Cross Practice Insights Part 4: Cryptoasset Considerations for Trustees and Personal Representatives

According to research carried out by YouGov in August 2024 on behalf of the Financial Conduct Authority, 93% of UK adults have heard of cryptoassets and 12% of UK adults own cryptoassets. We expect that this will continue to increase over the coming years, particularly with the introduction of additional regulation across Europe and the supportive position taken in the USA. Therefore, the chances of cryptoassets being included within an estate or subject to an express or implied trust are increasing.

Cryptoassets are generally (but not exclusively) thought to be an extremely volatile and speculative asset class. A Personal Representative (“PRs”) or trustees’ fiduciary duties are engaged when considering safeguarding, investing, disposing or otherwise dealing with cryptoassets as part of the management of a deceased’s estate or a trust.

There are a number of important considerations for trustees and PRs in order to appropriately discharge their fiduciary duties when an estate or trust contains cryptoassets, some of which are addressed below.

Due diligence

Trustees should carry out due diligence to verify the underlying source of funds and wealth prior to taking control of the cryptoasset. This is likely to require carrying out analysis of both ‘on-chain’ (such as where the cryptoasset was purchased from and where it has been transferred to) and ‘off-chain’ (for example, where the underlying fiat currency ultimately derives from and what records exist to support that). There may however be practical challenges in relation to historic records being incomplete or unavailable. This is very important for two reasons: (1) the Trustee may be under a regulatory obligation to obtain this information as part of their own anti-money laundering processes and (2) without this information, it may be difficult to convert, exchange or transfer those cryptoassets.

Protective measures

Once in their control, trustees and PRs must act appropriately in order to guard cryptoassets from the risks of cybertheft and fraud. This presents the trustee or PR with a challenge; how can they ensure that the way in which the cryptoassets are currently held is sufficient and does that need to change to ensure that their fiduciary and regulatory duties can be complied with (this is also to ensure that they do not inadvertently bring themselves within the regulatory perimeter for cryptoassets by carrying out specific cryptoasset related activities). The failure to properly consider these areas could expose a trustee or PR to liability. For example, the viability of continuing to hold cryptoassets at a custody exchange may need to be given careful thought – not just from a cyber security risk perspective, but also from an ‘exchange risk’ perspective (and the extent to which the trust or estate would be exposed to a loss on an insolvency of the exchange).  

As part of this, a trustee or PR will have to consider how the particular cryptoasset is controlled and how the relevant information which allows that control to be exercised is secured. The cryptoasset could be controlled by a private key, seed phrase or credentials to an account at an exchange. However, the reality is that this could be considerably more complicated. The access credential details must be safeguarded and protected because the failure to do so would likely lead to a very real cyber security risk relating to the access to and control of that cryptoasset. The measure of the appropriate cyber security controls needs to also be balanced with: (1) the cost of implementing that process, (2) the technical experience and expertise required to do so and (3) the practical ease and speed of making transactions.

Trustees and PRs should consider the appropriate use of recognised financial service providers, who are experienced in holding cryptoassets and safeguarding private keys. They need to consider who is taking custody of a digital asset or providing the custodial service (including whether or not they are regulated). Importantly, trustees and PRs should consider whether the custodian offers services for the particular token that has been invested and whether they have appropriate security in place. This an emerging market and the difficulty is that many of these organisations are regulated overseas, some will not offer services to consumers.

Investment and taking advice

Section 3 of the Trustee Act 2000 confers a wide power of investment on trustees subject to any express restrictions or exclusions in the trust instrument. Trustees must be careful to scrutinise the extent of their powers and the specific wording of the trust instrument before considering investing or trading cryptoassets including to what extent their liability for any losses incurred are limited. The trust instrument may differentiate between making investments and investing in securities, or have wording which limits the trustees’ investment powers in some other way. Generally speaking, not all cryptoassets are likely to be classed as ‘securities’ in England and Wales and so a trustee may be prevented from investing in cryptoassets if the trust instrument provides that a trustee can only invest in securities. Therefore, an analysis will need to be undertaken on a case by case basis as to whether it’s possible or appropriate to invest in, or trade crypto assets with reference to the wording of the trust deed, keeping in mind the best interests of the beneficiaries and the trust as a whole.

Even if they are empowered to invest in cryptoassets, trustees have a fiduciary duty to exercise care and skill when making investment decisions. Section 5 of the Trustee Act 2000 stipulates that trustees must – unless they have reasonably concluded that it is unnecessary and inappropriate to do so - obtain and consider proper advice before positively exercising any power of investment; but also, when reviewing the investments of the trust and considering whether the investments should be varied. A trustee accordingly cannot just sit back and allow the current investments to continue indefinitely – this is particularly relevant for cryptoassets, given that the value could fluctuate significantly.

“Proper advice” for the purposes of the Trustee Act 2000 is defined as “the advice of a person who is reasonably believed by the trustee to be qualified to give it by his ability in and practical experience of financial and other matters relating to the proposed investment”. Cryptoassets are a relatively new asset class and the availability of specialist advisors that are trusted (and regulated) may be limited and it is a constantly evolving landscape.

The tax considerations of any steps taken by trustees or PRs will also need to be taken into account – not least because the interaction with a cryptoasset could create a taxable event.  

Distributing cryptoassets

Cryptoassets can be transferred directly to the beneficiaries or sold and the cash distributed, depending on the terms of the deceased’s will or trust document. 

When considering whether to distribute crypto assets, PRs or trustees should take advice from a specialist investment advisor. Managing the risk of significant market swings is very difficult. Engagement with the beneficiaries at an early state is advisable so that they are onboard with any decisions; this might include an agreement as to whether the PR or trustee will simply hold or transfer cryptoassets, rather than ‘trade’. This may present challenges in the event that beneficiaries have varying appetite for risk. A small delay in distributing the asset could have serious consequences to the value of the asset in the event of a significant market swing. 

Additional considerations for PRs

1. Accessing the deceased’s cryptoassets

The PRs will need to understand how any cryptoassets are held in order for them to be practically gathered into an estate. If this information is not transferred then it is possible that the estate will never be able to practically access or distribute the cryptoassets.

2. Is the grant of probate required?

If the deceased was using a centralised third party provider (for example, an exchange), then – as with other assets such as bank accounts – the provider will likely need to see the grant of probate before they are willing to transfer control to the PR. Some of these providers are based overseas. Therefore, what is required in those jurisdictions might differ to England and Wales.

The PR does not need the grant of probate if they have full details of the cryptoassets in order to obtain access and control (for example, they may have knowledge of the credentials and information which allows them to exercise control available to them). In this case, PRs may need to take possession of the cryptoassets immediately (and should take legal advice before doing so). Whether or not this information is known to a PR, they should be alert to the fact that other parties could in some circumstances equally take possession of the cryptoassets if they also have access to the same information (for example, the private keys or seed phrase).

As with having a separate account to hold the estate funds, PRs should consider transferring any cryptoassets to a new wallet with a new private key that only they are aware of to mitigate the above risk.

In general, to reduce the risk of opening themselves to personal liability, it is important for trustees and PRs who do not have expertise in dealing with crypto assets to obtain specialist legal advice before taking any steps to deal with crypto assets.

Further information

If you have any questions regarding this blog, please contact Cally Brosnan or Chris Recker in our Dispute Resolution team. 

About the authors

Cally Brosnan is an Associate in the dispute resolution team, specialising in wills, trusts and inheritance disputes.  

Chris Recker is a Legal Director in the Dispute Resolution team. He focuses his practice on complex (and often international) commercial litigation, arbitration and investigations and has particular expertise in disputes involving digital assets.