Why do you need a cryptocurrency estate plan? Maybe you jumped in on Bitcoin in its infancy. Or you didn’t take the plunge until last month. Either way, you now own something valuable. But have you thought about how you will transfer that digital wealth to your family after you die?
Trusts and estates are straightforward in most cases, but technology is not. Transferring crypto after you die creates some unique challenges. And unfortunately, most estate planning attorneys don’t know a seed phrase from a pumpkin seed. You don’t simply put your cryptocurrency account information in your will and forget about it. If that’s what your estate planning attorney told you to do, you’re not getting value anywhere close to what you paid for your plan.
Planning for the transfer of your cryptos takes effort. But, you put considerable effort into building your wealth, so the effort to control it after you die is worth it.
On one level, transferring your digital assets to your heirs is similar to ensuring your family can access your electronic data, such as your iCloud account after you die. But, a digital asset’s technical nature makes that task more challenging because accessing it is often more than entering a passcode on a website. And that’s on top of the usual legal hoops, like dealing with estate taxes, you must jump through to leave your life savings to your heirs.
This article will first explain what you must consider when planning for your cryptocurrencies after dying. Then, I’ll give you a simple plan you can use to start protecting your crypto portfolio started.
*Note: This article relies heavily on the book Cryptoasset Inheritance Planning: A Simple Guide for Owner by Pamela Morgan. I’ve never met or spoken to Ms. Morgan, so I don’t know what she thinks of this article. But, her book is excellent, and I believe in giving credit where credit is due.
Why do I need a Cryptocurrency Estate Plan To Transfer My Digital Assets To My Heirs?
Your goals for transferring digital property aren’t any different from moving any other type of property in your estate except that it may be kept more private. After a lifetime of building your estate, you want your heirs to take possession of your property as efficiently as possible.1
But, the devil is in the details. While there’s a well-defined process for taking possession of a bank account, cryptocurrencies aren’t so easy. This is especially true for people who aren’t familiar with them.
With that in mind, a good crypto plan should do the following:2
- Allow your heirs to take possession of your digital assets when the time comes without having to give them or your trustee access at any time before,
- Minimize the risk that someone will steal your crypto before your heirs can take possession of them,
- Provide your heirs with the means to securely hold their new digital assets after they take control of them, and
- Prevent disagreements and avoid legal trouble.
The Advantages of Digital Asset Estate Planning
Developing a cryptocurrency transfer plan is complex, but it’s worth the effort.
Following are some of the benefits.
Ensures You Control What Happens To Your Assets After You Die
The primary goal of an estate plan is to ensure that what you want to happen to your assets after you die is what, in fact, happens. But crypto can be complicated. Without a plan, the heirs you want to have your Bitcoin and NFTs may never be able to possess them.
You Don’t Have to Trust a Third Party With Your Keys or Seeds
Limit the number of places where your estate plan can fail.
Third parties, such as a bank, brokerage, or crypto exchange, are a point of failure in your system. They may require your heirs to produce various documents and even get a court order before transferring your wealth.
Then there’s always the issue of trust. The more people you involve, the more people you must trust.
A comprehensive digital asset plan can be executed without reliance on third parties.
You’re Planning for Your Heirs’ Future
Did you know that in 2010, the first Bitcoin transaction was an exchange of 10,000 Bitcoins for 2 pizzas worth $40? Today, owning 10,000 Bitcoins would make you one of the wealthiest people in the world.
Your current cryptocurrency portfolio may not make anyone jealous, but that doesn’t mean creating a cryptocurrency plan is a waste of time. None of us know what digital assets you own today will be worth in 10 years. Don’t let today’s fiat exchange rate dictate your planning.
You’re Not Leaving Anything to Chance
Simply writing your seed phrases on a napkin isn’t good enough. If your heirs even find it, they may think it’s trash and throw it away.
Owning cryptoassets is indeed getting more accessible. Still, it’s not intuitive, like using an ATM. Your heirs will likely need some help. And even if they’re cryptonerds like you, it’s better to leave them with concrete details rather than make them guess.
What Shouldn’t You Do In Your
Before we get into what to do, let’s go over what not to do.
Don’t put your keys in your will
A will is a public document. That’s what you’re basically doing if you include access information in your will. Would you publish your ATM PIN on the Internet?
Although trusts aren’t public, don’t put your keys in there either. The law may require your trustee to give certain parties a copy of your trust in some circumstances. It’s better to be cautious.
Don’t rely on a single third party
It may be necessary to involve some third parties to help your heirs. If so, find several people you trust and spread information across them. But make sure you don’t involve too many people. Remember the whole points of value thing from above.
Don’t create or store your cryptoasset estate plan electronically
Internet-connected devices can be infected with a virus, and deleting a file doesn’t remove it from the hard drive. A tech-savvy snoop can recover “deleted” files.
Instead, use a good old-fashioned pen and paper. This may seem like overkill, but you could become the target of a hacker if you have significant crypto assets.
Besides, these old-school methods don’t require any advanced skills. Even the most technology-challenged among us can open an envelope and unfold a piece of paper. It’s one less thing that can go wrong.
You’ve Convnced Me, and I Love My Bitcoin. How Do I Create A Cryptocurrency Estate Plan To Protect It?
