By now you have heard plenty of stories about individuals striking it rich
with investments in crypto currency. With Bitcoin, the most popular crypto
currency, currently valued at approximately $6,000.00 per Bitcoin, it
seems that many millions of people believe that these digital assets are
valuable. Whether or not its current valuation is a bubble, the true value
of crypto currency is a topic that will likely be debated for some time.
Aside from the value of a Bitcoin, the technology that underlies Bitcoin,
the “blockchain,” is also valuable and it promises to have
many useful applications outside of an exchange crypto currency. Indeed,
I believe that one day blockchain technology will revolutionize the way
the we perform contracts, record deeds, keep medical records, and, most
immediately, pay for goods. This is because the blockchain distributed
ledger promises security, transparency, and cost savings for all types
How Bitcoin works
Bitcoin operates on a shared public ledger technology called the “blockchain.”
The easiest way to visualize the blockchain is to picture a spreadsheet
that is duplicated thousands of times across a network of computers, where
the network of computers is programed to regularly update each copy of
the spreadsheet so that they are identical. This creates a redundant array
of copies of the ledger for backup and verification of the transactions.
Each transaction creates a new proposed entry in the ledger, which is
verified by the network of computers and then added to the ledger. Each
entry in the ledger is cryptographically verified and signed so that fraud
An individual holds Bitcoin by storing it in a digital wallet, which is
assigned a Bitcoin address. A Bitcoin address is similar to an e-mail
address in that it is used as a destination to send Bitcoin. The wallet
is secured by the use of a 64-digit private key, which is used to sign
every transaction made by that particular wallet and is kept secret by the user.
Challenges for Estate Planning
Bitcoin’s anonymous design creates challenges for estate planning
because 1) there is no personally identifiable information associated
with your Bitcoin; 2) Bitcoin is a virtual asset that may not be readily
identifiable to your heirs; and 3) all Bitcoin transactions require the
individual’s private key.
A Bitcoin wallet has a public address and a private key. A Bitcoin owner
does not put his/her name or social security number on the wallet and
there is no certificate of title, deed, or account statement that proves
your ownership of the Bitcoin. In the typical Revocable Living Trust estate
plan, a person would transfer an asset in to the name of their Trust thereby
allowing their successor trustee to control the asset after the settlor’s
passing. This cannot be done with a Bitcoin wallet.
Further complicating the matter, Bitcoin is a virtual asset that can be
stored on a USB thumb drive, a phone, a hard drive, or anything that is
capable of storing data. This makes it likely that your heirs will overlook
your Bitcoin assets because they will not know what they are looking at.
Lastly, and perhaps most importantly, the only way that transactions of
Bitcoin can occur is through the use of the owner’s private key.
This key is saved in your Bitcoin wallet and it is the “golden ticket”
that allows someone to spend your Bitcoin. This presents a two-part challenge.
First, you will need to keep your private key absolutely secure while
you are alive, while also providing a method for your heirs to learn of
the private key once you have passed away. Second, if the private key
is lost there is no way to recover it and all the Bitcoin will be lost.
This last point is important because it could be potentially devastating
to your estate plan. With generally all other assets there is a third
party holding the asset that can be subject to Court jurisdiction. So,
in the event an asset is left out of a Trust the mistake is generally
fixed by filing a petition with the Probate Court. Not the ideal solution,
but it is not catastrophic either. However, this option will not be available
in the case of Bitcoin because no court order in the world is going to
be able to recover your private key. The Bitcoin will be lost.
The key to passing on your Bitcoin in accordance with your estate plan
is make sure that your estate plan provides for disclosure of your Bitcoin
assets and provides for a secure method of transfer of the private key
to your heirs. The solution may be as simple as a detailed letter of instruction
to your successor trustee, which is placed in a safety deposit box along
with your trust, or it may involve setting up a mechanical “deadman”
switch that transfers your Bitcoin upon your failure to check in. The
important thing is to work with your estate planning attorney to implement
a solution that works for you.