Durham Estate Planning Lawyer – Estate Planning In NC with Bitcoin
Audio Transcript: Estate Planning with Bitcoin 2020 Presentation
Attorney Koenig: All right. So, I am glad to be here and you will be too. I expect that probably half of you are here because you think Bitcoin is the stupidest idea in the world. And you’d like to hear why somebody might want to talk about it. The other half are probably here because you need the technology credit and yeah.
So yeah, but I’m hoping that you’ll have some fun here and you’ll have a chance to get your very own Bitcoin if you’re paying attention. Has anybody read the document that was attached in the folder? One person. Well, I want to tell you to go to Appendix A or read the instructions on one of my slides later. And you can actually get Bitcoin as part of this presentation. Not everybody’s thrilled. All right, well why talk about crypto assets in general?
And I’m going to tell you three stories. So two of them are true, the third one is a prediction. So the first story is about Ruth and Maryland. So Ruth’s best friend, Maryland was married to a, a guy of some means. They lived a very nice life. They were able to go out to eat and have all kinds of interesting things going on and travel and so on. He allegedly had several million dollars and she believed it because after all, they had this nice life and everything was going well, he passed away. Not unexpectedly either, but passed away over a year-long illness. And when he died, they’re unable to find any of the assets. Where did all those millions go He was the CPA for all of the big businesses in the community. Everybody knew him. There was no doubt. Everybody believed he had money, but the assets were gone. Now this could be just a plain old estate planning story, right? Where somebody just failed to plan well, and the assets are gone. But it turns out that this guy probably had invested a considerable amount of money in Bitcoin. And why do we think that Because when Marilyn went through all his stuff, she threw away a ton of things that look like little USB drives and she threw away all his papers, which were written a variety of different weird things that she didn’t understand. Not being a technical person at all. She just said, well, who needs that I’m not a techie. And I think, I can’t say for sure because we really can’t track it, but I think that the person that this guy probably had Bitcoin and was using cryptocurrency to finance his lifestyle.
So that’s one that’s a real story. Robert and Susan, they had a situation in which they had, where Robert was investing course. Do you remember the discussion just a few minutes ago about men and women and how they perceive risks differently? So Robert, of course, the guys do all the investing in Bitcoin because they don’t get the risk. But he invested in all this Bitcoin and he held most of his Bitcoin on phone wallets. Well, the fact is that when he died, his wife said, who needs all these old phones They’re just useless to me because most of them don’t really work anyway. You don’t actually need to have a SIM card in the phone, in a phone to have a Bitcoin wallet on it. Those went in the trash. So in this particular case, again, I don’t know that he had Bitcoin on those, on those phones, but he did have Bitcoin on the one phone that he had left behind that she kept because it was working.
So, so there are these kinds of things that happen to people and these happened because they’re not doing a good job of planning. So the third story is your clients. Now that you’d be going to this presentation, your clients are gonna say, well, we know how to plan, we understand. You guys will understand more about what’s involved, what do these various devices look like. That whole Bitcoin, what do they, what should you do with them and how should you proceed to protect your client’s interests when, when you were talking about Bitcoin.
So I did, of course, was introduced already, but I put this slide up, as part of my introduction. and I, there was a couple of things I want to highlight on there. First of all, I am a grandfather. Would you like to see pictures of the grandkids? I have those. I’m also a technology-oriented person, so I have all kinds of gadgets, lots of phones. My wife would probably freak out to find just how many things were around in the boxes in the closet. The ones she really, she read this slide and she said, say what Cryptocurrency and when did we buy that? So, it’s important to talk to your spouse, but I put that, I left that in there because I wanted to, to show you that I do actually own this stuff too.
All right, so we’re going to talk today and you’re going to hear me say things about three different areas. We’re going to talk about the technology a little bit. It is a technology hour, after all, I do have some ethics related to the technology of Bitcoin and then we’ll talk about estate planning when cryptocurrencies involved in the estate plan.
So, why am I going to talk about ethics Because you need to be competent not only in the technology, but also in knowing where the risks are because Bitcoin could contribute to significant risks in your practice. There are a couple of terms I want to make sure that we talk about and you know in every presentation about Bitcoin you’ll hear both Bitcoin and blockchain. And I’ll talk about both of these in a little bit more detail in just the next slide, but blockchain is simply think about it as a public ledger and I’ll show you a picture of that. And Bitcoin is an implementation of electronic currency or virtual currency or electronic money, however you want to call it on blockchain. And why does that matter And I’ll show you in a moment if you want to learn more about it, you can text Bitcoin paper to that phone number and our office SMS server, we’ll be happy to download a copy of the Bitcoin paper that was written by the founder of Bitcoin, or at least maybe it was the founder, who knows who the founder of the Bitcoin is?
Oh, I should also point out one other term that I didn’t put up on there, but I wrote on my paper is “Fiat currency”. My wife said I use that term a lot and she didn’t understand it. So I’ll tell you what it means. Fiat currency is the, maybe the antithesis of virtual currency. Fiat currency is distributed currency. It’s currency that is distributed and backed by a government. So the US dollar is an example of Fiat currency, and where Bitcoin is an example of virtual currency, and we’ll see the difference.
