Tara (00:51):
Thank you so much for tuning back into the Art of Estate Planning podcast for episode 39. It's Tara Lucke here, and today's episode is a bit of a special one. It's actually a conversation that I had recently in the Art of Estate Planning Facebook group.
(01:10):
Every month you probably know we go live with a free training for our members. Now the Art of Estate Planning Facebook group is free. It's all free. So if you're not in there and you're on Facebook, come and join us. It's such an incredible space. And in this training I had the privilege of interviewing crypto consultant slash former tax accountant, Jamie Reed, and he had an incredible presentation for us about what is best practise for cryptocurrency assets, for lawyers planning, estate planning matters, and then also what to do when a client has died without a plan for their crypto assets. So I learned so much. I'm a real crypto, you'll probably tell from the questions you hear me asking, but I found this really insightful and very practical and I really hope you enjoy it.
(02:13):
Now because it was recorded in a video format, the quality may not be quite as high as our usual podcast recordings, but I'm sure you'll forgive us when you hear how incredible his information and content is. And I'll just put in the show notes if you actually want to go and watch the full video and see what Jamie is sharing on his screen as well. Go and have a look at the show notes. You'll see the YouTube link there too. But I really hope you enjoy this conversation. I got so much out of it and I think you will too.
Jamie (02:47):
Pretty much today, the entire session's going to be around, so securing the digital legacy and then I'm quite a passionate person about this area. It's what I do for work. It's my personal life as well, but it's also something that's not often talked about and it's such a significantly growing asset class that people have that it's really important to have as many people as possible know what needs to happen and how to get it done. So pretty much today will be diving into how any estate planners, lawyers, accountants, any other professional in the space can better understand and prepare for crypto in an estate and how to respond pre-death, what you need to do post death, the mess if there's nothing planned. And so there'll be a little bit of theory that we'll start off with just to get everyone on the same page and it'll just be going over common terms, what they mean, why it's important to know what they are.
(03:46):
And then after that, you don't need to worry about theory and anything like that. It'll all be practical and focused on what you actually need to know if with a client and how you can help them. So I want pretty much the goal for me is everyone to walk away from this confident in speaking to anyone that has crypto in an estate, what needs to happen. And also just working with clients you'll understand hopefully a lot more without needing to go external until I guess you do need to go external. So the actual run plan will be going through those basics. Then ideally, what is the best practise? What would I think is the best way pre-death that you can set up someone with crypto to ensure legacy and ensure that nothing is lost, which is incredibly common. And then I'll go through a bit of practical work around how it would look like if you're working with a client, and then also how to get different information at different times.
(04:44):
Then after that, we'll go post death and the mess of no planning, what is recoverable? What can you actually save and what can be lost forever, which is quite common. And then because it is, I guess my origin specialty is, I'll go quickly through the tax considerations, but I won't bore you with that for too long. And so starting with the basics and the terminology, I guess we'll go right back to the very, very beginning. So what is blockchain? What is cryptocurrency itself? So if you think of general ledger for a business, so it includes all of the transactions in a company, every account where money has moved from one place to another. And then if we applied that to the Australian dollar, so if we could see every single place that someone spent a dollar, we could see where I guess all government funds were sent, what happened with any project, and we could trace that completely publicly.
(05:39):
That is what blockchain is for cryptocurrency, the blockchain is an open ledger that anyone can read, anyone can see, and you can see where the funds of anything has gone for that specific currency. So then I guess we know that that's how everything works with blockchain is it's an open wallet. It's an open ledger, sorry. But then how do people interact in that space? So onto, I guess, what are wallets? So as with normal money, a wallet is, it stores all of your funds. It stores the assets you hold, so cash or a credit card in crypto. It's also a wallet that holds everything, all of your crypto. And those are generally split into two different types. So you've got a hot wallet, which is, it's online. It's very easy to connect. So it could be an exchange account, it could just be a browser it extension, and they're very easy to use.
