E300 Inheritance by Bitcoin Family Wallet

E300 Inheritance by Bitcoin Family Wallet

A shared Bitcoin family wallet sounds like a simple way for your heirs to inherit upon your death. We’ll discuss the advantages of this setup, as well as some important drawbacks.

What is a Bitcoin family wallet? It is a shared Bitcoin wallet, but not a multisig wallet. It is a singlesig wallet/device/app that multiple family members have access to.

Hot wallet example: husband, wife, and kids use an app and all of them have the password and seed phrase.

Cold wallet example: husband and wife share physical custody of the hardware wallet, PIN, and seed phrase. The kids know where the parents keep the hardware wallet and perhaps even know the PIN (but not the seed phrase)..

Pros of Bitcoin inheritance with a family wallet

Pros of bitcoin inheritance with a family wallet

Compared to other inheritance solutions, a family wallet is easy to set up and maintain. Unlike mulitsig or secret sharing, there are no extra steps. If you are comfortable with self-custody, then you are most likely comfortable updating your hardware device and keeping firmware up-to-date.

It is also easier to make transactions during your lifetime. If you want to send or spend during your lifetime, it is easier with singlesig. With multisig, you have to get multiple signatures, and with secret sharing you might have to reconstitute your key to sign any spending transactions. With a shared family wallet, for example, your just sign the transaction with no extra steps.

Because the shared family wallet is one wallet (and everyone knows it’s stored in mom’s dresser), there is very little treasure hunting upon death. It’s even easier if everyone knows the PIN.

Cons of a Bitcoin family wallet

Cons of a bitcoin family wallet

It is extremely poor security to have so many different people with access to a single wallet.

First, there is the risk of a family member going wayward and just taking the wallet. Sadly, there was a news story of a son who drugged his dad’s tea to get to dad’s Bitcoin. No family is perfect, and if someone decides they are entitled to something more, they have instant access to a shared wallet.

Second, when you have multiple people who have full access to a wallet, there are multiple points of careless error. For example, the son doesn’t quite appreciate how self-custody works and leaves his copy of the seed phrase laying around. Everyone who has access to the wallet needs to take steps to maintain a high level of security. They all need to understand that the seed-phrase needs to be better protected than saving it on Google Drive (bad idea!).

Similarly, there will be varying levels of interest and understanding of self-custody among the family members.

Inheritance problems with a Bitcoin family wallet

Recently, we’ve seen a case with a shared family wallet and multiple family members have been contributing/purchasing into the wallet. That can cause confusion as to who really owns what. Sure, you can figure out which transactions and which UTXOs belong to which purchaser. But it creates accounting issues and increases the risk of family drama even to the point of litigation. Commingling of funds is never a good idea, and this is a good example as to why.

Upon your death, the question becomes: who’s the boss? Whenever the answer is unclear, it increases risk of family conflict. With legacy probate, it’s usually legally clear who’s in charge (the named executor or trustee). That named person has the authority over the estate and that person also bears all the responsibility.

Inheritance problems with a bitcoin family wallet

If there are multiple key holders, whoever starts signing first is in charge. It’s easy to imagine someone sweeping the wallet into a different wallet and seizing control. Now that person gets to decide who gets what. That is a recipe for family drama.

Another problem is: will your heirs figure out what to do with Bitcoin upon your passing? Even if you are a Bitcoiner, your kids may not care enough to figure it out. For example, our client called saying: “My son is very intelligent, but he has no interest in learning Bitcoin custody now. He says he’ll figure it out if anything happens to me.”

It’s a bad idea for even the smartest people to try and figure out Bitcoin on the fly. They can still make stupid mistakes compounded by the emotional stress of the loved one’s death. If you make a mistake with self-custody Bitcoin, the result can be catastrophic loss. You can’t pursue unclaimed funds, and there is no password reset.

Executor (can apply to Bitcoin)

If you have a shared family wallet, you may want to consider naming a professional Bitcoin executor, hiring a professional service, or naming a friend who is very familiar with the process.

My book, “How to Hire an Executor,” is not specific to Bitcoin, but it will help you understand more about professional executor services that are available.

As you know, we love this topic. Please email your questions or leave a comment on other Bitcoin-related topics you’d like us to cover.

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E297 Lessons on Bitcoin Inheritance from El Salvador 2022

E297 Lessons on Bitcoin Inheritance from El Salvador 2022

Here’s what I learned about bitcoin inheritance at the recent Adopting Bitcoin conference in El Salvador (my full bitcoin inheritance presentation here).

Background: (1) One year ago, El Salvador was the first country in world to make bitcoin legal tender, and (2) these conferences tend to be attended by the most hardcore bitcoiners, not so much the everyday users.

How does Chivo wallet work for bitcoin inheritance?