So blockchain is this thing called a, it’s a, it’s a series. I, there’s five bullet points that describe what Blockchain is a, it’s a ledger and it’s a public ledger. Would you say Well, what’s a ledger It’s simply a list of activity, right? And this ledger is, is example over here. And, that at that angle, it’s very hard to hold that little dot steady, so sorry about that. But the, Oh, I meant to wiggle it around like that. The, the, but the point is that all of these ledgers, the ledger consists of these blocks and hence block in a chain blockchain.
The blocks are all consist of the history of all the transactions that have occurred in a period of time during which this block was being built. And, and they contain, what’s called a hash, which is basically a unique code that describes every transaction in that block. And they contain a list of all prior transactions that have ever been done on the blockchain. So the fourth piece about it is that the ledger is stored on a network of computers. All of the computers in the world that participated in block in the Bitcoin blockchain all have to agree on the fact on what blocks are being added to the, to the chain. And they have to agree, which is that called consensus. All the transactions are encrypted so that what there is is a public key and a private key. So you hold the private key, the public key is available on the blockchain. And so the block chain altogether consists of, it’s a ledger consisting of blocks. The blocks have transactions. They’re stored on this peer to peer network of computers around the world, and they’re all added by agreement. So basically every computer, every person that participates in this blockchain all have to agree, and it’s a public ledger with public addresses. So why do I keep stressing that? Because there’s this urban legend that Cryp-, that Bitcoin has been used by nefarious forces and criminals and so on. But it would be, it’s kind of an odd concept for a criminal to use Bitcoin when all of the transactions are actually public and recorded. So why would you do that In fact, most of the criminal activity in the world is processed in US dollars. And when the, when Deutsche bank was accused of, of, funding terrorism, they had contributed to $130 million of US dollars to that effort. So that’s where the, you know, what’s the US dollar consist of these days It’s got everything on it. So we worry about Coronavirus, right Cause China is actually, freezing and washing their currency just to make sure that the Corona virus isn’t on there. But US dollars have been found to have the traces of DNA, cocaine, you name it, it’s on your US dollar. So Jared, our managing partner, our firm likes to call this stuff dirty Fiat for good reason. But the, but the point is that that, Bitcoin, it can be used for these transactions, but because it’s public, it’s just not that frequently used by a criminal activity.
So some of the characteristics of Bitcoin itself are that it was founded by this anonymous user and the people who own Bitcoin like that because they, they are, they tend to be the original owners of Bitcoin tended to be those people who didn’t like authority, who wanted this decentralized concept of money. The idea that that they didn’t have to report to anybody. And that actually drives somewhat how the estate plans get developed for these sorts of people. The Bitcoin is also, and as I mentioned, it’s, it’s decentralized. It’s also an incentivized system so that there are miners who are building, they’re called miners cause they’re mining bitcoin like you’d mine gold I suppose. But the idea is they’re of solving mathematical puzzles in order to generate new blocks and they’re only, and where Bitcoin gets its value from is people. But where does anything get value from? People trust it and people can use it. So people trust it because it is in fact a secure, a secure virtual currency and it can be used for transactions. My wife says, well, I can’t go to Walmart and buy anything with it. Well, no you can’t yet, but you can certainly go to a lot of other places and you could buy legal services from many firms, including ours with Bitcoin. Some caveats in the ethics section coming up. A Bitcoin is itself is secure. And in fact, if you read the manuscript that’s on, on the, in the Dropbox, I talk a lot more about the more the Extropians roots of Bitcoin. And in fact, the, the, original owners of Bitcoin, Hal Finney use one of those people who have a large holdings in Bitcoin. These people, many of them ascribed to the theory that they’re going to live forever and that some of them have in fact been frozen through cryogenics. And so, I mean, these people are a little more fringe than I am and, but they think they can live forever. Who reads science fiction in here? There’s some wonderful space sagas about people who, you know, and they’re always living a long time because we’ve eliminated all of the, all the illnesses and we can cure all of the human conditions that caused us to die early. Well, what happens if you outlive the US government and all you’re holding is in US dollars and suddenly that Fiat currency is no longer valid. It’s happened in many, many governments over time. So Bitcoin is designed by this group of people to outlive the current structure, the current system. So it’s essentially wealth planning for that very, very long term. Now, do I think about wealth planning over 20 generations or a thousand years of lifespan? I don’t; but it certainly, that’s where it originated. And again, some of the really wealthy owners, a Bitcoin subscribed to this theory. So think about why people own Bitcoin and that’ll come up when I get to the planning part.
Other Bitcoin owners, they’re not all Extropians. Other ones are simply those people who don’t like centralized government and control and they want to be, anarchists in nature. And so they buy Bitcoin because it gives them a way to, you know, fight against the man. Other people use it for investment in trade. And that’s more why I own it, because it has value. Yes, it fluctuates a lot according to, you know, if you measured against US dollars or any other currency, all currencies, however, fluctuate against one another. So, it’s hard to say that it’s fluctuating more or less significantly. But today I didn’t look this morning, but today, recently the value of Bitcoin runs about $10,000 per Bitcoin. That’s below its two year ago high, but significantly above the place where you would have had to spend 10,000 Bitcoins to buy pizzas, which is one of the very early stories of Bitcoin.
