Estate Planning: What Happens to Your Cryptocurrency When You Die?


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 of transactions.

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 is prevented.

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.

Share To: