This Blog was written by: Dave Madan, Market Lead and Manager, Scotiatrust
Estate planning has evolved recently. We have learned how our digital accounts are affected by our plan, how to deal with online accounts such as PayPal, Facebook, Google, and Apple, however, it has continued to evolve even further. Cryptocurrency has become even more mainstream. Major backers like Mark Cuban have invested significant assets into cryptocurrency. Bank of America, Citigroup, and Wells Fargo have developed their own cryptocurrency policies. You can now buy crypto on WealthSimple. CRA has given clear direction that income realized from cryptocurrency is considered taxable income.
This new segment of our economy is here to stay. As estate professionals, its important we understand some of the basics of how these accounts are held, managed, and secured, so we can continue to give good advice to our clients.
Let’s start by differentiating the different types of ‘accounts’ from each other.
License accounts, or licenses to use specific applications or content, are your most common, and nearly everyone has this type of account. This covers accounts such as Apple iTunes, Appstore, Google Movies, and your Amazon Kindle library. Purchases made on these platforms are non-transferrable. There is no right of survivorship on these accounts, and you do not own the items you purchase. Remember those Terms and Conditions you accepted? Yes, that was in there. Even more concerning, your personal data, photos and videos, all that data is living in Apple’s or Google’s cloud. The licenses are terminated on death, and your personal data needs can be inaccessible unless you have setup a delegated person on the platform. I recommend you export and backup any files offline as often as you can. For those iTunes collections, you may want to consider placing those in a family account so your loved ones can continue to listen to those Lynyrd Skynrd albums once you’re gone.
Cloud based accounts
Cloud based accounts, or centrally managed accounts are also fairly common, and may be familiar. These might be accounts like PayPal balances, or could also be cryptocurrency wallets managed by a 3rd party. Trusting a 3rd party has its own risks, especially in the cryptocurrency space, as many of us learned in the QuadrigaCX disappearance of customer funds. Current cryptocurrency online wallets and exchanges are somewhat safer, have audited financials, and fewer are now publicly traded, such as Coinbase. Inherit risks still exist, and these accounts are typically targeted for identity theft and phishing attempts. Cloud based accounts are registered to a person similar to a bank account, however, there is no joint account registration or survivorship. These companies will recognize probate and allow access to the account by the executor; however, it will require an executor who is familiar with these types of accounts to navigate the process.
Decentralized finance account
Finally, the more complex form of these accounts, and becoming increasingly common, is the decentralized finance account, or ‘DeFi.’ These accounts exist only within the blockchain, where they are not associated with the account holder’s name, nor are they controlled by anyone. It is a truly anonymous type of account. All cryptocurrency wallets have a public key, or address to identify themselves on the blockchain. The public key is used to send or receive funds, and is publicly viewable. These accounts can only be accessed by the person who has the public key, and the private key, or recovery phrase. If the private key or recovery phrase is lost, so are the balances held in these accounts. The system is completely decentralized, and there is nobody to go to for help in recovering that data or the balances within these accounts. If you think that won’t happen with someone who knows how to use these wallets, there are many people who have lost significant investments from losing these keys. There’s an interesting story of how a farmer lost 100,000 Bitcoin. While worth only $1,000 USD at the time, this investment today is worth in excess of $4 Billion Canadian! The private keys should always be stored in a safe place, where your executor or trusted family member knows where to access them. This could be as simple as printing out the private key and placing it in your safety deposit box. Your executor should also be someone who understands the nature of this asset, and will be capable of dealing with it.
As estate planning professionals, it is important we understand the differences in these types of assets, and are able to identify the risks for clients who may hold these types of assets. With this segment of the financial market continuing to grow, it will become even more common to see these types of accounts, where our clients are using them to diversify their investments.