(06:35):
They're very easily accessible, but they're risky. So anything online is I guess vulnerable to hacks, anything else like that. So they are risky, but they're easier to use. So then what's a cold wallet? So cold wallets are generally used more for long-term storage as opposed to trading because they're completely offline, they're not connected to anything until you plug it into the computer and start using it, which means if you click on a suspicious link, it's not going to affect anything until you actually plug it into the computer. So they're a lot harder to connect to. It's almost like a USB that will also need either a password or a pin code, and it's a lot more secure. So that's sort of like a recommended storage. I like to always, when I'm explaining crypto is refer to things that people are, they know very well. So they're very common with, so a public key is it's like your bank's BSB and account number.
(07:33):
So if someone has that, they can send you money and there's no other risk apart from that really. They can send funds into your account and then that's it with a private key, however, that's your bank's online login. So someone has that, they can access your bank, they can send money away, they can do what they want. So it's really important to know the difference between these two when it comes to crypto. And so public key is fine. You can share that around all you like. And basically if you want someone to send crypto to you, you'd give them your public key. But the private key is the thing you would never share. You don't want anything stolen, so you keep that very secret. So they look just like a normal USB. They have a little screen on them sometimes, and this is what that cold wallet is.
(08:20):
So unless you plug this into the computer, it can't access any of those funds, which means it's important to know where it is and keep it safe, but also having instructions on how to access it is another step that we'll go through. But physical crypto wallets actually exist. It's just they look like a normal USB, so you could easily just throw it away while going through a pile of things. And then I think the final sort of topic to know about, and that is important to know is what a seed phrase is. A private key is generally encrypted into what they call seed phrase. So it can either be 12 or 24 words in a sequence in an order, and that is your backup for all of these wallets. So if you had a seed phrase but you lost the hard wallet, you would be able to buy a new hard wallet, input this seed phrase, and then you would have an exact copy and you'd have access to your funds again.
(09:16):
So the 12 to 24 words, they're effectively impossible to, yes, it's been done in a way where there's more chance the number didn't really fit on a slide for the one in whatever it was. It's there's more chance of picking a single atom out of the entire Milky way than it is of guessing that randomly it's very secure, even though it's just a list of words. But that's what it's for. It's there to be secure, it's there to be safe, but it's also there to not be able to be guessed. And then if there's, I guess one thing that you take away from the entire presentation, just one singular thing to know is that in crypto ownership is a bit wavy. There's no direct legal ownership over crypto in terms of argument's sake. It's if you can access crypto, if you have the seed phrase or the private key, you can control it.
(10:12):
And in crypto, controlling is technically ownership. If you are able to get into an account, you can do what you want with the funds and technically you own it because everything's pseudo anonymous. I'm sure there's, when it comes to I guess wills and estates law, there's all the guidelines about who owns what, but once it enters crypto, this is where everything turns grey and nothing really has been established for that. And that's one of the actual hallmark reasons that people buy crypto. There's that sort of self custody is what a lot of people were drawn to for crypto, where it's your funds, you control them, so you own them and it's up to you to protect them. So then just an example for you is it looks normal. It's just a list of 24 words, but this 24 words could be the private key to a wallet somewhere.
(11:08):
It could have nothing in it. It could have a million dollars in that wallet, but you could use this list of 24 words as a private key for a wallet, which it does just look innocuous, but it's very important. So when it comes to wills and estates, you could be looking through personal effects if there's been nothing planned and you find a list of words which you wouldn't blink at, it's just a random list of words. Whereas one of the things to know with crypto is it could look like that, but it could have half a million dollars of assets just on that piece of paper written down. So we'll move unless there's any questions that have come up, Tara, I think we can move into what the pre-death plan looks like.
Tara (11:49):
But actually it's not a question, but one of our solicitors watching has said that they had a deceased estate matter where the gentleman lost 1.5 million in crypto because he was hacked and lost the access. And yeah, it was just a devastating scenario.