Bitcoin’s awesome. Admit it; it’s the money of the future. Don’t wait to put your crypto estate plan together if you have Bitcoin, Ethereum, Solana, etc. Following are the elements of a basic digital asset estate plan.
Find Several Secure, Fireproof, and Waterproof Storage Locations
Store your plan in a secure place where your heirs can find it. Ideally, it should be fireproof, waterproof, and access controlled. It’s best to store duplicate copies of your plan in different locations. Don’t store your keys and seed phrases with your plan for added security.
Write Your Documentation
This is where you explain to your heirs that you own crypto. In Cryptoasset Inheritance Planning, Pamela Morgan recommends a hand-written letter. While a letter has a warm, personal touch, your documentation doesn’t have to be a letter. Whatever format you choose, make sure you adequately explain what’s going on. You do you.3
What should you include in your document?
1. Introduction
Explain to your heirs why you’re leaving them this information. Tell them that you own digital assets that could be worth a significant amount, either now or in the future. Also, warn them that crypto transactions can be unforgiving. There’s no undo button. Once they initiate a transfer, it can’t be undone. So, they should be careful.
2. Make a Device List
Begin going through the devices you use to access your crypto. Record make, model, OS, OS version, and all of the apps you use on that device to access your crypto. Be sure to include any exchanges where you store crypto. Verify you have a backup method of accessing these cryptos, including a way to access your custodial wallets, if any. Also, make sure you back up keys, seed phrases, and any passwords required to access the device or apps.
It’s important not to record your keys, seeds, and passwords on this list. You’ll record them in separate documents in the next step.
Add your device list to your master document. Tell your heirs to collect these devices and store them in a secure place until they’re ready to access them.
3. Record Your Keys, Seed Phrases, and Passwords
Write down the keys, seed phrases, and passwords required to access your devices and apps. Record the name of the app or device, the cryptoassets accessible, and any notes to help your heirs use the information in this document. Use a separate document for each key, seed phrase, or password.
For example, if you have an Electrum Bitcoin Wallet, list the software as Electrum Bitcoin Wallet, the cryptoassets as Bitcoin, the date you’re recording the information, and any other notes necessary, such as if your heirs need a password to access the wallet. Then, below all that information, record your seed phrase.
You know how tech-savvy your family is, so you know how much extra information to include. More information is often better for something highly technical, like digital assets. But remember, security is a primary concern, so don’t include too much information that could allow a thief to access your wallets or accounts.
4. Identify Helpful Resources
Although digital assets are easier to own now, you can’t anticipate everything. It’s best to point your heirs in some specific directions to find help.
5. Close Your Written Plan
Once you have everything recorded, close your document with information about your will or trust. Also include the name of your attorney for your heirs to contact if necessary.
What Do I Do My Crypto Estate Plan?
OK, I have this cryptocurrency plan. Now, what do I do with it?
Make a Backup of Your Plan
Remember this phrase,
“Two is one, and one is none.”
Make a backup of your excellent new plan and store the copies in different secure locations.
Start Educating Your Heirs
In a perfect world, your heirs would be able to pick up your cryptoassets plan and retrieve everything without much frustration. But, as I mentioned above, you can’t anticipate every challenge. So, the better you prepare your heirs, the less you’ll lie awake at night worrying about whether your heirs will understand what to do.
Store Everything In a Secure Place
So, you have your plan all ready to go. What do you do with it? No one wants to go digging through some dead person’s unmentionables, so don’t store it in your underwear drawer and forget about it.
Instead, take all your information and put it in separate envelopes. Put the access information in one envelope for each copy you made. Same with your plan. Then seal the envelope and sign over the seal. This helps your family know that no one tampered with the envelope. Then put those things in your secure locations.
Make sure wherever you choose is secure, fireproof, and waterproof. An office safe or gun safe in your home will work. And something like a safe deposit box or a fireproof, waterproof safe at a friend’s house will do nicely for places outside of your home.
When deciding to use a safety deposit box or some other third-party solution, remember that your government may legally be able to access that location. And, just because your government doesn’t have that authority today doesn’t mean it won’t give itself that authority tomorrow.
Remember that it’s better to store your access information and wallet backups separately from your cryptocurrency plan. You don’t want to give thieves the keys to your kingdom and instructions on using them simultaneously.
And that, my crypto-friends, is the beginning of your cryptoasset plan.
Yep, I said beginning. While following these steps will get most of you at least 80% of the way to the finish line and provide great value, there’s still more you can do to improve it. In a future article, I’ll cover some more advanced considerations, like dealing with the tax man.
New technology, like cryptocurrency and blockchain, can be intimidating. But the good news is that your family doesn’t need to hire a coder to write a custom program to claim your digital assets. If you think through the process and document it well, you’ll give them everything they need to know to get their hands on your (hopefully) quickly appreciating cryptos.
1 In some cases, planning to minimize taxes is part of that goal, but we’re keeping things simple, to begin with.
2 Morgan, P. (2018). Cryptoasset Inheritance Planning: A simple guide for owners. Merkle Bloom LLC.
3 Pamela Morgan has an excellent template letter in the Appendix to her book, Cryptoasset Inheritance Planning.