Blockchain is, at its core, a distributed and immutable digital ledger. Because it records transactions across multiple computers, it ensures security, data integrity, and transparency. Blockchain does not rely on trust. While each individual holding cryptocurrency is anonymous, blockchain records are public and not issued by any centralized authority. Each transaction or contract must pass across the network so every computer can check its records. Blockchain can redefine how assets are transferred from one generation to the next.

Key Characteristics of Blockchain

Blockchain is a secure network that relies on the public to oversee transactions and does not depend on trust to ensure transactions move forward as expected. Some key characteristics of blockchain that are vital to estate planning include:

• Decentralized: A blockchain comprises a network of computers called nodes. Each computer has a copy of the entire blockchain, making it decentralized and less susceptible to manipulation or failure. Authorized parties, such as family members, lawyers, and executors, can have secure and instant access to important estate planning documents. Since it is a global network, these documents can be shared across borders.
• Transparent: Because the entire blockchain is visible to everyone on the network, fraudulent transactions are less likely to occur because everyone is accountable to everyone else. Blockchain relies on all participants to agree on the validity of the transaction.
• Immutable record: Once data is recorded on the blockchain, cryptographic hashing, and consensus mechanisms make it very difficult to delete or alter a record. Estate planning documents, such as wills and trusts, can be stored on the blockchain.
• Security: Using advanced cryptographic techniques, blockchain promises secure transactions and controlled data access. Each owner has a private key that is used to sign transactions. Digital identity verification can verify the executors and beneficiaries when executing wills, reducing the potential for fraud or identity theft.
• Smart contracts: These self-executing agreements have predefined rules and conditions. Smart contracts are used to automate processes and facilitate complex transactions. Smart contracts can automate the distribution of assets based on meeting certain specific conditions, such as a specific date. Documents can be updated without delay.

Blockchain provides the potential to ensure that wills and distributing assets are handled more quickly and efficiently and not delayed by a lengthy probate proceeding.

Examples of Estate Planning Using Blockchain

A trust could be established on a blockchain. Smart contracts using triggers would allow for distributions when certain conditions were met. Changes to the trust document would be immediately verifiable, as would the identity of the trustee and the beneficiaries. Since each transaction is transparent, successor trustees would have the entire ledger at their fingertips, decreasing the risk of fraudulent transactions and disputes among beneficiaries.

Estate planning using blockchain technologies makes it easier to incorporate digital assets, such as cryptocurrencies and nonfungible tokens, into your estate plan. Cryptocurrencies are not regulated in the same way as other assets, so they require specific estate plans. Blockchain technology can facilitate the secure and automated transfer of digital assets.

Points to Consider When Using Blockchain for Estate Planning

Whenever a new technology becomes available, there are bound to be hurdles that need to be overcome. Cryptocurrency and blockchain technology are no different. We can all learn lessons from cryptocurrency investors, including:

• Document your digital assets: Stefan Thomas was an early adopter of Bitcoin. He used a digital wallet to hold his passwords. The problem is the system would only allow ten attempts to enter the password before the information stored on the drive becomes encrypted and inaccessible. Unfortunately, he could not remember his password. Create a detailed list of all your digital assets and passwords and ensure they are updated on your estate plan.
• Choose an executor: Your executor must understand where your digital assets are stored and how to manage and distribute them according to your wishes. Clearly specify who will receive your cryptocurrency and what proportions of your digital assets they are entitled to.
• Consider taxes: Consider the legal and tax implications of including cryptocurrency in your estate plan. The Internal Revenue Service considers Bitcoin and other digital cash as property rather than currency. Therefore, any profits from purchasing cryptocurrency for personal or investment purposes will be subject to capital gains taxes.

Not only do digital assets such as cryptocurrencies and nonfungible tokens need to be included in your estate plan, but the future of estate planning may also be forever changed by using blockchain technologies. Estate planning and tax issues for digital assets are complex and continue to evolve as blockchain and other technologies become more commonplace.

Speak to a trusted advisor to help you develop your digital estate plan, contact us, and schedule a call with us at 855.631.3457 to learn more about how to protect those most important to you.