Wills and inheritances: Passing down passwords

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  Quantumrun Foresight
• November 20, 2024

Insight summary

The rise of blockchain and cryptowills is reshaping how people manage and pass down their digital assets, offering potential benefits like increased security and efficiency. However, challenges such as lost private keys and unclear legal frameworks pose risks. As laws evolve and more people accumulate digital wealth, governments may need to introduce new policies to address tax and inheritance issues surrounding these assets.

Wills and inheritances context

Wills and inheritance practices are evolving as technology advances, mainly through blockchain and smart contracts. Blockchain, a decentralized and immutable digital ledger, ensures that records such as financial transactions and ownership transfers are securely maintained. One of the most notable developments is the introduction of "cryptowills," which are electronic wills stored on a blockchain. These cryptowills allow individuals to list their digital assets, such as cryptocurrencies and non-fungible tokens, with the potential for automatic execution upon death via smart contracts. These digital wills could offer enhanced security and transparency, providing beneficiaries with seamless access to digital wealth without lengthy probate battles.

Furthermore, smart contracts embedded on blockchain platforms like Ethereum are gaining attention in estate planning. As noted by the UK Law Commission, these contracts automate the distribution of assets according to predefined rules, reducing the likelihood of disputes. However, a significant challenge is ensuring that cryptoassets stored in blockchain wallets can be accessed by beneficiaries after the key holder's death. The private key, which is similar to a digital password, is essential for authorizing transactions. If lost, the digital wealth may become permanently inaccessible. Companies are pioneering contract automation tools to streamline these processes, making digital wills a reality without requiring advanced technical knowledge.

While cryptowills offer promising benefits, there are ongoing legal and tax considerations. For example, the enforceability of cryptowills is still debated, particularly in countries like the UK, where traditional wills require witnesses and physical signatures under the Wills Act 1837. Inheritance tax laws, such as the UK's 40 percent rate, also present challenges regarding how digital assets should be valued and taxed. As technologies like blockchain continue to evolve, more comprehensive regulations will likely emerge to address these issues. 

Disruptive impact

As more people accumulate cryptoassets and other forms of digital wealth, the ability to store and pass them down securely will become increasingly important. With cryptowills, individuals can ensure that their digital property is transferred seamlessly to beneficiaries. However, the reliance on private keys introduces risks, potentially leaving heirs without access to valuable resources. Additionally, older generations unfamiliar with blockchain technology may struggle to adopt these solutions, creating a gap in estate planning practices across age groups.

Law firms, financial advisors, and tech companies may need to invest in educating their clients about securing digital wealth through cryptowills. Companies specializing in blockchain solutions could also offer custodial services for private keys or multisignature wallets to ensure assets are properly managed after death. However, businesses could face challenges navigating legal uncertainties, especially as laws surrounding cryptowills evolve. Cryptowill companies may also have to address the legal complexities of transferring digital wealth across borders.

Meanwhile, tax authorities like the Internal Revenue Service (IRS) in the US treat cryptocurrencies as property, and this could complicate inheritance tax assessments. As more people leave cryptoassets in their wills, governments may need to develop new frameworks for valuing and taxing these digital assets. Additionally, legal systems may need to update laws to recognize cryptowills as valid documents. Countries that lead in creating clear regulations around digital inheritance may attract blockchain companies looking to offer estate planning services, potentially boosting their tech sectors. However, without clear laws, there is a risk of prolonged legal battles and tax disputes, which may burden the courts.

Implications of wills and inheritances

Wider implications of wills and inheritances may include: 

• Governments introducing new tax frameworks for digital assets in wills, creating more complex estate planning processes for individuals and legal professionals.  
• Legal systems adapting to cryptowills leading to faster resolution of inheritance disputes, reducing court backlogs and benefiting families.  
• Businesses shifting to offering digital asset management as part of estate planning services, leading to increased demand for tech-literate lawyers and financial advisors.  
• Blockchain adoption in estate planning driving further investment in cybersecurity to protect sensitive information, resulting in a growing market for digital security firms.  
• Cryptowills changing demographic expectations around inheritance, as younger generations, more familiar with digital wealth, demand tech-integrated solutions.  
• Reduced paper usage in legal processes, contributing to slight environmental benefits from reduced waste.  
• More political debates on digital privacy as governments balance transparency in estate transfers with the need to protect private keys and sensitive data.  
• Technological development in decentralized identity verification systems, making global asset transfers more efficient.  
• A shift in labor demand within estate planning, requiring upskilling in blockchain and digital asset management to remain competitive.

Questions to consider

• If you have digital assets, how prepared are you to pass them down securely to your loved ones?
• How could blockchain-based wills offer a more efficient solution for managing family inheritances in the future?