E214 Transferring Bitcoin Upon Death


Let’s review a real-world case study of a client’s plan to transfer his bitcoin upon his death. This looks like an elegant solution, so let us know if you see any major red flags!

Cloned wallets and sharded seeds

The client’s plan focused on clone wallets and sharded seeds.

The plan starts with two clone hardware wallets. A hardware wallet is like a minicomputer that plugs into your USB drive, but it is not fully connected to the internet or the computer. It keeps your private keys/secret codes offline while allowing you to interact in online transactions. When you clone your hardware wallet, you make duplicates of it. Each clone wallet is password protected.

Cloned wallets and sharded seeds

The client gives one clone wallet to his executor. He gives the other clone wallet to his sister (who is an heir). Neither the executor nor the sister has the PIN to the wallet. They just have the device. They will receive the PIN upon the client’s death either by dead man’s switch or from another heir.

Then the client shards his seed phrase. Remember the seed phrase is 12 or 24 secret words that you can use to recover your cryptocurrency if something happens to your hardware wallet.

The client has divided his 12 words into two chunks of 6. The client gives half of those seed words to his executor. The executor won’t receive the second half of the words until the client dies.

Upon death, the executor will receive the PIN code to his clone wallet and then he has access to the cryptocurrency. The back-up plan is that the sister receives her PIN code from another heir or dead man’s switch. Then she has access to the cryptocurrency. In the event of hardware failure, the executor will receive the second half of the seed words to recover the hardware wallet.

Risk of theft vs catastrophic loss

Risk of theft vs catastrophic loss

Plans need to balance risk of theft vs. risk of catastrophic loss. You are twice as likely to lose your cryptocurrency than to have a hacker steal it from you. It is more complicated than memorizing a PIN code. You don’t have the safeguard of calling a bank to reset your PIN. It is also easy to over-complicate things and make it too difficult for your heirs. There might be security holes in your plan, but are they big enough to merit increasing risk of catastrophic loss?

Redundancy, and balancing risks

Using multiple hardware wallets is tangible and understandable. A hardware wallet is a device, and it needs a code to access the cryptocurrency. If hardware wallets fail, then you can always shard the seed phrase.

Redundancy, and balancing risks

By using cloned wallets, there is a slight increase for the risk of theft. In this case, the client accepted the increased risk of theft to decrease the chance of his cryptocurrency disappearing upon his death.

While this plan isn’t perfect, I like it. Please pick it apart – I want to hear your feedback. We might not be hard-core “bitcoin-ers,” but we do know what happens when people die! Being an executor is not easy. If you add cryptocurrency to the executor’s job, it’s definitely harder. It will be interesting to learn more as people die holding cryptocurrency.

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E210 How to Administer a Bitcoin Trust

E210 How to Administer a Bitcoin Trust


In Episode 206 we talked about how to set up a trust. This time, we’ll talk about how to manage a bitcoin trust as the trustee.

How to Transfer Bitcoin to Trustee

How to transfer bitcoin to trustee

As we discussed in Episode 206, there are a couple of ways to transfer control of the trust to the trustee. These are the dead man’s switch, sharding, and even old-school envelopes.

The dead man’s switch requires the trust maker to hit a button at regular scheduled intervals. Failure to hit the button presumes your death, and an email containing your seed phrase gets sent to your trusted people. (This is not a good plan, since it stores your seed on a ‘hot” device, the email server).

You can also “shard” your code and break up your seed phrase into chunks. You would give these chunks to different trusted people who will come together after your death to put the pieces together.

How to Invest the Trust Assets

Now that trustee has control, how should the trustee hold and manage the Bitcoin? This depends on the decedent’s wishes.

Sometimes, the decedent’s wish is to liquidate to fiat, convert to cash, then invest it as a normal trust.