Jamie (12:07):
Yeah, that's a common, since I've been doing wills and estates sort of consulting everything around that, it is such a common issue where you have to, when it comes to planning, you have to be safe with it. But even on top of that, it could just be a little bit of computer safety laps and judgement , and that amount is gone. I was recently, the last few days I've been working on a scam report, which is one of the things that I offer where someone, they had lost $400,000 to a scam. And from doing the sort of forensic tracing of the blockchain, because it is open, you can see it, it ended in a $44 million deposit into a Dubai based exchange. So there's such large sums moving around when it comes to hacks and scams that it's just unreal, but onto better things, the ideal pre-death plan, which is what you want to help set up with your clients to ensure that this doesn't happen and also that nothing just disappears.
(13:11):
So if everything's planned out, everything's noted. As long as there's what I'll walk through, which is what I call sort of the pre-death template, as long as that's been done well, you don't have to worry too much about just the assets losing access because no one notices the password. So the first is the risks, I guess, of a lack of knowledge. And you could put those, so some people might think we have all of this information, why not just put it in the will? Which that way once it's there after death, then it's fine, it'll all be there in one place. But the big issue and going back to access, which is control, which is ownership, is after death, you'll know that the will becomes public. So anyone could have access to that information and then control over those assets even if they knew nothing about it.
(13:59):
If for example, someone set up a script that just looks through the registry for wills that have crypto in it, they could effectively just scalp everything that comes through there. So then that means we can't keep that information in a will itself. So then you could just give it all to someone for safekeeping. So give it to your lawyer, give it to your accountant and say, here's all of the information about my crypto. Here's how to access it. You take care of that for me. And then after death, you can give it to the executor. But again, one of the key concepts when it comes to crypto is you don't want to have to trust a third party. One of the main reasons is you don't want to third party. So like a bank that freezes your account, you don't want that. So you don't want to have to trust anyone in crypto, which means if you were to give them all the information, you would be trusting them to not steal everything, which they could do anonymously.
(14:54):
So on top of that, even more, there's a huge liability for whoever has that information. If something was to happen, the finger would directly point at them. So you don't want to take care of that information. So then how would you safe keep it? No, it's not really a glitzy answer, it's just simple. It does the job and that's all you need. So it's pretty much what I call the crypto inheritance plan. So it documents where everything all of your crypto is stored, it tells whoever has that where to find the, say the cold wallet, where to find the seed phrase. It includes everything that's held. So you can check against that for say, an executor. They can say, okay, we found all of the crypto. We can go forward now. And then for every single platform, there's instructions of how to access it, how to get the crypto off and how to get that information.
(15:47):
Which I guess taking myself as an example, I've put one of these together for basically my wife just in case, and it has, I think it's six different exchanges, five different wallets, a cold wallet, and then another few hot wallets. So she doesn't know anything about crypto, but all of the information in here basically walks her through how do you get access to this? How does she get control and keep it safe, and then what to do with it next. So then we'll run through just like the main sections in this inheritance guide and what you would need in there and what you want in there for someone say an executor that knows nothing about crypto. So the first thing is those important notes. So all of the things we've covered so far about safety, security, everything like that is you need them to know that so that they don't fall into those sort of traps.
(16:41):
So don't share it with anyone. Don't store it digitally, basically. Otherwise someone can find it and be careful of scams. They're so prevalent now. It's the full-time job for so many people, so many organisations, that's all they do. So they're very good at it, but you need people to know those security issues. And then following that, it goes through each specific platform that you have. So a ledger, which is the little USBs, where is it? So it's in the safe at home, where's the backup phrase? So it's in a different safe because you don't want to store them together. A lot of people I've worked with, you find a lot of interesting people in crypto. So I've had had their backup seed phrase tattooed onto them. There's been some who engrave it onto a metal bracelet that one of the ones you can't take off.
