Let me start by clarifying that I’m not a lawyer. This is not financial, legal or tax advice.
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Things were going really well until a few months ago, I woke up startled and the first thought that popped in my head was, “what happens to my crypto if I die?”
I panicked because I didn’t have an estate plan, like a Will or a legal Trust, and complicated instructions for my family to access wallets and transfer assets when I die.
If I died intestate (without a will), my wife and three kids wouldn’t know how to recover most of my crypto in cold storage. They’d eventually get access to my exchange account through probate, and would be forced to sell Bitcoin to cover the tax bill (thanks to a low cost basis).
If you’ve ever been the executor of an estate stuck in probate because there’s no will, it sucks.
How embarrassing. Let’s fix this.
Bitcoin inheritance is a complex technical, legal and operational process that ensures your digital assets are transferred to the correct people without undue burden or excessive taxes.
Crypto assets, by design, are difficult for others to access.
Over the past few months we’ve been building out our crypto estate transfer service after extensive hands-on research and testing to find the best way to securely transfer Bitcoin private keys and addresses to my family.
I started by looking into the various 3rd party multi-signature options on the market. But everything I explored required storing and/or transferring sensitive data online and trusting people I’ve never met to control access to my Bitcoin keys.
It didn’t feel right, so we decided to combine 15+ years of software development and a deep understanding of Bitcoin to develop a crypto estate wealth transfer service. We work directly with the Bitcoin investors and their estate lawyer to create a customized crypto inheritance plan.
Together with an awesome team of financial, legal and tax experts we built a consulting practice for anyone transferring Bitcoin, stored online or offline in a cold wallet, as part of their estate.
At first I was skeptical of the potential cost then I discovered the tax benefits of assigning Bitcoin to my Trust which will reduce my beneficiary’s tax liability by ~67% due to the Step Up in Cost Basis.
It’s a no brainer.
If I died or became incapacitated today, my revocable Trust would initiate a sequence of events both analog and digital to assist my family recovering hot and cold storage wallets.
This is James Bond level legal protection that minimizes taxes and ensures a smooth transfer of crypto assets. The icing on the cake is that I didn’t have to trust a third party app or ‘service’ with safeguarding my keys or backup seeds.
I was client #1 and we learned a lot along the way.
A cryptocurrency estate plan customized for Bitcoin (and alt-coins) typically consists a Will, a revocable Trust, and custom instructions (plan docs).
An estate succession plan important for Bitcoin investors due to:
Talk to a lawyer. If they don’t have a ton of experience with Bitcoin then have them call us. We will never ask for your private keys and will not have access to accounts.
Due to the complex and dynamic landscape of Crypto, a qualified estate planning professional will consult with you about:
There’s a lot of information to process, especially if you’re new to legacy planning.
A trust is a legal entity that holds assets for your beneficiaries according to specific terms outlined in a Trust Agreement.
A Revocable Trust can be amended over time at your discretion compared to an irrevocable trust which can not be amended.
A Last Will and Testament defines what personal property your beneficiaries receive upon your passing. The Will is linked to your trust. A Last Will & Testament outlines your instructions and defines exactly how your assets will be distributed.
The best feature of the GST is a step up in cost basis. In my opinion, this is the real gravy for estate plans that include Bitcoin. Basically your cost basis for taxes is set on the day you die.
So, if you bought in at $10k, $20K or even $50k and Bitcoin is trading at $100k on the day you die your family’s cost basis for tax is set at $100k.
If you’re a wholecoiner, congrats! You’re part of the 1 Bitcoin Club and planning for the future is a no brainer.
Even if you have a modest amount of Bitcoin, it could mean a significant windfall in the future as adoption increases.
With a hard cap on supply of 21 million, there is only ~0.0025 bitcoin per human being that will ever be available.
It’s time to act like an adult.
If death is too morbid to think about, consider what would happen if you are medically incapacitated and forgot your wallet passphrase or location of your metal stamp. Disastrous!
Dying with your assets is NOT the way.
A legal trust is a fiduciary agreement made between you and a Trustee (third party designee) for the purpose of distributing your assets per your instructions.
While you’re living, the estate plan can be customized to provide an additional layer of protection like backing up your recovery seeds and recovering your cold wallet if you lose access to the wallet.
After death, or incapacitation, your Bitcoin Estate Plan kicks in to transfer assets and ensure secure access for your beneficiaries or heirs.
The main benefits of using a Revocable Trust for your Bitcoin succession plan include:
Pro Tip: when seeking advice about your crypto estate planning, make sure that the qualified professional has experience in your jurisdiction as laws may vary.
For example, these assets are exempt from Probate in the state of Ohio:
Failing to prepare for the inevitable is 100% avoidable.
