It’s said that in this world, only two things are certain: death and taxes. While the invention of Bitcoin may cast a little doubt on the certainty of taxes, death remains sadly inevitable. However, one consolation of mortality is the ability to pass on one’s values, knowledge and accumulated wealth to others.
When it comes to passing the baton of wealth to loved ones or favored projects, even here some governments demand their cut. Estate or inheritance taxes are perhaps the most odious of all taxes, combining death and taxes into a single grim package and turning bereavement into a financial windfall for the state.
Fortunately, Bitcoin offers the opportunity to pass on wealth in an untaxed form, at least until legislators start drawing up crypto estate tax laws… So, while Bitcoin greatly aids the possibility of building multi-generational wealth, doing so effectively requires a well-formulated process and a degree of crypto-financial knowledge on the part of the inheritors.
Distributing crypto assets via a third party will only work if the executor of your instructions is able to perform the necessary actions. This means they’ll need two things:
- Access to all relevant private keys, passwords, seed phrases, exchange accounts, software or hardware wallets, and everything else needed to distribute your assets.
- Comprehensive knowledge of how to handle all the above.
If your chosen executor has incomplete access or lacks familiarity with cryptocurrency, a regrettable outcome is likely.
The steep cryptocurrency learning curve means that the traditional choice of executor – a trusted lawyer – is less than ideal (unless they’re familiar with crypto). While a lawyer should be tremendously helpful with the rest of your will, you should arrange the cryptocurrency distribution personally or entrust it to a reliable crypto expert.
Keep in mind that if you don’t create a workable plan, it’s highly likely that the people you intend to receive your cryptocurrency will be completely unable to access it. Unlike traditional assets, a court has no power to distribute your cryptocurrency holdings should you pass on without a will in place. Unless you make some provision to share your private keys and passwords when you’re gone, your former coins will remain locked up forever.
Your inheritors will only be able to access crypto assets which they know about it. This means you need to lay out a detailed “map” to where all your assets are held. The best way to do this is to compose a message to each of your heirs, describing all relevant assets and how to access them.
Keep in mind that the message and any sensitive information which it contains (such as private keys, device locations and passwords) it contains, may be intercepted if sent via email or the postal service. Unless your intended heirs are familiar with public key cryptography as a means to securely transmit messages, it’s probably best to store your messages with a trusted executor or within a sealed safe, to be accessed only in the event of your passing.
In terms of assets, there are 5 major possibilities to consider:
1) Exchange Wallets
Although far from the recommended storage method, coins you’re actively trading coins may be located on exchanges. In this case, case you’ll need to share the exchange’s name, URL and your login details with heirs.
Keep in mind the necessity of also granting access to applicable 2 factor authentication devices. This means you’ll also need to share access info for any 2FA devices related to the exchange, such as the PIN for a phone or the login details to an email account.
Warning: Phones which use facial recognition or fingerprint authentication for access control could be a major problem. While bypassing these measures is possible, it’s complex.
If contacted under normal circumstances, an exchange’s support staff should allow 2FA to be reset or bypassed, however this could prove to be a very troublesome process in the case of inheritance. Without a legally-enforceable will which explicitly states that inheritors have access to your account, an exchange’s support staff could deny your heir’s request to remove 2FA obstructions.
2) Hot Wallets
While you can point heirs to wallets installed on your computer, phone or other devices, access to such devices may prove inconvenient method for distant heirs.
Seed Phrase Backups
Further coins may be held in software wallets. Most modern wallets, including Bitcoin Core 0.16 and later versions, use a seed phrase for backup purposes rather than a wallet.dat file.
A mnemonic or seed phrase is far easier and safer for your heirs to use to recover your coins. Seed phrases can be easily transcribed onto physical media which can be stored in a safe, vault or similar secure place. Paper seed phrase backups are a possibility but rather too easily damaged by fire, flood and the like. As a superior solution, we’d recommend the CryptoSteel or any other highly-resilient seed backup method. Engraving or stamping your own stainless steel plates can also work well.
If you encrypt your seed phrase with a password, as described in the BIP39 standard, ensure that you also record this password along with the phrase itself. Without this password, the seed phrase is useless.
Unless you extract the private keys from the wallet.dat – something which requires a fair degree of technical competence and will prove burdensome to restore for heirs unfamiliar with crypto – then wallet.dat backup files need to be stored on digital media.
Digital storage is risky, as all storage media (USB sticks, DVDs, hard drives, etc.) is fragile and unstable over a long timeframe. If your current Bitcoin or altcoin wallet(s) use a wallet.dat file, consider upgrading to an HD (Hierarchical Deterministic) wallet which uses a seed phrase instead.
For a better understanding of Bitcoin wallets watch this video.
3) Online Wallet Backups
Online wallets are not ideal for storage of significant value, due to the custodial risks (i.e. the site also has access to your private key…). Online wallets will generally provide a seed phrase for backup purposes, which should be handled as described above in 2).
While the seed phrase can be restored to any compatible Bitcoin wallet, heirs may find it easier to skip the restoration process and use the online wallet directly. In this case, you should provide access details as described in 1) above – keep in mind potential 2FA problems.
An online wallet should be treated the same as an exchange wallet; keep in mind the 2FA challenges.
4) Hardware Wallets
We regularly recommend hardware wallets for people wanting to securely store their cryptocurrency. Hardware wallets make it easy for newcomers to achieve a very high-security standard. This makes them ideal to transfer cryptocurrency to your heirs, particular those unfamiliar with crypto… The last thing you’d want is to leave a valuable amount of crypto to a loved one, only for it to get stolen due to unfamiliarity with proper security measures.
Bequeathing a hardware wallet is fairly easy, as it’s a physical device which can be placed in a safe. The hardware wallet’s PIN code and password (if set) should be transferred too. With this information, your heir can then use the hardware wallet directly.
However, it’s not essential that the device itself, nor its PIN or password, be transferred to your inheritor. Provided you arrange for them to receive the hardware wallet’s seed phrase (which you should have securely backed up in any case, as a matter of priority), they’ll be able to restore any coins controlled by the device to any Bitcoin wallet of their choice.
For safety’s sake, it’s best for your heir to receive everything; device, PIN, password and most importantly, seed phrase.
5) Paper Wallets
Due to the difficulty of securely creating and properly managing a paper wallet, this cold storage method is best left to experts. Unless your heir is very well-versed in the technical aspects of Bitcoin, we don’t recommend this method.
The major problem with paper wallets is that, in order to spend from them, you need to import the private key they hold into an online hot wallet. If less than the full amount contained by the paper wallet’s private key is then spent, the “change” will return to an address controlled by the hot wallet and unassociated with the address of the paper wallet.
The security of the paper wallet (assuming it was created properly and there was any security to begin with) will also be potentially compromised by entering the private into a hot wallet.
Paper wallets are a deceptively simple means to leave money to an heir; just tell them where to find the paper wallet. However, in practice they’re likely to lead to problems for any heir who’s not a crypto expert. While you could leave detailed instructions on the proper use of paper wallets, it’s probably a lot easier to transfer your cold storage funds to a hardware wallet instead.
Single vs. Multiple Heirs
The above guidelines will work best with a single heir or multiple heirs whose cooperation can be relied upon. In the case of multiple uncooperative heirs, the best approach will likely be to set aside the intended amount for each heir in separate wallets.
If you want an in-depth guide for planning your crypto inheritance you can also find dedicated guides on Amazon.