(17:32):
It's a piece of wood, a lot of people, so many different ways that people store it. But as long as it's secure and safe, then I guess that's fine. And then you want to let people know how to access that. So find the device put in, the pin code is stored here, connect it to the computer and open this application, put in the pin code again, and then the ledger will let you look at all of your balances once you've gone through all of those security measures. So then again, just to reiterate it again, is the warnings about this specific platform? So don't put the seed phrase online if it's lost, but you have the seed phrase, you can recover it, that's good. If the seed phrase NPNL lost, it's useless and it's not heavy enough to be a paperweight. So it's unfortunate, but it's all of those things where it's really important to know exactly how to do it, but you want it as succinct as possible, so it's easy to follow those instructions.
(18:28):
The next is, so this is Coin spot, which is one of if not the biggest crypto exchange in Australia. It's the most well known. It's the most used and it's the most simple to use. So again, you go through all of the information to get access and then the steps. So log in and I'll be showing you coin spot later in a bit of a practical about if you're with a client, this is what it'll look like. This is where you get information and then this is how everything works. But again, if a lot of exchanges as well, at least Australian-based, it's very important to know they do have recovery methods after death. So Binance, which is another, they have an appeal you can go to. It does take several months depending on if you have all the documentation, but they actually will work with you to look if there's an account for the deceased and then actually help you get those assets.
(19:23):
Queen spot, I contacted them and said, I'm doing a presentation trying to teach people how they can help. Can you let me know how you guys handle post death and deceased estate? And they said, get the lawyer to contact me and then we'll talk to them because we're not going to talk to you about it. So you'll get varying helpfulness, but as long as you're in the position where you are doing that, you should be able to get help from the Australian registered exchanges internationally. You never know, they could be helpful or they could say, awesome, that account basically can't be accessed. That's profit for us. Now you never know which way it'll go because they're not really bound by Australian law. And then finally, in the inheritance plan, you'll have the instructions for, you've got all the assets. Now what do you do with it?
(20:13):
You have all this digital money, that's magic. What do you actually do with that to realise it? So you could either set up your own wallet, which is sort of step one of what you should be doing of as a note I guess for an executor is one thing you should be doing first out is if there's crypto in the estate, set up your own wallet, set up a brand new wallet and send all of the funds to that. The reason for that is you don't know who has access to the old wallet. It could have been shared with an ex-partner and things are messy, so you don't want them to have access to these funds anonymously. You want everything in your control and in your safety because you never know really with crypto what could have happened. But if you set it up yourself, it will be secure.
(21:02):
And then depending I guess what's in the will itself, you could convert it to fear currency, send it out to a bank account, or if the crypto itself was just to be sent, you can do that as well. So it's from here, it depends on what you want done with the crypto and who you want to have it or have the funds. And then finally again, more security, more, make sure that everything's set up correctly and safely. And then the final section would just be, if you need help, this is who to contact. So contact a crypto expert for help with getting access to everything. Contact a reporting and consultant if you need the reports done for asset holdings, for probate, that sort of thing. So it's one document that can be just part as an adjacent to the will that has all information in it, but also no information that could be used to gain access to those funds.
(21:59):
So it's everything they would need to find access. But no actual direct passwords that are saved in there is the biggest thing to know. If you had a client come to you and they've said, I have the details of crypto for the deceased estate, I need the information, but I don't know what to do. So if probate's coming up, you need the assets to register, put it through. How do you actually get that and what do you need to know as we're going through everything? So how do you source values from two weeks ago in those holdings? How do you find transaction histories? Everything like that. So if there's nothing that's been planned, there's no inheritance plan. It is possible to piece things together, but getting access is sort of a different story altogether. And the mess is like, I like to call it post death, but no planning.
(22:54):
It's in my opinion, it becomes less of a let's get all the information together and becomes more of a what can we save? What can we piece back together to try and make sure that these assets aren't lost and that there might be wealth that disappears, which could have been passed through to the family if it was planned correctly. So first thing is a client comes, they have crypto or they might have crypto, which is quite common where say a partner was very paranoid about their investments, they didn't talk about it too much, but you know that they mentioned crypto once or twice. What should you look for? So going through the personal effects themselves. So the devices you want computers, you want phones, any hardware wallets would be goldmine effectively. But like what we've seen before with the computers, you can find extensions and see, okay, they did have crypto.