How does Chivo wallet work for bitcoin inheritance?

When El Salvador launched bitcoin as legal tender, that came along with a government-maintained software wallet that you can keep on your phone (called Chivo). Based on my conversations with locals and with the researcher that I hired, Chivo is by far the dominant wallet in use in El Salvador.

This is unlike other parts of the world where there are at least a dozen popular wallets (hardware and software). While the rest of the world is still scattered, El Salvador has one main wallet that everyone uses. It’s not like Mac vs. PC or Apple vs. Android phones (where people usually have one or the other).

The Chivo wallet is highly centralized and KYC (“know your client”), which means you can’t get this wallet unless it is linked to your national ID number. It is managed by a centralized entity (the government). This is the antithesis of what U.S. bitcoiners are into.

One pro is that because it is centrally managed, you don’t have to worry about losing your seed phrase. The government knows that the bitcoin belongs to a certain person.

Another pro to this is that you can name a beneficiary on your wallet, like an IRA or life insurance. If you pass away, your heirs can theoretically call customer service. The heir would need to submit the equivalent of a death certificate, letters testamentary, and a claim form to have the bitcoin transferred to the heir’s Chivo wallet.

While in El Salvador, my researcher and I tested customer service for a death claim. We called a few times to get different representatives. They had no idea what to do for a dead customer. To be fair, even if you call Binance, Gemeni, or even Bank of America, they don’t know what they are doing either!

Salvadoran bitcoin estates data

Salvadoran bitcoin estates data

There’s not much data on how it’s been working, since it’s only been one year. Most of the bitcoin users are on the younger side. El Salvador has a population of six million. Not many of the deaths in the past year were of younger people. Those who died were not bitcoin holders and also not using Chivo. For this reason, we weren’t able to gather much information about self-custody issues or seed phrases lost, etc.

Recently, Chivo enabled linking your bitcoin wallet to your legacy bank account. There’s no privacy, but the point is to minimize volatility. For example, I pay my Uber driver $10, and he doesn’t want to take the risk of bitcoin going up or down. He has the option to accept the bitcoin then immediately convert it to dollars. This is how the government addressed the users’ fears of volatility, etc.

People who need this money for daily needs want something that won’t fluctuate. If users are using bitcoin like PayPal or Venmo (converting everything to dollars), there may not be many probate issues. These users aren’t investing in bitcoin, rather just using bitcoin like a Venmo system.

Bitcoiners are thinking about inheritance

Bitcoiners are thinking about inheritance

The conference in El Salvador was surprisingly well-attended: there was standing room only, but people were also sitting on the floor. There were so many other presentations cooler than bitcoin inheritance, that I thought I’d be lucky to see a dozen people.

During the Q&A part, it seemed like multisig was the most popular solution. Remember, these were hardcore bitcoiners, and multisig is not a technically easy solution.

Shamir’s secret sharing was also a very popular solution. As you may recall, this process involves splitting up a seed phrase that’s not too risky. I will look into this further and make future posts about my findings.

But what about solutions for everyday users? They want to keep the bitcoin in their own custody without living in fear of catastrophic loss upon their passing. One possible solution is to have a multisig with someone who knows how to execute it, such as a professional bitcoin executor.

Some other observations from my time in El Salvador: the bitcoin tourists were the ones paying with bitcoin. Vendors were reluctant to let us pay for things with bitcoin. One cabbie said he accepted bitcoin, but when I arrived at the destination, he asked for dollars because his phone wasn’t working. After a little prying, I found he could open his Chivo app just fine. It seems that he didn’t know he could immediately convert the bitcoin to dollars.

Probate book

My book, “How Probate Works,” can relate to bitcoin inheritance as well. At the conference, I handed out many free copies of the book, and people were interested. If you did not get a free copy at the workshop, you can also find my book on Amazon.

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E292 Help! I Don’t Have a Bitcoin Executor For My Wil

E292 Help! I Don’t Have a Bitcoin Executor for My Will

Choosing an executor can be very difficult if you feel you don’t have many choices, especially if you own non-traditional assets such as Bitcoin. We previously discussed this topic, generally (https://anthonyspark.com/help-i-dont-have-an-executor-for-my-will/), but what about Bitcoin?

Whether it’s because your friends and family lack knowledge, or because you don’t want to leave behind stress or drama, there are many reasons why so many Bitcoiners feel they don’t have anyone to name as their executor.

Your Family and Friends Don’t Understand Bitcoin

Your family and friends don’t understand bitcoin

You are afraid that when you pass, they will lose your Bitcoin. They don’t understand custody or any basic security protocols (OPSEC).

Another worry is that your family and friends will dump it, and immediately turn it into cash. They might fall for the hype that it is bad for the environment or actively believe it’s a “ponzi scheme.”