The step up in cost basis is arguably the most attractive benefit for using a revocable trust in your Bitcoin Estate Plan.
A ‘step up’ is a tax advantage for living trusts because it sets a cost basis for an asset valued on the day the grantor dies, not the day they acquired the asset.
If you have a low cost basis buying Bitcoin prior to 2018, the step up in cost basis could be the most significant reason to put your crypto in a trust.
You acquired and HODL 10 Bitcoin (BTC) on 01/01/2017 for a total of $10,000 given BTC-USD price on that day of $1,000.
On the day that you died, BTC-USD was $95,000.
When the estate settles two months later, for example, the beneficiary liquidates the 10BTC at BTC-USD $100,000 for gross proceeds equal to $1,000,000.
Without ‘step up’ your heirs would realize $990,000 in capital gains.
(($100,000-$1,000)*10BTC))
With the ‘step up’ your heirs would realize $50,000 in capital gains.
(($100,000-$95,000)*10BTC)
If the grantor is alive, a revocable living trust has little impact on taxes aside from normal 1040 reporting and doesn’t require a unique Tax ID or separate return filed.
This changes the day you die as your Trust automatically converts from revocable to irrevocable and the trustee must acquire a Federal Tax ID to start reporting taxes with Form 1041. Your successor trustee is financially responsible for protecting your heirs and may liquidate assets which can generate capital gains taxes.
Pro Tip: Assets that are inherited may automatically qualify for long-term capital gains taxes. Consult with your tax professional to confirm if this applies to your situation.
From our experience, setting up a Revocable Trust + Pour-over Will is the preferred method compared to transferring your Bitcoin through a Last Will and Testament.
75% of 18-54 year olds don’t have a valid will let alone a more sophisticated estate plan government by a legal Trust.
Version 1 of your Estate planning doesn’t have to be perfect. Having something in place is better than having nothing.
A Last Will is better than dying intestate (without a will) but without a Trust, your estate is exposed to the Probate process and carries considerable risks including:
The amount of time and cost required to set up an Bitcoin Estate Plan with a Trust must be compared with the risks of not having an estate plan.
Consider your time preference for money and discuss these risks with your lawyer or qualified professional. Contact team@stratus.io with any questions.
Your Bitcoin Inheritance strategy requires careful planning and coordination.
These are the six steps you should expect to take when creating your crypto estate plan:
Use your network to get an introduction to an Estate Lawyer who specializes in digital assets like Bitcoin within your jurisdiction. There’s no substitute for hands-on experience working with crypto to set up an efficient, secure, private Estate Plan.
Remember, not all ‘professionals’ are crypto experts.
After the meeting, conduct your own due diligence based on the attorney’s responses and your confidence in their ability. Do your own research (DYOR) to vet your lawyer before signing on the dotted line.
After the initial meeting, you’ll likely receive an engagement letter which serves as a legally binding agreement outlining the fee for service to prepare your Bitcoin Estate Plan.
Engage with the attorney or continue searching until you are confident in the attorney’s ability to handle your assets according to your wishes.
Provide all necessary documentation, instructions and information as requested by the attorney. This includes account numbers, passwords, recovery seeds and instructions to execute specific duties.
Pro Tip: It’s ok to ask your estate planner about their internal controls and procedures for dealing with sensitive information. Ask about what extra measures are in place for digital assets like Bitcoin or Ethereum held in trusts.
You’ll need to provide the contact information and procedures for all trusted parties involved in executing the instructions of your estate plan.
Review the obligations, considerations and responsibilities of your attorney if they have a specific role, like signing a multi-sig wallet, to execute the estate plan upon your death.
The trustee (or executor) should be a person you know, like and trust to respect your wishes.
Reliability, common sense and good judgment are also important to consider when selecting your successor trustee.
Adult children, family members or close friends may be better suited than a spouse who has a similar life expectancy.
If you don’t have any reliable options, consider hiring a professional executor for your Bitcoin Inheritance plan. Look for Certified Trust and Fiduciary Advisor (CTFA) or Certified Estate and Trust Specialist (CES) credentials.
Hiring a professional trustee who understands probate, tax law, and audits can cost between 1-5% of the estate value. Depending on your jurisdiction, this could be comparable to your state’s statutory fee which would be paid to a family member acting as executor.
The lawyer selected to draw up your estate plan docs is often used as the successor executor but you could conduct separate due diligence for this role.
Understanding Bitcoin self-custody, security and transacting on various blockchains is a skill-set that hasn’t permeated traditional estate planners.
Once you decide who the executor or trustee will be, it’s time to legally nominate this person.
Do your own research, and remember that you can make some changes to this over time.