(23:52):
You can look for saved passwords, you can look for emails, you can look in cloud storage for anything that's saved. It's all about can you find a trace of where the crypto was from and also where it might be stored at the moment. So those are the biggest things for devices. And then past that is so physical with the seed phrase. So do you find a scrap of paper somewhere with 12 words written on it that seem just like nothing, you'd normally throw it out. Can you find that in a safe? Is it stored somewhere else? Or such things as like a seed vault, which effectively is that but stored on metal or engraved on wood? Did they have a tattoo they never talked about? It's all these things you have to investigate to find out if there's crypto and how you might have access to it.
(24:41):
And then the final sort of information you could tra through is bank statements. So did they send funds to an exchange? If they did perfect, exactly what exchange to get in contact with or look for information on. And then from there you'll be able to track where the assets are, but you need to find something before you're able to go further from there. So those are the biggest personal effects to look for when it comes to crypto. And then what can you access? So like I was saying before with Australian centralised exchanges, this list here is the information that Binance has asked for if you want access post death to someone else's account. So you'll need your own Binance account, a hundred points of id, certified debt certificate certified will if you need power of attorney, and then grants a probate. So they need a lot because it's very strict for them to give access to anyone, but they are willing to work with you, which is the biggest thing.
(25:43):
So if you have all of this and they're an Australian based exchange, there's a good chance you'll be able to get access to it. But international exchanges are where everything, again, just you're not too sure. It could work, it might not work. So it's a lot of documentation. It could take a month or two. So definitely plan for it if you have deadlines coming up, but just know that it is possible, which is great. And then what can you access in terms of wallets? So if you have the seed phrase, you've got access to everything. If you don't have the seed phrase a password or the pin number and it's lost, unfortunately nothing can be done. You're not going to be able to guess it. You're not going to be able to. That's the whole point of these seed phrases is you can't guess them if you don't have them, you can't have access to those funds is I guess the entire premise of crypto in a nutshell.
(26:35):
So it's all about security. So if it is lost, unfortunately nothing can be done. But if you have the seed phrase but no hardware wallet, that's fine. Buy a new hardware wallet and just restore it. The seed phrase is your forgot password button when the forgot password button doesn't exist effectively. So then with all of that, that's the importance of why planning is so critical. You could do no planning and then step into this, everything's gone. And I've had that a lot with people I've worked with. I've said, this is what to look for. They couldn't find any of it. There was no trace on the computer and they couldn't access the person's phone. And that just the wealth disappears. No one will ever have access to that again. And it's effectively deleted in that sense, which it's a horrible outcome, but it's why it's so critical that people understand that you need to plan and you need everything sorted.
(27:29):
And into the most exciting poem of the presentation, at least for me is tax, because that's where I started. I love tax sometimes, and it is a little bit interesting when it comes to crypto, and I'll just give you the very short of everything. So the atos stance is crypto is a capital asset. There's lawyers out there at the moment fighting this with the ATO, putting in submissions. I don't see much coming out of that. Their arguments are very strong, but the ATO will never concede on this point because otherwise they need to make new legislation. Whereas at the moment they've said, this is the legislation we've got make it work. And it's not a great way for them to be doing that, but it's what we've got. And with the ATO, that's what you've got to work with then. So it's a capital asset if it produces income, that's not a capital receipt, it can be on income account.
(28:28):
So you could have assets sitting there post death in an estate that is still generating income, which is why it's important to know what's happening with everything so that you don't effectively get hit with those a tax bill at the end because it's been generating income and you haven't reported anything. So then when's the taxable on disposal? Same is capital assets. It has to fit in the existing legislation. And then one note that a lot of people don't realise is that trading crypto to other crypto is taxable. You could buy Bitcoin with just Australian dollars, use that Bitcoin to buy something else, and that is taxable. It's not, you could never touch Australian dollars. Again, everything drops to zero value and you're still paying tax on those different trades, which I've seen a lot. But it's something that people don't really realise because it is a bit of, it doesn't track well in terms of logic, but it's the way things are.