Or they may just be completely clueless; never heard of Bitcoin.

You Don’t Want to Burden Your Bitcoin Friends

You don’t want to burden your bitcoin friends

Maybe you have friends in the developer/Bitcoin community who are technically savvy enough, but you’re not close enough to ask them to take on this big job. Appointing an executor requires trust, and executorship is a burdensome job (lots of time and work).

Besides, Bitcoin may only be a small portion of your entire estate. I’d guess that most technologically advanced folks will get SUPER frustrated by the archaic parts of probate. As we know, probate includes lots of phone calls, faxes, standing in line, all without many apps or elegant solutions. Your friend who is used to cutting edge technology probably won’t want to stand in line to close your bank accounts with a physical signature. They’ll be ripping their hair out and looking for a way to do it online!

You Don’t Want to Cause Disputes Among Your Family and Friends

You don’t want to cause disputes among your family and friends

Even if you have family members or friends who can do the job, the rest of your heirs (who don’t understand Bitcoin) may have a million questions, suspicions, and doubts. The heirs’ lack of Bitcoin knowledge, compared to the executor, will breed suspicion of the executor. Your executor will probably be frustrated with the constant questions and doubts.

When all the heirs and executors know each other and there is distrust, it can ruin relationships, cause resentment, and tear families apart. It’s easier for a completely independent executor to weather that storm.

You Can’t Find a Suitable Service

You can’t find a suitable service

Most technically knowledgeable custody service providers (Casa, Unchained) have great inheritance guidance, but, to my knowledge, they don’t offer executor services. Their advice is to talk to your attorney.

You can also find someone like myself.

Or you can look for a bank to serve as an executor. However, banks have high liquid asset requirements. Most Bitcoiners who are self-custodied probably don’t trust the banks anyway…

Do Any of These Situations Apply to You?

If any of these situations apply to you, your best solution may be hiring a professional Bitcoin executor. Some of the benefits we offer:

  1. We have a fully staffed office available to handle all the various burdensome tasks that come with being an executor.
  2. We are focused on and committed to staying up to date on Bitcoin custody, OPSEC, and other need-to-know issues surrounding Bitcoin inheritance.
  3. Choosing an independent executor, instead of friends or family, can help prevent drama and disputes, since a professional executor is a neutral and unbiased party.
  4. We’re bonded and carry malpractice insurance to cover any wrongdoing as executor. This provides an additional layer of protection you wouldn’t get when working with a loved one, friend, or even a trusted financial planner or accountant.

How Do You Appoint a Professional Bitcoin Executor?

Name us in your will or trust

Name us in your will or trust

Just tell your estate planning attorney that you appoint Anthony Park as executor. In most cases, using estate planning software yourself is fine, too.

Next, schedule a call with me to make sure we’re a good fit. Then send us a pdf copy of your fully signed will/trust so I know I’ve been formally nominated.

After that, we will have annual check-in calls to stay in touch.

Nominate Us as Executor After Someone Has Died

Nominate us as after someone has died
After someone has passed away, the heirs may realize that person owned Bitcoin and they become intimated. Even if I am not named in the will or trust, there is a process for naming me post-death. It requires a little more work, but in most situations, we can work with the court and get appointed as executor even after death. The heirs can rest assured that we will now handle everything for them.

In review: just because your executor knows about Bitcoin now doesn’t mean they will still have knowledge of the ever-evolving process when you pass away. Even letters of instruction for your executor can become outdated fast! The best solution is to hire an independent professional executor who is committed to staying up to date on Bitcoin.

Probate (can apply to Bitcoin)

To learn more about executorship in general, check out my book, “How to Hire an Executor,” available on Amazon. Or you can call us and we’ll be happy to speak with you.

I’ve received more and more questions on this topic, and I am actually slated to speak at a the Adopting Bitcoin conference in El Salvador. Hopefully, I will meet some of you down there and I’ll be happy to answer your individual questions.

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E287 How Long Does Probating Bitcoin Take in New York

E287 How Long Does Probating Bitcoin Take in New York?

How long does probate take in New York if the estate includes bitcoin? As we talked about in  a prior blog How Long Does Probate Take in New York, generally probate takes 15 months or longer; sometimes up to 3 years. Those numbers are actually on the lower side, because everything is more delayed these days.

Here we will discuss how a new-ish asset like bitcoin may add some delays.

How long does it take to become executor of a New York estate with bitcoin?

Typically, it takes about 3-6 months to file and get the court paperwork naming someone as executor. The reasons for the delays are:

  1. Collecting documents;
  2. Court delays; and
  3. Hearings before the court will decide who should be executor.

Even with bitcoin added to the mix, this step of the probate process will remain about the same. The only area where bitcoin would make any difference is the estimated value of estate on the probate petition. The executor may have trouble pinning down how much bitcoin the decedent had. Also, because bitcoin is a newer hot topic, the knowledge that the decedent had bitcoin could attract greedy heirs. “Hmm, Uncle Joe had bitcoin; maybe I should contest his will,” etc.

