What Happens to Your Bitcoin When You Die?
Imagine building a cryptocurrency fortune and having it lost forever after you die; odds are you’re closer to that outcome than you think. Many crypto investors overlook including their wallets in their estate plans. Even for those who do, adding the wallet to their will may not be sufficient to guarantee their heirs can access the assets.
Think of your cryptocurrency like jewelry that you have placed in a locked box and buried in your backyard for safekeeping. Even if you name an inheritor for the jewelry, if they don’t know where to dig up the box or have the key to unlock the box, the jewelry will be lost forever—the same goes for your cryptocurrency.
So, how do you protect your crypto wallet in your estate plan?
1. Choose Your Heir(s) and Educate Them
Choosing who will inherit your digital wallet is the first step to securing your legacy. Unlike other assets such as a house or jewelry, you may need to educate your heir(s) on the basics of cryptocurrency. This requires some knowledge of technology and cryptocurrency. Providing some education on how to use a crypto wallet could help the transfer go smoothly.
Additionally, you may want to consider the tax implications of who will inherit your cryptocurrency. It may come as some surprise that, unlike dollars, using crypto to buy goods and services could incur a tax bill because the IRS treats it as property (like other investments or a barter transaction), which could be a burden for heirs to manage and report. On the other hand, this may work to the inheritors benefit because they will receive a step up in basis on the cryptocurrency, which they wouldn’t get with cash.
2. Share the Location of Your Cryptocurrency (Safely)
Simply naming an heir for your cryptocurrency in your will is not enough. Inheritors also need to know where to find the wallet that holds them. You can tell them directly or specify the location in your estate documents. Depending on the type of wallet you have, the process for your successor to get access to the wallet may look different depending on whether it is a hot wallet or cold wallet.
Hot Wallets: Cryptocurrency Wallets Held Online
If you use a crypto exchange platform like Coinbase, Robinhood, PayPal, etc. it will look similar to retrieving cash from your bank account. The inheritor(s) will gather the required documents (this varies by each platform) and go through the institution’s process for filing a death claim. This option enables the exchange platform to assist your heirs with the cryptocurrency transfer, providing them with guidance throughout the process.
Cold Wallets: Cryptocurrency Wallets Held on a Physical Device
Alternatively, wallets held on a physical device provide more security for your assets but come with more complexity for inheritors. You need to share the location of the physical device, which can be done directly or in your estate documents. It’s also helpful to show your heirs what this device looks like—some look like a regular flash drive and can be easily misplaced or thrown out, especially if the successor isn’t aware of its value. Additionally, each device is different, so providing some basic explanation of how to use it (as part of step 1) will help your heirs later.
3. Provide A Private Key or Recovery Phrase (Cold Wallets Only)
Once the inheritor knows where to find your wallet, they must take specific steps to retrieve the cryptocurrency. There are two ways this could be done:
Recovery Phrase or Code
The first is providing them with your recovery phrase or recovery code. This is like the answers to security questions that unlock your account, the recovery phrase will unlock your private key, which is needed to gain access to your cryptocurrency.
Private Key
Alternatively, you can share the private key or pieces of your private key through multiple channels. Think of this like Lord Voldemort and each of his Horcruxes—you could elect to protect your crypto wallet the same way by providing inheritors with a portion of your private key and including another portion in your estate documents, then when put together, your crypto wallet can be accessed. You can also use digital documents or login services that help structure this arrangement, keeping your wallet secure while you are living, but accessible upon your passing.
Whichever method you choose, consider the security of your wallet—anyone with your recovery phrase or private key, and your wallet location, has access to your crypto fortune. On the flip side, avoid making the treasure hunt too complex, if your successors can’t solve the puzzle, no one wins.
Camelotta Advisors can help you build a digital estate plan or assist you in navigating a complex inheritance. Get in touch with us today to secure your legacy.
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