One of the services we offer at Stratus is working directly with our clients and their estate planning attorneys to advise on creating clear plan docs for crypto estate plans that utilize a revocable trust.
For example, a document detailing the Plan for Accessing Crypto must be included in your estate portfolio. You should describe, in detail, how the successor trustee will access your crypto upon your death.
This plan document is meant to safely transfer your crypto assets to the trustee. Important information like the physical or digital location of accounts, login/access details, contact information, and step by step detailed instructions depending on who has custody of your keys.
Of the 15 ways to transfer Bitcoin when you die, the two most common options are:
Include the full/partial recovery seed or passphrase as part of a revocable trust may shield your crypto estate from government seizure, as long as the trust structure complies with relevant laws and regulations.
Bonus: While you’re living, these instructions could also be used as redundancy for securing your recovery seeds.
Ensuring that no one person has complete control of your recovery seeds reduces the risk of creating a single point of failure.
Even though the crypto market is technologically advanced, old school paper estate transfer methods are still the best method to preserve generational wealth.
“Upon my death, I direct my executor to transfer ownership of all cryptocurrency holdings to the trustee of the [name of trust] trust. The trustee shall have the power to access and manage these holdings on behalf of the trust beneficiaries, in accordance with the terms of the trust agreement. The executor shall also provide the trustee with any necessary private keys required to access and manage these holdings. The trustee shall keep these private keys and passphrases in a secure location and use them only for the purposes of managing the trust’s cryptocurrency holdings.”
Your lawyer will prepare the estate documents for review and signature. If you already have a Bitcoin Inheritance plan, you can amend those docs to include anything you’ve learned from reading our posts.
Prior to signature, conduct a dry run of your instructions which may include transferring Bitcoin and restoring wallets. You can use ‘test’ credentials if multiple individuals are participating. Next, conduct a private test using real keys and seeds prior to finalizing your instructions.
Review the attorney’s internal controls and policies for security, privacy and transfer of responsibility if necessary.
Agree on the schedule for periodic review to address any changes and update your estate plan.
For example, keep your inheritance plan up to date by conducting an annual review. Your lawyer will be happy to get paid for their time to answer questions or make amendments like:
Pro Tip – You probably don’t need to meet with your lawyer every year. You should schedule a recurring calendar event that reminds you to reach out to your estate planner every year. If you don’t need to meet, just send an email to your attorney acknowledging no update and wish them well.
Maintaining communication with your estate lawyer helps to build a relationship based on trust and transparency.
A revocable trust only distributes assets that have been transferred to the Trust through a process called ‘funding’. This type of trust is considered a Grantor Trust and for tax purposes, assets in the trust are still considered owned by the trust owner (grantor).
According to FindLaw, there are many ways to fund a trust including:
Pro Tip: Never include your crypto, recovery seed, private keys, or wallet as tangible personal property. Bequeathing crypto assets as tangible property negates the instructions of your Trust and your assets could unintentionally end up split between the wrong beneficiaries.
Having a pour-over will helps to roll up any assets that weren’t specifically identified and in my opinion is a must have as part of your Bitcoin Estate Plan.
One of the best things about Bitcoin is that it’s trustless. The Bitcoin network is programmed to enable participants to achieve consensus without the need of a trusted third party, like a bank.
Satoshi gave us Bitcoin after the Great Recession of 2008, when trust in banks was at an all time low. “Trust, but verify” has been the battle cry of the Bitcoin community ever since.
The decentralized, peer-to-peer network demands vigilance and a personal security plan to protect Bitcoin.
We’re on high alert. Wary of getting hacked by a Bitcoin dusting attack or phished out of your coins.
That same level of scrutiny carries over when I hear folks asking if they should trust their lawyer.
Suggestions to protect your estate from legal risk:
Pro Tip: Prior to transferring any materials to a lawyer for custody, seal the contents in an opaque envelope and place into a tamper-evident bag. Instruct your lawyer to NOT reveal the information unless it’s in person to you or with a specified heir pursuant to your instructions upon death or incapacitation.
You should only work with a lawyer that you trust. In the unlikely event your trust is breached, having controls in place to prevent theft or fraud.
Preserve your legacy by applying what you learned in this post to customize an estate plan for Bitcoin inheritance.
Disclaimer: Stratus does NOT provide investment, legal or tax advice. All information in this article is for educational purposes and should not be interpreted as investment, legal or tax advice. The opinions expressed are those of the author for informational purposes and neither Stratus nor the author are liable for any errors, inaccuracies or omissions. Digital assets, such as cryptocurrencies or decentralized finance, present unique risks for investors. For investment, legal, tax, or other financial guidance you should consult your own advisor.
The post How to Create Bitcoin Inheritance Plan first appeared on Stratus Crypto.
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