And then the fourth kind of owner in my slide anyway, are the people who own large amounts of Bitcoin and don’t intend to ever do anything with it. And those people that are affectionately referred to in the Bitcoin world as whales, they stay just hold it. And there’s a, there’s a lot of good reasons I suppose for, for holding Bitcoin forever. but I don’t understand any of them because it’s, it seems to me if it’s a virtual currency you can use, I want to use it or pass it onto my, my family. And so that’s one of the things that, that I talk about in estate planning with Bitcoin.
Dr. Bullock talked about these different worldviews and I think that fits right into why some different people have had Bitcoin and think about it different, different ways. There are by most counts and if you look on the manuscript, there’s some graphs about these things, but around 10% of the people in the US owned Bitcoin, anyone here besides me owned Bitcoin? One, two, couple of people. So, so most people don’t want to admit it. So I bet there’s some others out there that own or their spouses own it and they didn’t get to know about it yet. We’re finding when I actually ask and dig into it, around 20% of my estate planning clients actually own it, even though they don’t start off admitting it. And I wouldn’t be surprised if, if that were true for y’all as well.
So here’s where you can own your own Bitcoin. This is the first of three slides where you get a chance to scan this. And so if you’re, if you’re keeping up with me on this, what you want to do is install a lightning wallet on your phone. It’s safe. I’ve done it, I trust it. I see some people that are looking at it. All right, so you could, if you download it from Google play or, the Apple store, you can download the wallet. Just tell it you’re saving the phrase that it’s going to give you and then select the wallet, scan this picture and hit receive, and you will receive your very own 500 sets of Bitcoin. How big is a set? One 100 millionth of a Bitcoin. So, today 500 sets is worth about 5 cents. Well, but you know, when Bitcoin’s worth $1 million, it’s going to be a $50 transaction. So you save up for your Starbucks, but you, which by the way, I think Starbucks is gonna be one of the ones that’s gonna start accepting Bitcoin fairly soon. So, I’ll give you a moment. Is anybody else interested in Seriously, this is 5 cents for you. It’s free from our firm. You should all be taking advantage of it. And you could scan as many times as you can while it’s up there on the screen. Maybe by the time you know at the end you’ll have 30 cents worth. But the idea is that this shows you how straightforward it is to transact in Bitcoin. So all I have to do is provide you a QR code and you can transfer money into my trust fund account. While you can’t do that for ethics reasons, but you could pay me a flat fee to do this planning for you if you wanted to. Of course, it would be a little larger than 500 sets. All right, enough of that slide.
So this side shows you a couple of things of interest. One of them is that the idea that speculators are holding smaller amounts of Bitcoin than investors, and if you look down here, you see that the, this is the, the speculator and this is the investor and these are the very largest owners in the number of Bitcoins that they own. This is, you know, like people who are just playing with it and you all, if you just scanned a few sets you’re up in here. And so, the idea it from this slide because it’s basically a logarithmic slide, there’s a lot of Bitcoin that’s held in large quantities by a fair number of people who are investing in Bitcoin. And why is that important?Because some of these people are going to be our clients.
How do they store it? Well, since this is a technology presentation, it’s probably well I’ll tell you that this is inside this little box, which isn’t actually open, is a, is a USB size drive. That’s where you store it. Bitcoin is actually not physical, so you can’t reach into your pocket and take out a paper that says that, that you have Bitcoin. But, but there are ways, I actually need an attorney licensed in North Carolina. Can somebody, you’re, you’re licensed here, right? Would you hold this security for just a few minutes? And you agree you’re holding a security for me right now. I know nobody’s gonna you’re not gonna let anybody take it from you. You’re just going to hold it. Alright, we’ll get to why that’s important in a minute. Yes, go ahead. Look at it. Tell me what’s on it. The just, there’s just 24 words on there, just 24 random words and why, and I’ll tell you why that is important in a minute. So there are different ways to save Bitcoin and, and the, the key to getting it back from wherever you save it is the key. The private key and the private key is actually formed by, among other things, 24 words. So, and there are many different kinds of wallets. This is a, this is a hardware wallet. This is a hot wallet because it’s stored on the phone. It’s also a piece of hardware, but it’s just a terminology thing. And there’s many ways this would be one that I can log on to directly. You can also, and I’ll show you another slide, but you can, there’s online accounts and so on for it. But there’s also the ability to see, this is just me. I can log into this on my own, but I can also set up multisignature where my wife and I and our CPA, two of the three of us have to sign on at one time to be able to access it. So these are, there’s many ways to hold Bitcoin. You need to understand them in order to have the competence necessary to be able to advise your clients, which is why I’m telling you all this.
So can you lose Bitcoin? Sure. You can. I talked about, you know, people who’ve thrown stuff away. There’s a out of great Britain where a guy threw a hard drive into the garbage from an old computer, and then he realized that it actually had a significant amount of Bitcoin. Today it’s worth about a hundred million dollars. They will not let him go to the dump to dig it out. I’m not sure how he would find it anymore, but I guess if I had a a hundred million dollars of Bitcoin, I might be worth digging through some garbage to find it. So, so anyway, but those kinds of things happen. There are cases where people have thrown things away and I already outlined two of them in my real life stories. But you can also put things in higher risk wallets or in places that they don’t belong, or you can give the code away. Like I, I gave my seed words away. Now there’s $5 only on that account, but I, but you could take it from me. Right. So, and I use Coinbase and a lot of our clients use an online system to be able to, to store a Bitcoin. Oh, yes. And I see that paper going around. Don’t forget to sign in that you’re here cause it’s such a riveting technical presentations. You definitely want credit for it. Alright. The last point on this slide is the Bitcoin is not yours unless you generate and hold the private key. Why does that, Oh, on this prior slide, if you text, if you want to know more about wallets, you can text well to that same account and SMS and it’ll send you a paper on a curated list of different wallets. The Bitcoin is not yours unless you generate a key and that’s going to come up when we talk a little bit more about actual estate planning.