How long to settle an estate with bitcoin in New York?

Typically, it takes 15 months to 3 years to settle an estate. Settling an estate means the executor collects assets and pays debts and taxes to get the net amount to distribute to the heirs.

Of course, after 2020, everything has slowed down. Probate is currently taking much longer than mentioned above. Then, if you add a newer asset like bitcoin, a few more months may be added to the process.

The first reason is because of bureaucracies. Even traditional banks and brokerages are not great at handling decedent’s estates. It’s a constant game of phone tag. New bureaucracies (exchanges such as Binance, Kraken, Gemini, Coinbase) will probably struggle with processing the death claims. They may not yet know what they are doing, because they don’t have a well-oiled machine for this kind of process.

The next possible cause of delay is if your decedent held his own keys and own wallet. Taking custody of self-hosted wallet and transferring it to secure multi-sig estate wallet could be time-consuming. The executor would need a lot of education to know how to handle it. It may be wise to appoint an executor who is familiar with both probate rules and bitcoin custody.

Another cause of delay for the executor is deciding whether to liquidate the bitcoin (convert it to dollars).  With other assets, you want to covert the assets to dollars as quickly as possible to avoid the risk of price fluctuations. But bitcoiners tend to be hardcore and may specify that they want the bitcoin (not dollars) to go to the heirs.

Lastly, taxes add time to the process. Besides estate tax, figuring out the capital gains tax can be daunting. Even just filing a regular income tax return with bitocin may cause your tax preparer and examiner to conduct additional research on the rules. As we discussed previously, getting tax clearance tax a long time, even without bitcoin.

How long to close an estate with bitcoin in New York?

Generally, the final phase (closing the estate) is anywhere from 3 months to 1 year. Again, the executor collects documents (statements, transcripts, and proof of what occurred during the probate process). Then the executor prepares the accounting, which are the books and records in a specific format required by the court. Lastly, the executor has to deal with any contests or objections to the will. Dealing with a contested will can add months to the final phase.

So, when the executor collects documentation of the assets, how does he document bitcoin acquisition? You can’t call a bank and ask for a ledger. You might be relying on screenshots. It’s not even clear if you can rely on the exchanges; you may have to reference the mempool.

How does the executor document bitcoin sale? Hopefully the sale was made on the exchange, and you can document it that way. After a sale, how does the executor protect himself and ensure the heirs that the bitocin didn’t lose value?

If you have an inexperienced person putting together an accounting and the court doesn’t accept it, much more time will be added.

We’ve tried to apply much of our probate knowledge to bitcoin situations. Let us know if you find this useful. Also check out my book, “How Probate Works,” to understand how probate works in general. Then, add to that all the complexities of probating an estate with bitcoin!

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E283 5 Stages of Probating Bitcoin

E283 5 Stages of Probating Bitcoin

Probating bitcoin is more complicated than usual probate. We’ve discussed the 3 stages of probate generally. Here, we’ll describe some specifics of the process for when the decedent owned bitcoin.

How to find out if deceased had bitcoin

How to find out if deceased had bitcoin

First, did the decedent even own bitcoin? We previously discussed three steps to take to find out if the decedent owned bitcoin.

To recap:

  1. Check for hardware wallets, which are little devices that look like a USB drive, calculator, or small smartphone.
  2. Check the decedent’s phone and computers for software or soft wallets. If you have no idea what those apps are named, just do a Google search for the most popular software wallets. New programs and apps come out all the time.
  3. Look for instances of 12 or 24 words. You could find these on a piece of paper, etched into metal plates, or anything else you come across that may be a seed phrase to the decedent’s wallet.

Get letters testamentary for bitcoin

Get letters testamentary for bitcoin

Once you determine that the decedent owned bitcoin, you need to get letters testamentary.

Is this practically necessary?

Do you really need letters testamentary for someone who had self-custody (held in a private wallet and not on an exchange). Probably not, unless bitcoin is held in exchange. If the decedent held the bitcoin privately, there is no gatekeeper to get past. Once you have the decedent’s key or PIN, you have possession of the bitcoin.

Is this legally necessary? Absolutely.

Say you walk into the decedent’s house, find cash, pick it up and walk out. Sure, practically, you can do that. But it doesn’t mean you should! Taking possession of the bitcoin without letters testamentary is no different taking personal property, cash, or jewels from the estate without proper authority.