But most bitcoin holders probably want their trust to continue to hold bitcoin on behalf of the heirs. The problem is that there is no such thing as a fiduciary account on the centralized exchanges. That is, there’s no way for a trustee to open an account at Coinbase, Gemini, etc. Those exchanges only allow individuals to open accounts, not trusts. So make sure you choose a trustee who knows how to handle a digital or hardware wallets and safeguard the trust keys/seeds.

How to invest the trust assets

If your trustee holds the Bitcoin in trust, he must manage his own wallet. He must also maintain security and anti-loss protocols as if it were his own. If the trustee dies with the keys or seed phrases, that’s not good. The trustee needs to have something in place to avoid catastrophic loss in a secure way. It makes sense for the trustee to have a sharding with the successor trustee or a backup attorney.

Bitcoin Trust Fund Distribution to Beneficiaries

Since cryptocurrency is so volatile, it is best to distribute the bitcoin in-kind. Meaning, instead of the trustee selling the Bitcoin and giving the cash to the heir, just distribute the actual bitcoin to the heir. This way, the beneficiary bears risk of if/when to exchange to fiat.

Bitcoin trust fund distribution to beneficiaries

The problem with this approach is that not all beneficiaries know how to receive or manage cryptocurrency. Beneficiaries should have some skill with cryptocurrency and have their own wallets/digital addresses.

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E206 How to Set Up a Bitcoin Revocable Trust

E206 How to Set Up a Bitcoin Revocable Trust


Cryptocurrency (such as Bitcoin) is a new and unique asset. It’s sort of like cash, personal property, and intellectual property all in one. You need to plan for this type of asset in a different way than you would for your bank or brokerage account.

If you want a revocable trust for your bitcoin, you’ll need both a legal plan and a technical plan.

What to Include in Your Bitcoin Estate Plan?

If you want your trustee to hold bitcoin, you can’t rely on the same old boilerplate trust language. You’ll need to tweak a few things for your legal plan to work.

 

Opt-out of the prudent investor rule

Most trustees must follow the Prudent Investor rule, which (roughly) says the trustee may be liable for losses if he doesn’t invest the trust portfolio according to legacy investment principals. For example, 60% equities, 30% bonds, 10% cash. This doesn’t work for Bitcoin, since most people still consider it highly speculative. So a bitcoin revocable trust must include language opting-out of the prudent investor rule.

Access to devices and logins

What to include in your bitcoin estate plan?

Make sure to include language that gives your trustee access to your computers, devices, and logins. Without this, your trustee may technically be violating privacy laws.

Keep it flexible

It is important to keep your Bitcoin estate plan flexible since cryptocurrency continues to evolve.

Bitcoin in a Living Trust

With a traditional bank, you’d rename your account so that the trust owns it and not the individual. For example, you’d rename your personal checking account from “John Doe,” to “The John Doe Trust.”

But this won’t work if you hold your bitcoin on a centralized exchange. Currently, exchanges don’t open accounts for trustees. Nor do they offer beneficiary designations. So, to make a bitcoin trust, you’ll need to hold via a digital, hardware, or paper wallet where you control your keys.

Bitcoin in living trust

Think of your wallet as personal property, like artwork and other collectables that don’t have a deed or other record of ownership. One way to prove transfer of ownership for personal property is to sign a gift or assignment deed from yourself to your trust.

What Happens to the Bitcoin Trust Upon Your Death?

Now onto your technical plan: how to give access to your trustee when you die.

One solution is to “shard” your seed phrase and break it into chunks. For example, give half of the words to your lawyer, then give the other half of the words to another trusted person. Only upon your death will these two people be able to connect with each other to complete the seed.

A component of those plans could be a “dead man switch.” A dead man switch is where you routinely do something (ex. press a button) to indicate you are still alive. If you fail to press the button or miss two button presses, then it is presumed that you are dead. An email containing seed phrase then goes to your trusted people. (This is not a good plan, since it stores your seed on a ‘hot” device, the email server)

What happens to the bitcoin trust upon your death?

You could also give your seed to your trusted people in sealed envelopes. If this is worrisome, you could tell them to send you pictures to show that the envelope is still sealed (not ideal, just brainstorming here!)