Okay. So I’m going to move on to part two of my talk. How am I doing on time? Brian? Half an hour left. Perfect. Okay. So, so the ethics, the ethics part of it, I’m just going to summarize one line. Don’t hold Bitcoin for your clients. And if, what did I say about the key If you hold the key, you hold the Bitcoin, right? So I think, I think you’ve, yeah, there’s a, there’s the guy at the back of the room that will take your law license now cause you’re right. But, but, but that’s the point is how easy it is to hold Bitcoin. You don’t even know you’re holding it, right? Until I explained it to you, didn’t actually realize that the, I, so this started with the IRS back in 2014, they defined a Bitcoin to be a virtual currency. Now they had an interesting choice, right? So Bitcoin is a currency. We all in the world generally agree, Bitcoin is some sort of currency, electronic word, whatever you want to call it. The IRS had to decide how they’re going to classify it and the IRS determined that they’re going to treat it not as foreign currency. Right? It can’t be Fiat currency cause it’s not been issued by the US government. And so there’s only one kind of domestic currency. It’s the US dollar. The only other kind of currency they can really understand is foreign currency. But foreign currency has a number of tax issues related to it. I don’t know. I’m not a tax guy. I don’t really understand all of these, all of these issues in real great depth. But when you’re dealing with foreign currency and foreign transactions, you’ve got to live up to live within different rules. The IRS determined that was not the structure that they wanted to deal with Bitcoin then so they classified it instead as property. So that’s an interesting designation because property with gain and loss requirements means that we do, if you buy Bitcoin today and you sell it, if the Bitcoin I gave you was worth $5 today and $10 tomorrow, and I sell it or give it away to somebody, I’ve got to account for that in a, in a capital gains transaction. But it also means because it’s property that I think it fits into the standard step up in basis kind of behavior. And so I think there’s a great opportunity for estate planning for people with great amount of appreciated Bitcoin because it has a lot of people who bought Bitcoin at $300 or $3,000 it’s worth $10,000 today. It could be worth $100,000 in a year or two years or 10 years. That appreciation is way better than real property for a lot of people. And so there’s, I think there’s opportunity to talk with our clients about that. But where did this come into become a problem for us as probate attorneys or planning attorneys is that the state bar issued an opinion, a formal ethics opinion last year that essentially said, yes, it’s property, but it is so unsafe that no lawyer can, can be allowed to hold it. Now I think it might be an overreach. I’m going to go on record saying I think it’s an overreach with by the state bar. I don’t think they totally perceived actually the safety of Bitcoin. But given where they are, the right answer is you cannot hold Bitcoin and I would never recommend that you hold it. but I don’t, I don’t understand. I don’t quite sure understand what distinction the state bar was worried about in terms of this property. I think what they’re looking at is they’re saying that there’s large fluctuations, but I can hold Thai baht, which is the currency in Thailand. I can hold South American, South, South African Rand for my clients, but I can’t hold this virtual currency. So I’m not, I’m not quite perceiving that.
I also talked to one of the members of the board that made this decision and they said they were extremely worried about the fact that the fact, which is not a fact that 30% of Bitcoin is lost. And so what they perceived is, as I understand from talking to the person on the board, that they perceived that 30% of the transaction between you and me on this seed word thing, could be lost. But that’s not actually the 30% right? So, so here’s the question. When you, if you have $100 in the bank and you withdraw $80 of the money from your bank, is that other 20 lost? It’s not lost. It’s still in the bank. How do we know it’s in the bank Because there is no dollar in the bank. The bank does not hold all the money in the world in their bank. They only hold enough to meet their capital requirements. Right? So where is that money Well, the, well, nobody worries about that 10 or $20 as being lost, but when you talk about Bitcoin, suddenly we’re worried about it being lost because it hasn’t moved in a while because these transactions that I, when I bought Bitcoin, I haven’t sold my Bitcoin. Does that mean my Bitcoin is lost No, it doesn’t mean it’s lost, but it counts under some of the way people talk about security of Bitcoin accounts as lost. There is actual lost Bitcoin that’s provably lost when, for example, there was that case last year where one of the coin, one of the trading exchanges failed and the guy who owned the trading exchange, I think it was 100 million or something of Bitcoin, he had all these Bitcoins on devices and he was the only one with the pass codes and when he died, it didn’t leave the passcodes behind. That’s a provable loss, but that’s not a transactional loss that a lawyer, a probate lawyer is likely to run into. Because if you’re holding the Bitcoin on whatever device on paper or in a device like this, you’re not exchanging it, right. You’re not trading it, you’re not trying to get more benefit out of it, you’re not investing it. So I’m not sure how though, how, how the, the state bar’s worried at the level necessary to say it’s so insecure. No, no, lawyers should hold it. We’re going to make that argument via some mechanisms, but yes, go ahead. There’s two questions.