Take custody of the deceased’s bitcoin

Take custody of the deceased’s bitcoin

Now that you confirmed the decedent owned bitcoin and you have letters testamentary, how do you take custody of the decedent’s bitcoin? Generally, you want to move it out of the decedent’s wallet into a new wallet for the purposes of the probate process.

If the bitcoin was held on an exchange, submit paperwork (death certificate, letters testamentary, claim forms) to authorize the withdrawal. This is similar to the process involving a brokerage account.

If the bitcoin was held in self-custody (ex. a hardware or software wallet), make sure you have all necessary device(s), seed words, pins to access the wallet. I recommend moving it into a new wallet for probate. For the executor who knows how to cover their own tail, I recommend moving the bitcoin to a 2-of-3 multisig with a reputable custody service (Casa, Unchained, etc.). The reasons are that the custody service will hold a third key; in case the executor dies during probate, and to minimize risk of the executor being held personally liable for losing keys/custody. There is more of a chance of someone losing the information than there is for other disasters. As an executor, you don’t want to put yourself in that position. There’s no perfect solution, but the 2-of-3 multisig creates levels of redundancies and backups.

Sound complicated? It is! And it’s exactly why you should consider naming a professional bitcoin executor.

Should executor sell or hold bitcoin?

Now that the executor has possession of the bitcoin, should the executor sell or hold during the pendency of probate? This is the toughest question.

With stocks and other volatile assets, the general rule is to sell and liquidate. Why? Because executor’s job is to preserve value, not grow the estate. Executors will only get blamed if the price goes down; there’s no reward or upside if the estate goes up.

BUT, some bitcoiners are pretty hardcore and may direct that they don’t want the bitcoin liquidated into dollars. If decedent or the heirs really want to keep the bitcoin holding, the executor should prepare paperwork to document that the consequences are not his fault. Holding the bitcoin poses pretty considerable risk for the executor, so most won’t do it. Again, if this is important to you, consider hiring a professional bitcoin executor! You need someone willing and comfortable bearing the risk under the right circumstances.

Even if the decedent tries to spell it out in the will, the executor may not be comfortable taking the risk of holding the bitcoin. If this is the case, it may be beneficial to find and name a professional bitcoin executor in your will.

Close an estate with bitcoin

Close an estate with bitcoin

Many folks think once the executor collects the assets/bitcoin, they can turn around and immediately relay it to the heirs. NO, the distribution of the estate does not occur immediately after the executor gets his hands on the hardware wallet. The executor must wait for all debts, expenses, and taxes to come in and pay those first.

Only after all those final debts and expenses are cleared can executor safely distribute bitcoin. If an executor pays out the bitcoin before he settles taxes and debts, and then receives a tax bill, he’s going to have problems. The executor either has to ask heirs for money back, or he will have to pay out of his own personal funds.

It’s best to wait until you have receipt and release from the IRS and letters from creditors stating that they have been paid in full. You don’t want to be in the position where you ask the heirs for money back to pay debts. They probably won’t give the money to you anyway.

We’ve tried to apply much of our probate knowledge to bitcoin situations. Let us know if you find this useful. Also check out my book, “How Probate Works,” to understand how probate works in general. Then, add to that all the complexities of probating an estate with bitcoin!

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E278 How to Probate a Bitcoin Miner’s Estate

E278 How to Probate a Bitcoin Miner’s Estate

How do you probate a Bitcoin miner’s estate? We’ll cover: what a miner looks like, whether to keep the miner running through probate, and how miners will probably have yet another wallet to figure out.

The Bitcoin mining machine

The word “miner” can apply to the individual who engages in active mining or to the device itself. Confusing, right
Did the decedent own a miner? A miner is a supercomputer dedicated to solving complex math problems to earn Bitcoin. The process of solving those math problems is what makes the Bitcoin network secure.
The bitcoin mining machine
This machine is not an ordinary laptop or PC. The miner itself looks like a prehistoric computer or heater, and often worth at least $10,000! Executors – make sure you Google what it looks like! You don’t want to accidentally throw away Uncle Bob’s “large old computer…” It could also be mistaken for a space heater, because it actually does throw off a lot of heat.
Keep in mind that the decedent could own a hosted miner. Because the machines are huge, hot, and noisy, people may not want to keep them in the house. Instead, there are miner “farms” that handle the cooling, electricity, and noise reduction. This allows shelves upon shelves of miners to be in one place and under the right conditions. A decedent may own a machine at a hosted facility and pay rent for the facility to provide those solutions.