We have worked on several Bitcoin revocable trusts, and these are the types of situations we encounter. It is exciting for us to learn about cryptocurrency and work with our clients to protect these valuable assets.

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E202 Bitcoin Risk of Theft vs. Risk Loss

E202 Bitcoin Risk of Theft vs. Risk Loss


Bitcoin and cryptocurrencies are currently a popular topic. Here, we are discussing the risk of theft verses risk of loss with these types of funds, specifically why that matters in the context of estate planning. We are by no means experts in this subject, but we’ve done our homework.

Estate planning for Bitcoin can feel like you are in a Divinci Code movie, with secret codes and memorized phrases. It can feel like a treasure map, compared to your traditional banking.

There is so much advice out there online telling you to take some extreme measures to prevent hackers and thieves from plundering your stash. However, you have to make sure you don’t overboard, at the expense of increasing your risk to another type of catastrophic loss, simply losing your Bitcoin!

Estate Planning for Bitcoin

Estate planning for bitcoin

One of the most common ways of holding your cryptocurrency is on “hardware wallets.” That means that you have a device, not connected to the internet, that has access to your key (the fancy word for your secret password). One way to look at it is that it’s like your ATM pin. The only difference is that you can visit a bank to reset your pin, but when it comes to cryptocurrency, no one can help you recover it. We’re not talking about a simple passcode with 7 to 8 letters; we’re talking a combination of 24 words that will allow you access to your bitcoin (also called a seed phrase).

In terms of security, you don’t want to leave this phrase accessible to anyone. The internet goes to great lengths to tell you how to keep this secure. They suggest never taking a photo, which is typically stored on your computer, phone, or cloud. This also goes for storing it on your computer. Again – hackable.

They suggest a handwritten note. Which in itself can be problematic. Paper is fragile. Not to mention, have you ever put a note in a “safe” place? A place that’s so safe even you can’t find it? There in lies the predicament. That’s quite a conundrum. One copy can get lost, while a few copies can be misused. Why we don’t have all the answers for storing not losing your phrase, we are here to compare the bigger risk – someone hacking your bitcoin and stealing it or you simply misplacing your phrase and losing it. Based on which is the bigger risk is how you should plan accordingly.

How Much Bitcoin Is Stolen?

How much bitcoin is stolen?

According to Casa, one of the crypto security firms out there, 1.6 million Bitcoin has been stolen of all time, out of 18 million total. The vast majority of these thefts have occurred by hacking big companies, as hackers are going for the big score. This also includes Ponzi schemes and fraud. For example, someone says they will buy Bitcoin for you with $100,000, but instead buys a Lamborghini.

We believe that this number is underreported. Not everyone reports it when their cryptocurrency is stolen, as they may believe that there is nothing that can be done to recover it.

How Much Bitcoin Is Lost Forever?

How much bitcoin is lost forever?

Let’s take a look at the statistics and compare lost vs stolen. By “lost” we mean that you’ve done such a good job of hiding your passcodes, that you cannot access the bitcoin. According to Chainalisys, a crypto currency think tank, about 20% (or 3.7 million of 18 million) has simply been lost. That is more than twice the amount that has been stolen.

This number may be a little high, because Chainalisys may include super inactive accounts. However, even if you remove those accounts, the stats are still much higher than the amount of Bitcoin that is stolen.

As you decide to hold cryptocurrency and you are learning how to use secure codes, keep these stats in mind. It is twice as likely that you will just lose your Bitcoin by your own doing compared to it being stolen. If you are that worried about having your second piece of paper hidden somewhere, it may be worth the risk of someone finding the second paper compared to you losing the only piece of paper.

When planning for your estate, you have to decide how you will leave these passcodes to your beneficiaries. There are a lot of ways, and they all come with their own risks. A family member may not be able to retrieve your access codes if given a treasure map to “find” the password. You have to balance the risk of simply not being able to access your cryptocurrency with the risk of having it stolen.

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