Is Bitcoin Part of an Estate?

Few bitcoin owners have seriously considered what will happen to their bitcoin when they die. A recent article titled “The Importance of Having an Estate Plan for Your Bitcoin” from Bitcoin Magazine, strongly urges owners to create a legally sound plan of action ensuring both the sovereignty and privacy of these holdings. However, many owners don’t expect to die very soon, and even those who have an estate plan haven’t considered the nuances of estate planning for digital assets. Among all digital assets, there’s no asset requiring more planning for custody and conveyance as bitcoin.

Can you use an irrevocable trust for bitcoin? This type of trust is an excellent tool for your estate plan and beneficiaries. However, for bitcoin, a revocable trust may be the better alternative. The revocable trust does not protect your assets from creditors, but it provides complete control to the grantor, the person creating the trust.

Bitcoin cannot be treated like dollars in your estate plan. If your crypto is held on an exchange like Coinbase or Gemini, your executor may not have as much of a battle to uncover and access your money. However, what if they are not? Would your executor know what to do with the seed phrases buried in the backyard, or “how to interpret BIP39 punched into steel?” These are things known only to bitcoin owners.

Digital asset estate planning requires a level of technical competence and understanding.

Most states have adopted the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) or plan to in the near future. RUFADAA, in most instances, empowers the executor of your estate with the authority to request access to most digital assets, taking into account your privacy interests and the terms of service agreements with big tech companies. However, when it comes to decentralized money like bitcoin, RUFADAA will be of little use.

In many cases, a living or revocable trust is the best choice. This will allow you to maintain access to your assets in the same way you do while living, but if the unexpected occurs, like death or incapacity, the assets won’t be lost, forgotten or misused.

With a revocable trust, you may act as the trustee of your digital assets. As both the grantor and trustee, you can make as many changes as you want to the trust. The property is not protected from creditors and does not receive any special tax treatment while you are living. However, the revocable living trust can be created to convey bitcoin to your heirs without limiting your own use of the assets while you are living.

How you store bitcoin during your lifetime is your choice. Many use a non-custodial cold storage solution, which provides great privacy but requires technical competency to manage. The bitcoin you wish to pass to your heirs needs to be documented correctly legally and technically. Talk with your estate planning attorney to be sure your digital assets are as protected as your traditional assets.

Reference: Bitcoin Magazine (April 17, 2022) “The Importance of Having an Estate Plan for Your Bitcoin”

How Does Cryptocurrency Work in an Estate Plan?

Crypto-assets, including cryptocurrencies and non-currency blockchain tokens, hold significant family wealth today and present challenges to securing, transferring, protecting and gifting, as explained in the article “What Holding Crypto Means for Your Estate Plan” from U.S. News & World Report.

Traditional estate planning is evolving to include this new asset class, as digital asset investors embrace a market worth more than $1 trillion. Experienced investors who use digital assets to expand their asset diversification are more likely to understand the importance of protecting their investment through estate planning. However, first time investors who own a small amount of cryptocurrency or the early adapters who bought Bitcoins at the very start and now are worth millions, may not be as aware of the importance of digital asset estate planning.

Unlike traditional bank accounts, controlled through a centralized banking system and a legacy system of reporting, digital assets are by their very nature decentralized. An owner has access through a private key, usually a series of numbers and letters known only to the asset’s owner and stored in a digital wallet. Unless an executor knows about digital wallets and what a private key is and how to use them, the assets can and often do evaporate.

It can be challenging for executors to obtain access to traditional accounts, like 401(k)s or brokerage accounts. Mistakes are made and documents go astray, even in straightforward estates. In a new asset class, with new words like private keys, seed phrases, hardware wallets and more, the likelihood of a catastrophic loss increases.

A last will and testament is necessary for every estate. It’s needed to name an executor, a guardian for minor children and to set forth wishes for wealth distribution. However, a will becomes part of the public record during court proceedings after death, so it should never include detailed information, like bank account numbers. The same goes for information about cryptocurrency. Specific information in a will can be used to steal digital assets.

Loved ones need to know the crypto-assets exist, where to find them and what to do with them. Depending on the amount of the assets and what kind of assets are held, such information needs to be included and addressed in the estate plan.

If the assets are relatively small and owned through an exchange (Coinbase, Biance, or Kraken are a few examples), it is possible to list the crypto asset on a schedule of trust assets and ensure that the trustee has all the login information and knows how to access them.

For complex cases with significant wealth in digital assets, establishing a custodian and trustee may be necessary. A plan must be created that establishes both a custodian and trustee of digital assets. Steps include sharing private keys with a family member or trusted friend or splintering the private keys among multiple trusted individuals, so no one person has complete control.

This new asset class is here for the foreseeable future, and as more investors get involved with cryptocurrency, their estate plan needs to address and protect it.

Reference: U.S. News & World Report (Oct. 5, 2021) “What Holding Crypto Means for Your Estate Plan”