Guest: What about the consideration of a trustee adding through diversify and invest in reasonable investments and not, you know, and so now you held this bitcoin and it went down in value when you get sued because you should have sold it?
Attorney Koenig: Should have known better. Did you sell that house in time before the housing crash I mean, I think that’s true for any investment and the rule, there’s already a rule in place that’s the reasonable and prudent investor fiduciary responsibility that the trustee already has. So if you’re not competent as a trustee to manage the Bitcoin, the the, the answer isn’t probably to say it’s so unsafe you shouldn’t do it, but rather that you should have the right competency to do it.
Guest: So what are they defining as the attorney to actually invest in this asset Or if a client gives me a list of all their passwords and all their important information, including their bitcoin sequences and I hold it in, my safe-
Attorney Koenig: No, not the way that I, the way that we read that decision. The ethics opinion is you cannot do that. You cannot hold, you cannot hold. That’s why I was kidding with Larry is you know, the idea that there’s a, the seed words are enough to recover the bitcoin. Therefore that’s tantamount to holding it.
Guest: What if you’re the fiduciary? What if you are the executor?
Attorney Koenig: That’s a very interesting problem. And I think if, I think the ethics opinion makes it impossible for you to continue as the administrator. We actually have that problem in our firm at the moment, which is one of the reasons why I think we might be getting the opportunity to address this question again with the, with the bar is because, one of our clients passed away and has a significant amount of Bitcoin holding that we didn’t realize once we got the computers and the, and the phones, recovered from, they were seized in a little federal action, but they came back with Bitcoin. Right, so now what do we do because we’re technically in violation of the, of the ethics opinion? So, you know, how do we deal with it? And I don’t have a good answer for it except that the correct answer is the ethics opinion says you can’t hold it. And so consequently, I think it means that you probably can’t be an administrator. You probably can’t safeguard the wallet’s in your safe. You probably can’t keep the keys on a piece of paper. You know, so if we are going to set up multisig where you and you and I have a signature and we’re two or the three of us have to sign off to get the client’s money out of the account to pay the bills or whatever, I think that would also probably be a violation of ethics rule because we have somehow dominion and control over the Bitcoin and it’s a risk. So, so anyway, that’s, that’s kind of what we’re worried about. And I think it’s, that’s why I said I think it might be an overreach of, of the, you know, there’s a law, there’s already, a guideline that says we have to have technical competence to do anything. And so I think that plus the prudent investor rules, I think protect the client well enough already without having an opinion that is broader than it needs to be.
Guest: Is this just in North Carolina an ethics opinion or is this something that’s been repeated in multiple states?
Attorney Koenig: Nope, we are rarely in the lead on these things, but we’re only the second state that’s issued an opinion.
Guest: And just to kind of maybe clarify a little bit super simply, but so from what I understand of what you’re saying is, I can’t hold a piece of paper with 24 words on it cause that 24 words evidence is some potential value that might fluctuate over time, is that what you’re saying?
Attorney Koenig: Well not only fluctuate, but is so inherently risky that you, that you are violating your ethical responsibility to your clients to safeguard their assets. They’re not just words though. They are the foundation of the private key, which is the only access to the Bitcoin or any cryptocurrency doesn’t have to be bitcoin. And access is the value.
Guest: How was the Bitcoin created? And how are the people mining them? Who decides, what the research that you let being down in your computer is worth?
Attorney Koenig: Okay, That’s a great question for next year’s presentation cause I don’t have time to, I don’t, I’m not trying to dismiss your question. It’s a very good question. How is it created? It’s basically mined through solving mathematical puzzles and I mean puzzle not in a friendly like Sudoku puzzle, but a mathematical equation to generate the Bitcoin. And there is a limit of 21 million, which is also why there is a scarcity factor. So this will always, assuming people continue to trust Bitcoin and there’s technically no reason not to trust it. And in the sense that it’s a usable kind of a medium-
Guest: All of the bitcoin that has ever been issued or already issued.
Attorney Koenig: No there’s only about 18 million that have been mined so far. So there’s still room, there’s still growth in the, in the number of coins.
Guest: So once they hit their max, then what?
Attorney Koenig: There’s built-in scarcity and the Bitcoins will continue to trade and, and if more are lost, that will increase the value of the others.
Guest: So no more calculations are being done?
Attorney Koenig: Correct. Then what the miners get rewarded with is for maintaining the integrity of the public ledger, which grows longer of course, over time. There was one more question in the back.
Guest: Well you just answered my question, but I was going to ask what gives bitcoin its value? Is it scarcity?
Attorney Koenig: Well, scarcity is one of them, but, but the value comes from the fact that it’s usable and it’s secure and it’s safe. And so if, if you’re seeing the government in transition, then Bitcoin becomes the- potentially becomes the medium of choice for exchanges and not that government’s currency anymore. So that’s where the value is going to come from.
All right. There’s still an opportunity to scan. You’re getting them? Are they coming through when it says receive as you should see it. Oh, okay. Well it should work, you may need to zoom in on it enough to get it all right.
Guest: Oh there you go! I got five cents!
Attorney Koenig: All right! There you go! And if you’re quick, you can scan it again and double your value! Well, see it’s now in her wallet, which means that she can actually trade it or send it to you or buy things on Amazon with it. That’s coming too.