Running a Bitcoin miner throughout probate

Running a bitcoin miner throughout probate
Should the executor continue running the Bitcoin miner throughout the probate process? As we know, probate can take a long time. Running miners for a year or more could generate significant income. You need to do a cost-benefit analysis. Do you unplug the miner and sell it or keep it running?
Just like any other operating business, don’t over–think it. Does the executor have the capability to keep running the miner, or is it better to sell it immediately? For example, an executor is not equipped to continue running a retail store for an estate, so it’s better to sell quickly. But an executor could maintain a rental property until ready to sell.
So, if you have a hosted miner, it may be easy enough to pay the miner farm rent to keep it running. But, if the machine is in the decedent’s home, you probably don’t want it there while you are preparing to sell the home.
Some factors to take into account are:
  1. Electricity cost vs. revenue. It takes a lot of power to run the machine. If you are spending a lot of money on electricity and the current price of Bitcoin doesn’t justify it, the executor may want to sell.
  2. Risks: If one of these machines blows out in the home, it could cause problems. If the machine itself is worth $10,000 and it blows out, then the heirs lose that money.

Another Bitcoin wallet

Another bitcoin wallet
We’ve talked about wallets that executors may miss (https://anthonyspark.com/e270-3-Bitcoin-wallets-executors-overlook/), and miners may have another one! The miner’s earnings usually have to go through a “pool” before it gets to the wallet.
It’s hard to win the calculation contest at home on your own little device, so many people join pools where miners combine their computer power and divide up the earnings. Because of that multi-layered setup, you may need to find yet another seed phrase for another wallet.
Hopefully this is a good overlap of probate experience with bitcoin miner knowledge. My book, “How Probate Works,” will show you how probate works in general. I don’t have a Bitcoin chapter yet, but you will get a sense of how the probate process applies to your situation.
As always, if you have questions about Bitcoin and probate, let us know!

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E274 How Will Your Executor Handle a Bitcoin Crash

E274 How Will Your Executor Handle a Bitcoin Crash?

How will your executor handle a Bitcoin winter (or crash) like the one we’re living through now? We’ll compare a few likely scenarios depending on who you’ve chosen as your executor.

But first, a few assumptions:

  1. You’re a “maxi” (a Bitcoin maximalist – someone who really values Bitcoin in and of itself, and not just its conversion to dollars);
  2. You want your heirs to inherit the actual Bitcoin you’ve accumulated, not just the fiat dollar value on your date of death; and
  3. You believe Bitcoin’s value in dollars will probably be very volatile for several more years. You understand that even if it’s “down” during your probate, you want your executor to hang on to it.

So here are a few scenarios:

Professional executor, but doesn’t “get” Bitcoin

Professional executor, but doesn’t “get” bitcoin

There are many attorneys and banks who are savvy in executorship and probate. In fact, banks have whole departments with trust officers that handle this. Once you find these experienced folks, do they have knowledge of Bitcoin? Maybe, but they probably have knowledge of crypto in general.

Bitcoin maximalists consider themselves separate from the rest of the crypto universe. If your professional executor has only a light understanding of crypto in general, they will associate Bitcoin with the current crypto crash. During a crash, can they withstand psychological pressure to sell? Probably not. That’s the most likely outcome with a professional executor that doesn’t understand Bitcoin like you do.

Maxi amateur executor

Maxi amature executor

Say you chose your buddy who is a fellow maxi but has never been an executor before. He probably has similar values as you and wants to hold on for dear life (“HODL”). But, he has very little knowledge of the probate process or experience being executor.

If Bitcoin is going through a winter cycle during probate, the heirs may demand that he sell the Bitcoin so they can get their inheritance in cash. Can this amateur executor withstand threats of lawsuits, accusations of breach of fiduciary duty, and sob stories from heirs? Between dealing with that and also trying to HODL, it’s going to be a lot of pressure. If the executor doesn’t understand how to defend himself, he might be convicted enough to protect his own stack of Bitcoin. But he might give in to pressure from the heirs and sell their UTXOs so they leave him alone.

Understandably, you want your executor to be experienced with Bitcoin, but you also have to weigh whether the executor can withstand the pressure.

Professional Bitcoin Executor

Professional Bitcoin Executor

Your best bet is to find a professional Bitcoin executor. Investor Michael Burry, from the movie and book Big Short, ran a fund holding money for other people. He shorted the real estate market right before the crash of 2008.

While the real estate market was doing well right before the crash, his positions were losing a ton of money. His investors wanted their money back and threatened to sue him. Burry kept saying no and told them to trust him. He even took technical steps to keep the investors’ money in place to prevent investors from withdrawing.

In the end, the recession happened, and all of those shorts exploded, allowing his investors to make 400 times their money. At the end of the movie, Burry sends out a one-liner email: “You’re welcome.”

In our estate scenarios of a Bitcoin winter, you need someone like Burry who is both convicted AND knowledgeable. You need someone who can carry out your wishes and do a probate-version of a side pocket to make sure he withstands the pressure and delivers the Bitcoin to your heirs.