(29:27):
And again, how to calculate that profit and loss, which is what you'll be reporting to ATO. So you've got your three options, which is what I can see as solely existing in the space is when I first started as an accountant, the way I did it, which is manually in Excel, match the cost base to what you're selling, which can be broken down into six or seven different transactions and calculate it yourself, which I would never wish on anyone to have to do that because it's a nightmare, is the only way to describe it. The second is using one of the online calculators. So you've got queenly, crypto tax, calc, coin tracking. There's a lot of them out there at the moment, and they're great if it's a very, very simple matter. So for example, they only had buys and sells on coins spot, which is the exchange we looked at.
(30:14):
If they had nothing else, they didn't send it to anywhere else, you can use an online calculator and it will work for what you need. But the main issue with those is it's all automatic algorithm based information flow. So they pull in the data, they try and classify it based on an algorithm, which means the more complex things you're doing, the more likely it is for that to be wrong. So I've seen people with, I think it was a hundred million dollars portfolio is what the online calculator said, but it's because there were two assets with the same name. One had a crazy high price one and it just misclassified it. So it's one little thing that can happen that can cause those issues with online calculators when it becomes more complex. So then there's the third option, which is a shameless plug for me, which is using a proper professional service to get the reports and calculations done.
(31:09):
So one of the main sort of services I provide is that tax calculation, the profits of getting everything in the report, having it there for you and you don't really need to worry about anything past seeing crypto, knowing I need to speak to someone that knows what they're doing and just sending it through. And that's the extent of what you need to do. Past that, you get end results and can use that how you like. And so going into the main takeaways for everything is I think you will eventually encounter crypto no matter how much you try and avoid it. If you bury yourself under a rock, you're still going to encounter it at some point. The last stats that I saw is up to, I think it was eight to 10 million Australians have crypto or have invested in crypto at some point, and that's up from, I think it was 3,000,000-4,000,00 4 years ago.
(31:57):
So it's expanding like crazy. You will run into it. So you'll need to know what to do. So is so critical is sort of big takeaway from this is if you want those assets to be able to be passed on, if you want everything secured and you want that digital legacy, you need to pre-plan. There's no way around it. If you don't pre-plan and you're able to pass on all the assets, that's luck. Honestly, that's all I could say is that it's luck that you're able to capture everything and get it done. The second point is knowing what to look for is basically half the battle if nothing was planned. So what personal effects do I look through? What information do I need from online, from different exchanges? Knowing what to look for and what things should be pointed out is super critical for all of this.
(32:51):
It's basically if you didn't know, you'd end up throwing out a seed phrase which could access a wallet, which has all of the assets on it. So it's having that baseline knowledge of what is crypto, what is the biggest points of security and keeping crypto is super important. And then the one biggest thing that I think would be the access to crypto is control. And that is ownership in terms of crypto, which is why security is so important. If you can access crypto, it's all pseudo anonymous. That money could disappear because that person controls it. And once it's disappeared, they own it. There's no ifs and buts. It's all based on that computer ledger that you've seen. If it's in their wallet, basically they own it. So it's so important to have that security and that knowledge about don't share the passwords, keep it in your own wallet once you are doing an estate and just know that you can't store them publicly or I can almost guarantee the money will disappear.
(33:55):
And the final sort of thing to know, I guess is what do I do? So I've spoken a lot about cryptos, said that I do a lot of things. What are the main things that I actually do? So first ones are the reports on all the holdings. So whether it's date of death or anything like that, I can do those reports, help to gather those details and information of working with clients of how do you get all the information together for your lawyer. And then as well as that is I've worked with a couple people to consult on in-house sorts. So when it comes to a client with crypto, what's our checklist? What do we get the information from them and how do we sort everything? And then I guess the biggest one, because it's yearly, is financial year reporting and then scam reports and tracing. So it's all about information and that's basically what I do.