All right, so I’m going to switch over to planning. I should have enough time to get through it. So back to the planning question now. So this is part three. So I talked about what Bitcoin is from a technology perspective. You saw a little bit about blockchain and Bitcoin in general, and then we talked about the ethics. And so why you can’t actually hold Bitcoin, but you still have to be able to tell your clients what to do with their holdings cause they’re going to come in and if you ask them, “Do you hold Bitcoin?” they’re going to go, “No, no, I don’t own it.” But they might actually own it. And we need to be able to explain to them what the risks is for them to own it.
There’s one more of these QR codes by the way, at the end. All right, so, and then you’re going to develop plans. We’re going to add this stuff to the legal documentation and we’re going to back come back around to probate. So, you need to know your client’s background. This comes from the previous two presentations. They were saying exactly the same thing. You, you, the client has a bias. They have a culture. They come at owning Bitcoin from different ways and it’s helpful to know why they own Bitcoin. Are they interested in transferring the Bitcoin? This is their goals. Now, are they interested in transferring the Bitcoin to their family at their death? Do they want protection of their Bitcoin today? Do they want to plan for incapacity? So what happens, you know, if I’m, I may know the code word today, but what if I forget it because I have oncoming dementia and I don’t remember this code anymore? What am I going to do? How do I keep that for my family? And then there might also want to be avoiding disputes in the family and we all know that fights about money are the worst fights that you run into. There’s also the tolerance question. The clients may have higher or lower tolerance for certain things like exposing their interest in Bitcoin to you, the attorney. And they also might have a low tolerance for, changes in the world of Bitcoin. And, it’s in the manuscript. I’m not going to talk about forks and airdrops and different kinds of things that can happen to Bitcoin and the blockchain, but your plans need to be able to accommodate that. So the simple plan basically is just simply a list. List all the crypto assets that the client has. Most of the Bitcoin owners that you will run into have lots of coins, phones, wallets, pieces of paper floating around. They probably don’t know where everything they have is located. It’s the same problem that we have with people with multiple bank accounts, right? They have them all over the place and they don’t necessarily know. And I think that my story about Ruth and Marilyn, Marilyn’s husband had dozens of these dozens of pages of paper. They’re probably private keys all over his office that she threw away.
Guest: Can you consolidate?
Attorney Koenig: You can, yes. Yep. But people don’t want to because they own it partly because they believe in decentralization. So what’s the worst thing you could do is pull it all in one place. So they’re by nature the person who owns it for that reason, is going to have it in many places. So they need to not only list it but identify where to find them. So are they in the safe deposit box? Are they in the drawer? Are they in Mae’s desk, are they in the coffee can that’s buried in the backyard- which is where we found $8,000 once for one of my clients.
Guest: How do you identify if someone stole it or if it’s been taken from you or you know, one of your siblings took it all when they were supposed to get one-fourth of it.
Attorney Koenig: All right. So I’m walking down, that’s a good question. (Takes paper back from the guest he previously handed it to) And I am illustrating the fact that this is how easy it is to take the Bitcoin.
Guest: Is there any trace or any tracking of it?
Attorney Koenig: Well, there’s tracking for the public address, but if you’ve got the private key, you have access to it. And then once it starts trading, you can trade it away. But it’s not unlike stealing dollars or stealing diamonds from the drawer. I mean everything’s got some risk to it. But the private key generally makes it more secure. And your ability to plan for where those private keys live. So your, so your helpers, this is the next stages identifying the digital custodian that’s defined under 36F I think of the code talks about digital- It’s a uniform digital assets act and, and so you can name the helpers for that. I’m going to talk about trustees in a second, but it gets down to that very question is who you, people can steal it. It can be traced. The IRS knows exactly. once they have, once they get the information from Coinbase, right, they know exactly who, who has been trading Bitcoin. So you can’t get away with too much because it is a public ledger.
Guest: I thought there was anonymity?
Attorney Koenig: The anonymity was at the beginning. So the reason why these Bitcoin holders like Bitcoin is because no centralized person, there’s no person whoever started it just sort of emerged. And the, you know, the legend is Satoshi is the guy that that did it, but nobody knows who he is. And the government can tell because they’ve got access to the public record, right? So if they can identify the public keys then or the transaction addresses, then they can find out who’s done the transaction. They don’t have access to it without the private key. They’re not going to, they can’t take it from you, but they can, they can identify it, which is another reason why drug traffickers don’t use it because it’s traceable.
All right. So after you create the simple plan, which is basically generating a list, you need to build better options into it. And those are, different ways to store it. Maybe better security than what the person originally picked. it’s important to actually audit and test all this because it, you don’t want the first test of a plan to be when the person is deceased because if there’s a mistake or a problem or the helper, the digital custodian that was named isn’t the right person. It’s too late at that point.