I hope to fill a similar role, and hope others will, too. I have the experience as a professional executor, and I am beginning to see the light of Bitcoin values. While this topic is very specific, you can still learn about hiring a professional executor in my book, “How to Hire an Executor.”

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E266 Bitcoin Taxes During Probate

E266 Bitcoin Taxes During Probate

After someone dies with Bitcoin, among all the other chaos, are questions about taxes. How do you pay capital gains from during the decedent’s life? Or if he was a long-term holder, how much capital gains tax will the heirs owe? What about estate tax?

Final year capital gains tax from trading

If decedent was not a true holder, and was buying/selling, there are probably realized gains. You have to sell something to owe capital gains tax.

Final year capital gains tax from trading

But how does an executor sort through to find the basis, the sales prices? It’s still complicated, because at least for now, cryptocurrency is not a well-established industry and is constantly evolving.

First, check the decedent’s devices for apps that track basis. There isn’t a main app out there right now, so Google “cryptocurrency tax tracking” to see which apps are popular at the time. If you find an app, it’s somewhat good news. The downside is that some of these apps don’t work very well.

Next, check the exchange that the decedent was using (Coinbase, Kraken, Gemini, etc.) Some of the exchange platforms do basis tracking, but again it’s not that good yet. Even traditional stock exchanges don’t always track the basis. So, it’s a bit unrealistic to expect the crypto exchanges to do as good a job of tracking basis. When someone is alive, it’s easier for them to track their own basis. But, like any other estate, things become a bit messier when you’re doing it for someone who has passed away. It takes work to reconstruct the portfolio to find the values.

What happens if you don’t find the basis? You can’t wait around forever; at some point the executor must take a position on the basis. Then the executor files the 5495 with the final 1040, holds his breath and waits to see what the IRS says. Obviously, this is what the executor does after LOTS of legwork to come up with the best guess for the basis. Filing with the IRS should not be the first step, and you should have a very strong argument supporting your guess.

Long-term Bitcoin gets stepped-up basis

Long-term bitcoin gets stepped-up basis

Like all other capital-appreciated assets (homes, stock, etc.), Bitcoin will get stepped-up basis.

As a quick review, the basis is your adjusted purchase price. If you bought a house twenty years ago, your purchase price is your basis. Same with stock. If you bought stock for $50 a share ten years ago and now it’s worth $500 a share, you made a ten-fold increase.

Capital gains are calculated by what the asset is worth now (when you sell) vs. what you paid for it (when you bought it). When a person passes away, there is a very rare freebie from the IRS called the “stepped-up basis.” If you bought Bitcoin for $1 and it’s currently trading at $100,001, your gain is $100,000. You’d owe a lot of tax on that. But, if you pass away and your heirs get it, their stepped-up basis becomes $100,001. If the heirs sell it the next day for $100,002, their capital gain is $1.

Long-term Bitcoin holders may have SIGNIFICANT gains, so passing it on to the heirs could be a huge tax benefit.

Estate tax on Bitcoin

Is there estate tax on Bitcoin? Yes, it is an asset, just like anything else. Estate tax is a tax of your net worth upon your passing. Your executor or heirs need to put together a balance sheet or list of all your assets, minus liabilities, and present it to the IRS.

Estate tax on bitcoin

The good news! Most people do not need to worry about estate tax because, currently in 2022, the tax only applies to estates over $12mm (and $24mm married).

However, there are probably some Bitcoin holders that are very close to being over the exclusion amount. Earlier, we discussed the stepped-up basis to avoid the capital gains tax. But, if your gains have gone up so much that you’ve shot past the estate tax threshold, you’re trading capital gains tax for estate tax. If your estate is worth that much, you should consult with an attorney or an accountant.

This topic was based on a question from one of our listeners. Thank you and please keep the questions coming!

If you want to learn more about probate in general, please check out my book, “How Probate Works.” I don’t have a Bitcoin chapter yet, but you will get a sense of how the probate process applies to your situation.

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E262 3 Bad Bitcoin Inheritance Plans

E262 3 Bad Bitcoin Inheritance Plans

Let’s talk about 3 common suggestions that are bad bitcoin inheritance plans. Why so negative? Why talk about bad bitcoin inheritance plans, rather than the good? Well, sometimes the process of elimination can help focus our thoughts, so we better understand what makes the good plans “good.”

Sharing you private keys

Share you private keys

This is just terrible security while you’re living. Why? Because sharing your private keys with someone gives them immediate, irreversible, and unfettered access to your bitcoin hoard.

“But I trust my spouse (or kids, or best friend,” you say. I’m sure you do at this moment. But we’ve all seen thing change faster than you realize.

Maybe a great marriage suddenly veers to divorce. Or who would suspect their own child so controlled by drug addiction would poison them to get their Bitcoin?

