Cryptocurrencies and wills: important information for secure estate planning

Cryptocurrencies such as Bitcoin, Ethereum and other digital assets present a new challenge in the drafting of wills. Due to a lack of legal regulations and a lack of established case law, there are considerable legal and tax uncertainties regarding the inheritance and administration of crypto assets. In order to enable heirs to access digital assets smoothly and to minimise tax risks, forward-looking planning is essential.

1. Crypto assets as part of the estate

According to the currently prevailing opinion in the legal literature and the communication from the German Federal Government, cryptocurrencies are inheritable under German inheritance law and are subject to the so-called universal succession in accordance with § 1922 BGB (transition of the assets as a whole to the heirs / community of heirs).

However, a successful will requires a close look at the specific crypto assets to be inherited. Only precise knowledge of the legal classification of a crypto asset enables a successful testamentary (and tax) arrangement.

Cryptoassets are diverse and can be categorised, for example, into payment tokens, security tokens and utility tokens. Payment tokens such as Bitcoin serve as a digital means of payment but are not subject to any uniform regulation. Security tokens securitise ownership or participation rights and may fall under the scope of securities law, which subjects them to strict regulatory requirements. Utility tokens grant access to certain platforms or services and are usually not classified as securities, but may be subject to grey areas. The legal classification of cryptoassets is developing dynamically and is often based on existing financial and securities laws.

2. Inheritance tax & compulsory portion law: challenges in the inheritance of cryptocurrencies

Cryptocurrencies are subject to inheritance tax in Germany. However, there are uncertainties regarding:

• Valuation: Cryptocurrencies are subject to strong price fluctuations. The market value at the time of the inheritance is decisive. However, it is not fully understood how this value is determined exactly. In principle, it is the ‘fair market value’ that could be realised in the ordinary course of business according to the nature of the asset in the event of a sale (section 9 of the Valuation Act).
• Distinction between private and business assets: If crypto assets are held as business assets or used for business purposes (e.g. through mining or trading), they may be treated differently for tax purposes than if they are held as private assets. The tax treatment of cryptocurrencies requires precise classification. Click here to find out more about tax advice for digital assets!
• Calculation of the compulsory portion: Persons entitled to a compulsory portion have a claim against the heir(s) for payment of a sum of money to be calculated on the basis of the value of the estate. The volatility of cryptocurrencies can lead to considerable disputes in this regard. In principle, the value on the day of death is decisive. A subsequent fall in the exchange rate is generally at the expense of the heirs.

Practical tip:

• Regular documentation of the crypto portfolio with valuations on the reporting date.
• Tax advice on optimising the tax burden in the event of inheritance.

3. Drafting wills and bequests for crypto assets

Since cryptocurrencies are not held in bank accounts or in traditional custody accounts, it is important to draft a precise will:

• Proportionate bequests: It can make sense to divide up the crypto assets among various heirs on a percentage basis in order to avoid tax disadvantages.
• Individual bequests: Certain wallets or specific cryptocurrencies can be bequeathed to individual persons.
• Regulations regarding power of disposal: The management of private keys should be clearly defined in order to avoid access problems.

Practical tip:

• Will with clear instructions on the distribution of cryptocurrencies.
• Documentation of the private keys while maintaining security. Under no circumstances should access data be included in the will!

4. Execution of the will: protection and administration of digital assets

Appointing a knowledgeable executor can ensure that crypto assets are properly managed and transferred to the heirs. Since cryptocurrencies are subject to technical and security-critical peculiarities, a person with the appropriate expertise should be selected.

Practical tip:

• Select an executor with experience in the field of cryptocurrencies.
• Create detailed instructions for the administration of the digital estate.

5. Legal uncertainties and future developments

Due to the dynamics in the area of digital assets, numerous questions remain unanswered:

• Regulation: Future legal regulations may significantly influence the treatment of cryptocurrencies under inheritance law.
• Proof of inheritance: The rules for providing proof to crypto exchanges and wallet providers are inconsistent and can lead to practical problems.
• Access problems: Without clear rules, heirs may have difficulty accessing wallets and exchange accounts.

Practical tip:

• Regular review of the will in line with new legal developments.
• Creation of a digital estate plan with all relevant information.

Conclusion

Inheriting cryptocurrencies requires comprehensive planning and a clear will that ensures the confidentiality of the access keys. Given the existing legal and tax uncertainties, it is strongly recommended that you seek advice from your lawyer and tax advisor at an early stage. This will ensure that your digital assets remain secure and are not lost in the event of inheritance.