Estate planning for cryptocurrency: What happens to your Bitcoin after you die?


Cryptocurrency has never been more popular, so much so that legendary investor Paul Tudor Jones and entrepreneur extraordinaire Elon Musk recently jumped on the bandwagon. Even some Fortune 500 companies have joined the party, converting part of their cash reserves to Bitcoin. The result is skyrocketing valuations as a growing number of people add Bitcoin, Ethereum, and a myriad of other cryptocurrencies to their financial portfolios.

For now, people are focused on the potential of Bitcoin and its brethren. They see the massive gains since Bitcoin was unveiled, and hope that the rocket ship will keep going. But few people have thought much about what will happen to their Bitcoin once they die. And that’s asking for trouble because many of the features that initially attracted people to Bitcoin create estate-planning challenges when they die.

For example, Bitcoin is a digital, intangible asset. There’s nothing to hold or touch. So, it’s unlikely that your heirs would ever know you had any Bitcoin unless you tell them.

What’s more, Bitcoin is generally held in online wallets or specialized physical wallets. These wallets, in turn, are protected by a “private key” akin to a password. If the private key is lost, it’s difficult to recover. And if your heirs don’t have the key, then the Bitcoin is as good as gone. Thus, it’s crucial that you create a plan for transferring your private key to your heirs.

But, at the same time, it’s important to be careful with your private key because anyone who knows it can transfer your Bitcoin. And those transactions are largely anonymous and irreversible. In other words, letting heirs know your private key while you are still alive creates the risk that they might decide to dip into their inheritance early. And if you let multiple heirs know in advance, and one of them takes advantage of the situation, it will be tricky to figure out who was the culprit.

Another unexpected issue is probate. Often currency bypasses probate. But Bitcoin is not technically a currency according to the Internal Revenue Service. Instead, the IRS classifies Bitcoin (and other cryptocurrencies) as property. As a result, it will be treated like real estate rather than cash or coins. So, technically Bitcoin needs to go through probate before being transferred to your heirs.

A final consideration is taxes. Because Bitcoin is property rather than currency, it’s subject to capital-gains tax (just like stocks, bonds, and real estate). And since the value of Bitcoin has went from effectively nothing per coin in 2009 to around $50,000 per coin at the time of this article, the gain could be sizeable.

Now that we’ve laid out the main problems, what do we do about them? The easiest to solve are the probate and tax issues. To sidestep probate, place the Bitcoin in a revocable living trust. As for taxes, don’t gift them to your heirs while you are alive. It’s better to use them as part of a charitable-giving plan or, in most cases, to transfer them upon your death. Otherwise, your heirs will be stuck with significant and avoidable capital-gains taxes.

The harder problem is how to safely give your heirs or an agent access to your Bitcoin wallet. How you will want to handle it in part depends on how you store your Bitcoin.

If you have an online wallet, the problem is that you’ll eventually need to give someone your private key. And once they have it, they will have ongoing access to that wallet. So, if you want to make sure your coins are accessible only after you die, one way to go about that is to write your private key on a piece of paper and then put it in a bank deposit box that won’t be accessed until you pass away. Meanwhile, if you need to give someone access while you are alive, then after their need for access disappears, you may want to set up a new wallet with a different private key, and then transfer your coins there. If so, you’ll also want to update your bank-deposit box.

Another approach is “cold storage”—basically a special type of USB that holds the private key. Because this device stores the private key, you don’t need to tell your agents or heirs the private key. You can just hand the device from person to person as necessary. And then, voila, they have temporary access to your account. But so too would anyone else who stole the device.

A third approach is emerging thanks to the blossoming of a financial ecosystem around cryptocurrencies. Now, you can buy, sell, and hold Bitcoin through intermediaries like Coinbase that look and act much the same as Ameritrade, Fidelity and Charles Schwab do for stocks and bonds. In these cases, estate planning will generally echo the same strategies as transferring your stocks and bonds after you pass away.

But with all that said, cryptocurrency is a quickly evolving arena. The rules, regulations, and systems surrounding it are in a state of flux. So, be sure to work with knowledgeable resources when setting up an estate plan for your cryptocurrencies. And then periodically check in on your plan to make sure that it’s still current.

This column is for informational purposes only and is not intended to be taken as legal advice. For your specific case, consult a lawyer.

Jordan Sundell | Author
Jordan Sundell is a lawyer. His practice primarily focuses on business, real estate, estate planning, and asset protection. You can find his columns here every other Tuesday as well as on The Fine Print on Facebook. You can contact Mr. Sundell via this newspaper at or 235-6397/235-2440.
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