And it doesn’t need to be so dramatic, just basic carelessness. Will your loving spouse, child, or best friend know how to keep your private keys as safe as you would? Will they get fished, or simply lose their keys?

And if they do have sole and unhacked possession of your private keys when you die, will they know what do you? Or upon your death, will they be relying guidance from a “trusted third party” to understand how to probate your bitcoin?

“Just” educate your heirs

“Just” educate your heirs

For many, their plan is to “just educate” their heirs so that heir will know what do when you die.

Um, do you remember how long it took for you to accumulate your current bitcoin knowledge? How many mistakes did you make? How many BIG mistakes did you make?

Now imagine your heirs are grieving, stressed, and have a lot to do during probate. And on top of that they’re supposed to navigate transferring self-custody? It’s just unrealistic

Even if, by some miracle, you cram their heads full of update to self-custody knowledge today, will they stay up to date? Do they want the knowledge enough to stay apprised of protocol updates, multsig best practices, current use of QR codes or air-gapping? Or will their knowledge be obsolete by the time you pass?

Treasure maps

Treasure maps

You think you’re writing a simple letter of instruction, but to your heirs it’ll feel more like a treasure map.

Why? Remember, your herirs will be grieving, stressed, and have a lot to do during probate. And no matter how much you “educate” them, it’s unlikely they will know know what to do upon death, and will have to rely on “trusted” third party.

And these letters/maps go out of date faster than you think, Do you really want to spend your life constantly updating your letter of instruction? By the way, this problem is the same for any will or trust, not just Bitcoin Inheritance letters of instruction.

If you want to learn more about probate in general, please check out my book, “How Probate Works.” I don’t have a Bitcoin chapter yet, but you will get a sense of how the probate process applies to your situation.

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E258 Bitcoin Estate Planning for 2 of 3 Multisig

E258 Bitcoin Estate Planning for 2 of 3 Multisig

As the default recommended multisig quorum, there must be lots of  2 of 3 multisig holders out there. So let’s make sure your 2 of 3 multisig also works as well upon your death as it does while you’re alive.

Three things to think about: who has your third key; access to keys 1 and 2 upon death; and consider a 2 of 4 multisig.

Who has your third key?

Who has your third key?

Your best candidates are a custody service, a professional executor or lawyer (who also understands bitcoin custody and opsec), or family and friends.

Ideally, this keyholder will have an ongoing understanding of both bitcoin custody and security, as well as probate and estates. This means someone will keep up to date as technology and best practices evolve, and not just a fleeting understanding.

We discussed in depth “who should hold keys as part of your bitcoin inheritance plan?” in E256.

Access to keys 1 or 2 upon death

Access to keys 1 or 2 upon death

Presumably, while you’re alive you have sole access to keys 1 and 2. So how will your 3rd keyholder get access to one of your keys upon your death?

One of the benefits of multisig is that you don’t need such extreme security measures. Why? Because even someone gets one of your keys, they’d still need to get another key to be able to access your bitcoin.

So how to make sure a second keys is available upon your death? A few ideas:

  1. Share a full seed phrase with a family or friend, who would share with your 3rd keyholder upon your death
  2. Give a hardware wallet clone to family/friend, who would share with your 3rd keyholder upon your death
  3. Store a copy of your seed phrase or a hardware wallet clone in a safe deposit box
  4. Write a full seed phrase in your will/trust

All of these brainstorm ideas trade some security to increase the chances your estate will actually be able to access your bitcoin upon your death.

Consider 2 of 4 (or more) multisig

Consider 2 of 4 (or more)

2 of 3 multisig means your 3rd keyholder must somehow get access to keys 1 or 2 (your keys) upon your death.

In our experience, too many things go wrong and go missing upon death. And not just bitcoin. Far less esoteric things like bank accounts, atm cards, birth certificates get lost in the shuffle and chaos of probate

For that reason, I’d prefer to have a quorum of keys ready immediately upon death. For example, a custody service such as Unchained Capital or Casa has key 3, and a professional bitcoin executor (me) has key 4.

I prefer this setup because keys 3 and 4 are immediately ready, and we can still fall back onto keys 1 or 2 as backups for redundancy.

What are the drawbacks of 2 of 4 versus 2 of 3?

  1. Setting up is a bit more complicated
  2. While alive, validating receive addresses may be more complicated
  3. And non-2 of 3 multsigs currently standout on the blockchain, and are therefore less private. But Taproot should solve this.

If you want to learn more about probate in general, please check out my book, “How Probate Works.” I don’t have a Bitcoin chapter yet, but you will get a sense of how the probate process applies to your Bitcoin situation.

Request your free consultation

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Sign-up for your free consultation using the form above, and I’ll be happy to email you a free chapter from Anthony’s best-selling bookHow Probate Works.”