So you want to do these things and you want to audit what they’re doing and you want to help them test it. So basically say, “What if I died today? Let’s go through the list and see if we can find the Bitcoin that you’ve identified.” And it doesn’t have to be you, the lawyer, but you, the lawyer are helping advise them of the processes they have to go through. And then the operational security question is things like securing those seed words. So I don’t just hand them over to somebody, but some people have even said, well, “what if we just, you know, tear the list in half and I give 12 seed words to you and 12 to you?” Well that just doubled my risk of loss. Right? Because now only one of you needs to lose the paper and I don’t have access to it anymore. So, so that’s a very bad plan to do that. And it helps to improve the change tolerance. We’ve talked about changes a little bit too, but because there’s just, the world is uncertain, you don’t know exactly what’s coming. The plan needs to be tested and evaluated.
So then we move on to the legal documents that support all this of course in the Will, you need to be referring to the asset letter. So the fact that they’ve written this letter down to the people saying, “Here’s all my digital assets. Here’s where you can find them. Here’s the names of the digital custodians I want.” That letter has to be found somewhere, right? So it’s not enough to write it. You have to refer to it. So you can say in the Will, just like we do with a personal property memorandum, “I may have created a personal property amended memorandum. I expect my, you know, executor to follow that plan.” Same thing with this. Let’s say I have created a digital asset letter, and that’s where you’re gonna find everything and you can find the digital asset letter in some location. All right. That’s okay to put in the Will. Do not put the key, the 24 seed words. Don’t start the first sentence of each paragraph with one of the words. That’s an interesting approach but probably not safe. And, name a digital custodian in the, in the Will of course we can do that. We’ve always been able to name digital custodians. They’re going by different terms but under the new 36F we can do that with support of current law. When you are doing powers of attorney, of course Will operates at death powers of attorney operate during incapacity. So we want to add specific language to support access to cryptocurrency and keep referring to those statutes. Why do you need specific language? Because cryptocurrency is different and there are specific laws about or terms of art that are going to be necessary to make it easy for the agent, the digital agent or the digital custodian to be able to operate with your cryptocurrency.
Guest: What does that mean? “No private details”
Attorney Koenig: So in the Will, you can identify, the asset letter, but don’t put the keywords in. So the private details, I mean don’t put the private key, I should’ve put private key details in there because you don’t want to expose because the will is going to be public, right? And so I don’t want it to be sitting at the courthouse with the private key information right there. And the multi-signature piece is to say who’s going to be responsible for the signatures Are we having two of three, three of five, seven of nine. Although that was a character in Star Trek.
Guest: But if all you have to have is the numbers, how, how did the signatures make any difference? If you had all 24 of the keys and it said, but it takes three of you-
Attorney Koenig: Oh this might be in a word document that was only openable by three people of five names listed, three half to have access to it to get to it. There’s, and there’s lots of ways that there’s, if you downloaded that wallet, white paper, then you would, I think there’s an explanation about, multi-signature in there as well. But I also have some more in the manuscript that’s on the, on the Dropbox. Okay. How am I doing on time? Oh, well I’m going to have to talk slower.
So, trusts are also a part of this whole picture. And as I mentioned earlier, I think there’s an opportunity for the step up and basis process to come into play for cryptocurrency. I cannot point right now to an IRS ruling about that, but if they’re calling it property and they’re taxing of like property, then it ought to be treated as property in all characteristics. So why not that too? But what I really like about trust that avoids probates, we can eliminate, you know, all these questions about executors and Wills and, and we can let the trustee be named, not only now, but during a period of incapacity and post-death same trustees can manage the crypto assets and everybody knows the rules. So I really like having ownership of, of these crypto assets and trusts and the trusts can hold private information because we’re not going to be presenting it to the clerk of court. A trust can also contain these management rules for co for the cryptocurrencies. So, the idea being that if, if I want my crypto managed a specific way on behalf of my kids or whatever, I can put that in just like any other asset management rule.
Guest: So let’s say I have crypto currency and I set up a trust, how do I transfer title to my cryptocurrency trust?
Attorney Koenig: Yeah, that’s a good question. So that depends on,- so ownership is, is ownership of the key, right So, so as long as you can create the key, then you have ownership. So one way to do it is simply to identify in the trust how to generate the key. So that could be the list of 24 words, which I don’t recommend. It could be the multi-signature approach, but that’s, that essentially provides ownership within the trust. It doesn’t provide ownership from the point of view of IRS, however, because we need to transfer it from here into the ownership of the trust. And that probably needs titling. And there’s, there’s several ways to do that. One of them is just simply to title the accounts, set up an online account like Coinbase or one of the other, one of the other systems. So that’s owned by me. If I added to my, if I retitled it in my trust name as trustee, then the trust now takes ownership of that account. I think there’s more ways to do it and we’re kind of experimenting on ways that we can get these things into trusts.
Guest: The financial power of attorney and the new statute that applies to digital assets, I haven’t read recently, but does it cover this scenario?
Attorney Koenig: Yes. I don’t think that that definition goes far enough, which is why 36F actually works well to support it. So don’t just depend on the power of attorney rules because then you can add that and you can just put language in that says, you know, I give my agent the right to use digital currency. It’s like 36C-1-F something like that. And I, I mean I don’t, don’t write that number down cause I don’t know it but, there is a sub, there’s just one paragraph and I don’t think that’s enough. I think you need to refer to this other section.
Guest: And you can own cryptocurrency in your IRA?
Attorney Koenig: So there are multiple ways to own cryptocurrency and IRA. One of those is to own that through an exchange-traded fund on an exchange like the New York stock exchange. Are there, those funds? There are, and they’re going to become more and more prevalent.
Guest: But you couldn’t own it individually, your own, without one of these funds?
Attorney Koenig: So you’re owning the key and so then the transaction lives electronically and I own the key. I use the key to execute a transaction of Bitcoin. So what does ownership mean?
Guest: If I have money in my IRA invested in Microsoft and I decided to sell that and buy Bitcoin inside my IRA. and I didn’t want to do it through a fund, I wanted to buy it directly, how would I do that?
Attorney Koenig: Yeah. I’m not sure you could do that today because Bitcoin is a key oriented virtual ownership. So how does it appear in an IRA unless it’s managed by a third party that has a fund? But now you start doing that and you’ve stepped away from the decentralization authoritative world and you know, and so it’s like violating the very basic tenants of what these original Bitcoin owners wanted for it. But, but the fact that it’s a currency and the fact that it’s going to be more and more traded as exchange fund ETF, I think you’re going to see this is going to be more option for you to own it that way.
Guest: You might get to this, but can you talk a little about how you said you can accept payment in Bitcoin, so what are the issues that come with that? And then I guess the second is, I assume you can get paid, but you can’t accept a retainer because that would require you to hold it and it not be yours.
Attorney Koenig: Exactly right. Yes. Yes, I forgot to mention that when we were talking about the ethics part. You can. Yes. So as a law firm, as a lawyer, you can take Bitcoin for flat fee payments because that is your responsibility. You took the money, it’s too bad if it’s unsafe and you lose 30% of it, who cares that’s your problem. But you’re right, you put it in a trust for the client or in your IOLTA, then that’s no-go. So you cannot, therefore you can’t take Bitcoin on a retainer.
Guest: Can you talk about Medicaid planning and how traceable is my purchase if I’m 65 and I’m purchasing bitcoin?
Attorney Koenig: If you had a multisig purchase based on, it’s like tenants in common in a slightly odd way. So it’s like if you had a deed and there were two owners on it, you know, but in this case, it could be three owners of which you needed two names.
Guest: But is it like a wristwatch?
Attorney Koenig: Is it personal property? Is an LLC asset a countable asset? If an LLC property could be a countable asset in Medicaid planning, I think that Bitcoin falls into that category because it’s treated like a property. I’m not sure I would see Bitcoin being a personal possession because the IRS has viewed it as a currency, a virtual currency. So I think it’s a tradable asset, but it’s not a personal possession. That would be my view. I think litigation might come up with a different plan. I don’t know.
All right. Let’s see. The last line on this, I just wanted to point out on trust is you have to be very careful in the successor trustee role because as the primary trustee, you have all access to the keys. You have access to everything necessary to manage the estate when a successor is named for some reason that successor needs to be told by the advising attorney that you’d better change the seed code, right? Change the private key because if you don’t, the old trustees still got to have access and so if you removed them for cause malfeasance or something, you know, you’re not getting anywhere if you haven’t changed the code, because remember back to one of the very, one of the earlier lines was, you don’t hold the coin until you hold the key.
Guest: What about involuntary transfers? If somebody’s got a code and they’re being removed and you’re like, “Well, I’m not giving you the codes”
Attorney Koenig: Well, we’re exploring some of those problems. Our seized asset case might be one of those.
So I’m going to move on to the last slide, I think, other than the last chance to get sets, is the, thinking about probate. Don’t forget about the fact that the ethics opinion says you can’t hold Bitcoin. So you might need to figure out if you are named an executor of an estate that has Bitcoin, what you’re going to do about it. Remembering that asset transfer requires that private key transfer, which is to your question. Be sure that the license agreements, so if I have Bitcoin in various places, but one of them is Coinbase, if I give my wife the login information for that, she’s technically violating the law, by the license agreement, by logging in as me on that exchange.
But with the powers from, from 36F she’ll have with the digital custodian, she would have the right to be able to do that. So that’s why I say you have to have, you have to have this language named and the various things. Make sure you keep in mind these prudent investor rules. Because if you’re, again, you can’t hold the Bitcoin, but you can explain to your clients that they have to manage it safely. And if they don’t have competence, they should find somebody who does have competence. And Oh, another point about this was liquidity is important, in the States and Bitcoin is immediately liquid. Now you might say, well, can I buy with it I can’t buy anything. But you can always exchange it to US dollars or Thai baht or South African Rand, whatever you decided you wanted to exchange it to, it’s exchangeable instantly. Now, there may be a delay in terms of the transaction settling, but you can exchange it. You don’t have to worry about accounts freezing and things. However, remember, this doesn’t give you any new rights that you didn’t have before. Right?So it’s not just because you can access it doesn’t mean you should. If you’re, you know, if you have an obligation to manage the account and the clerk has said you can’t move the assets, you, you can’t just because you have access to it. Yeah, you can. But, something to keep in mind it is more liquid and don’t forget about taxes is still have to be tax returns, gain and loss for Bitcoin still has to be reported. And there’s your opportunity to scan one more time as, I don’t know if anybody got up to a dollar yet in scans, but, but it’s certainly, it’s certainly okay. All right. Any more questions? On keywords, can you make up your own key words? Yes, you can. You can choose your own keywords. Most of the time they’re just generated when you create the, the account or the wallet, they’re just generated at that time for you.
If you have any more questions, please let me know. Thank you for your time.
