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Trustee Issues with Crypto-Currency (with Matthew McClintock)

Family offices, trust companies and opportunistic individuals are dealing with a new and exciting asset class: cryptocurrencies. New Bitcoin multi-millionaires are “minted” by the day as interest in the space has captured the public’s imagination. It has created a host of challenges for the owners of that wealth as they use the usual wealth management tools for intergenerational planning, asset protection, and tax structuring.

(Here is a quick primer on Bitcoin – A HISTORY OF BITCOIN, INCLUDING PRICING. Today’s podcast isn’t a discussion of the merits of cryptocurrencies as investments or where they fit in a portfolio).

Bitcoin and the other cryptocurrencies are controversial. Cryptocurrencies are grounded in a logical technology workflow (blockchain), but they have a shadowy origin and crypto’s intrinsic value is rooted in public confidence around that blockchain workflow, not the usual confidence in the strength of the country that supports fiat currency. However, crypto’s popularity has exploded and its value (and volatility) has rocketed along with it.

What is unquestionable is that significant wealth has been created with the rapid increase in value of many crypto-currencies. The financial services industrial complex has not kept up and it puts many crypto-wealthholders at risk. There are 13,290 BTC addresses with more than $1mm according to this GlassNode REPORT and this does not include other coins like Ethereum, Ripple and the rest. Much of that wealth has been created in the last five years. Those owners are asking lawyers, accountants, and crypto-exchanges how to protect it, use it, borrow against it, diversify it and transfer it to the next generation or their selected interests. The owners of that crypto-currency wealth are getting older and looking for structures to protect this wealth for future generations.

These structures include trusts and involve individual and corporate fiduciaries who have major responsibilities around the safeguarding and reporting of assets (including tricky ones like crypto-currency), the prudent investment of assets, and distribution of assets according to the terms of a trust and, where silent, in accordance with their best discretion.

Besides the investment bona fides, what are the issues that these fiduciaries should be worried about?

How do institutions, trustees, and others who have responsibility for others’ wealth deal with this complex asset.

To find out more, I spoke with MATTHEW McCLINTOCK– Partner at the law firm of EVERGREEN LEGACY PLANNING. Based in Evergreen, CO and Newport Beach, CA. The firm focuses on generational wealth planning for affluent clients. Importantly, Matthew has on-the-ground experience planning for cryptocurrency wealth, including clients with crypto-wealth in nine figures.

We talk a little bit about the asset class, but focus on spotting the issues for the advisors that have to help client’s navigate the high stakes world of crypto-wealth.

The outline for our conversation:

Matthew, tell us a little about your background-

How did you get interested / experienced in cryptocurrency?

What makes cryptocurrency so unique as an asset? 

What are the properties that make it like a Currency? Property? Commodity?

Very quickly, how does one buy, hold and sell crypto currency?

How big are crypto-fortunes right now?

With intergenerational wealth, often times trusts are used for tax, asset protection and other forms of planning.

Trusts are “located” in a jurisdiction, contain assets, have a grantor, a trustee and beneficiaries.

The Trustee must safeguard/custody, invest and distribute the assets per the trust.

Are people funding trusts with Cryptocurrencies?

Being responsible for crypto-wealth

Dabbling in this space can be dangerous and mistakes costly. Trustees must be willing to invest the time to learn how crypto-currencies work.

How secure is crypto-currency for those holding it personally?

Encryption is the key for secured access

Cold (Digital Storage that is disconnected from the internet and hackers) vs Hot Wallets (Exchanges with connectivity to the internet)

How susceptible are exchanges to hacking?

Custody- What makes cryptocurrencies a tricky asset for custoidans?

Required encryption (which could get lost)- a positive and a negative.

What if there are bad actors? Is Crypto-Currency risk really a human resources problem?

Processes for storing and then transacting crypto-wealth should require checks and balances to access it- should you require multiple parties to effect a transaction?

What if a trustee resigns or is fired and has access to the crypto information? Is this remedied by transferring the crypto to a different wallet?

What does a good procedure look like for transfers and transactions involving crypto-wealth? (Once it is gone, it is extremely difficult to get back- a transposed number could destroy a firm)

What does a good procedure look like when a crypto-holder dies? What should executors and powers of attorney be prepared for?

If going from a cold wallet (secure) to a hot wallet to liquidate/trade/lend (yield farming), how does a trustee deal with that?

Cryptocurrency is taxed as property and requires the tracking of basis. What systems do you need to effectuate this?

Many estate plans make use of situs to effectuate goals like tax planning, asset protection and other goals. How do you maintain situs with a “non-physical asset”?  If improperly set up, state taxes on crypto capital gains (or estate/transfer taxes) could be significant. Is this a breach of fiduciary duty if a trustee or other fiduciary doesn’t effectuate the broader tax planning?

Best Practices

Is it total madness for an individual trustee to take this on?

What are you seeing good trustees do when dealing with cryptocurrency wealth?

What advisors should a crypto-wealth holder have and what questions should they ask? Is the right first question, “Do you have any cryptocurrency holdings?”

Important partners:

Accountant (and custodians that are able to track necessary information like basis and farmed income)

Attorney used to tax, estate planning with experience in crypto

Financial Institutions (and states) used to dealing with cryptocurrency

Exchanges used to dealing with trusts

States with legislation that cryptocurrency friendly (ex. Wyoming, Tennessee)

Examples of weird state intersections

What are the hot points should we look out for as this space develops?

Fun question

What three people living or dead (and not family) would be a fun dinner group for you?