley Collins, Solicitor, Private Client

Mandy Casavant, Partner, Private Client

As with traditional assets, it is Emily’s executor who will be responsible for accessing her crypto assets and transferring them to her chosen beneficiaries. However, different platforms have different rules about how an asset may be accessed on death and, if applicable, the contractual terms and conditions of those platforms should be carefully considered as they can limit the access of executors.

To add a further complication, ability to access Emily’s crypto assets could become more difficult by needing to determine in which jurisdiction the assets fall and thus the specific authority the executor will need to show (e.g. a death certificate, Grant of Probate or perhaps a specific court order).

Accessing crypto assets

To identify and access her crypto assets, Emily’s executor will need her passwords and personal keys. Therefore, Emily should keep a hard copy list with instructions on how to access each crypto asset and her preferences for how her executor deals with each one. This list should not just be the information on the valuable NFTs (non-fungible token) or cryptocurrencies but also social media accounts, password protected photographs stored on the cloud or computer, digital music library, loyalty points, digital wallets (the list goes on!). It should be kept up to date and in a safe place, Emily should not share this list with anyone but should let her executor know where it is kept.

As some platforms prohibit the recording of passwords in writing, Emily may use a secure digital password manager with just the master password being provided to the executor. Due to cryptocurrency and NFTs having public and private keys which are needed to access the asset, it is often recommended that these keys are kept in a safety deposit box (details for which can be stored in Emily’s crypto asset list) for the loss of these keys can result in the loss of the asset!

Tax planning for crypto assets

Structuring how Emily’s crypto assets sit within her estate is important for tax purposes as well as for practical purposes, for how a crypto asset is owned and the rights which are allowed to be passed on can increase the steps and length of time required to transfer the asset to Emily’s chosen beneficiaries. The use of trusts (made under Emily’s Will or during her lifetime) may be helpful for tax planning, potentially mitigating her inheritance tax liability on her death by removing a fluctuating asset from her estate for inheritance tax assessment. For trusts set up during her lifetime, this could also provide easy access to the crypto asset held on her death, not requiring a grant of probate to enable access.  

Nevertheless, as a new and developing area of law careful consideration should be given to HM Revenue and Customs comments on the taxation of crypto assets, and whether they fall under the laws of England and Wales or another jurisdiction.

Emily may just leave outright gifts of her crypto assets under her Will. Due to the personal nature of some of these assets (photographs and social media) and the complex nature of others (cryptocurrencies) she should consider appointing a separate digital executor to deal with them. This might be someone who can better appreciate the nature of the asset and can also be sensitive to its content. For example, Emily may not want her nephew reading her personal emails, or the files on her computer, but rather a friend to deal with this and delete sensitive items before the computer passes to her minor children. For this to be possible, Emily may need to have specific powers included to enable her digital executors to be able to deal with her assets effectively.

Emily should carefully consider the definition of any asset she leaves with digital data on it, such as a computer. This will ensure that there is no confusion as to whether the data stored on the object is to pass to the recipient of the computer or if the computer is to be wiped or modified. Furthermore, the rights Emily has to an asset might be limited, and thus the rights she is able to pass to her chosen beneficiary also limited. For example, music bought in iTunes is only licensed to the individual account holder and therefore cannot be transferred to any beneficiary.