Who gets the crypto? The passing of digital assets using a will

Answer

This article was originally published on 19 December 2023.

Digital assets are caught under the definition of 'personal estate' as per Section 1 of the Wills Act 1837 – although they aren't expressly referenced. This then follows that they’re capable of being disposed of through a will, as per Section 3 of the same act.

People are increasingly using a multitude of platforms to dabble in the world of cryptocurrency, and we have also seen the rise of non-fungible tokens (NFTs) whereby people buy and own the rights to digital media, such as photographs, animations and other pieces of art.

This article will consider a few practical difficulties and pitfalls for practitioners to avoid in this area, while highlighting the importance of remaining aware of the changing regulatory landscape so as to ensure you can provide clients with up-to-date and commercially astute advice.

First and foremost, practitioners need to be alive to the fact that this is an extremely volatile market. There’s very little predictability, for example NFTs particularly have plummeted in value – data from Chainalysis suggests that the average price has fallen 92% from 2022 to 2023. It’s also an area that’s notoriously difficult to legislate for because of the fast pace of change. Legislation is something to keep a close eye on as it may cover the transfer of such assets, so the passing under a will may be caught by these provisions too.

However, it’ll be interesting to see how this legislation is implemented in practice due to the multijurisdictional element of digital assets. If a testator has an account in another jurisdiction, it may be subject to different rules and regulations, but ultimately it’ll usually form part of a UK-based testator's taxable estate for inheritance tax purposes.  

One practical consideration would be ensuring the assets are identified and subsequently accurately described in the will. If not, there’s a risk that the gift will adeem and form part of the residue – therefore it may end up with someone other than the intended beneficiary.

Another issue to be aware of is accessing the assets. It’s worth mentioning that it’s notoriously difficult to access, or even identify, such assets without being in possession of the full information due to their anonymous nature. You could risk them being stuck in cyber-space if the information dies with the testator, with there literally being no way of getting them back.

If there’s digital currency across various accounts, you should ensure your client has left clear instructions as to how to access the accounts and ultimately gain control of them. This may include website links, usernames and passwords. For cryptocurrency clients will also need to include their private key for their crypto wallet. It should be noted that a will is a public document in that, once probate has been granted, anyone can apply to obtain a copy of it. Therefore, any sensitive information in this regard shouldn’t be included in the main body of the will – or you risk anyone being able to access the assets. A side letter may be the best place to provide this information while maintaining confidentiality. The letter should be stored securely, such as in a safety deposit box, in a safe or with you in your capacity as legal adviser.

In terms of actually dealing with these assets, you should remind your client to consider their choice of executors. When selecting executors for any estate, some typical suggestions would be someone who’s trustworthy, fair and has some knowledge of the family history. However, this person may not possess the technological skills to access and manage assets of this kind, so it's worth considering the appointment of an additional executor with specific expertise to take on the role of 'digital executor' to ensure the assets are handled appropriately.

Another practical consideration is the value of such assets. Like stocks and shares, they’ll be assessed for tax purposes on the date of death – but it’s possible that they could then plummet afterwards and the recipient receives a very small amount – potentially even with a value of less than the tax they paid. Unlike stocks and shares, they’ll not qualify for post-mortem relief on the tax, so there currently is no remedy here. An additional practical point is that HMRC doesn’t accept cryptocurrency as payment for any tax liability. Therefore, it must be converted into cash in order to satisfy any outstanding tax bill.

You may be thinking that the best way for your client to pass on assets of this kind is to dispose of them during their lifetime, but there are pitfalls here too. If the testator dies within seven years of making the transfer, it’ll become taxable based on the value at the date of the gift, so again you may be faced with a hefty tax bill if the asset itself is no longer worth very much. An additional note is that while there are names such as 'CryptoCURRENCY' and 'BitCOIN', they’re assets rather than money, so any lifetime transfer will also mean they’re subject to capital gains tax too.

If the testator is wishing to leave assets to more than one beneficiary, you should ensure that they’re aware that it can be difficult to even out legacies just through provision of cryptocurrency alone, again due to their volatile nature. It can’t be accurately compared with a cash or property equivalent because the value can fluctuate so drastically. If the testator is bequeathing an NFT where the intention is for beneficiaries to have joint ownership of it, consideration should be given as to how this should be dealt with – for example, will there be conditions stating that it must be sold within a certain time period or sold for at least a minimum price?

Practitioners in this area should be aware that they may be faced with situations involving digital assets more frequently, and so should be adequately prepared to advise their client. They should be alive to potential issues and aware of the changing regulatory landscape to ensure their client's wishes are carried out accordingly.

Grace McGuigan is a trainee solicitor in Womble Bond Dickinson’s London office.