How to Probate Self-Custodied Bitcoin
When people reach out about hiring me as their bitcoin executor, they tend to ask a lot of the same questions. These things might be on your mind also, so I’m going to answer them here. Let’s get started!
How to Hire a Bitcoin Executor
When people reach out about hiring me as their bitcoin executor, they tend to ask a lot of the same questions. These things might be on your mind also, so I’m going to answer them here. Let’s get started!
E339 Why Sharing Your Seed Phrase is a Bad Bitcoin Inheritance Plan
In this episode, we will talk about self-custodied bitcoiners (not those who have their coin on an exchange or with a third party). Some bitcoiners share their seed phrase with their spouse or adult children. Or perhaps they share their cloned wallet with those trusted individuals.
E335 Why a Letter of Instruction for Bitcoin Inheritance Will Fail
A letter of instruction will likely fail for your bitcoin inheritance plan and should have only a marginal role in your plan, if any.
E326 Why Not a Deadman’s Switch for Bitcoin Inheritance?
A deadman’s switch is a seemingly elegant and trustless solution for bitcoin inheritance. But if you think it through, it currently has too many problems to work securely.
E322 Multisig versus Passphrase with a Bitcoin Executor
Multisig or a passphrase (“poor man’s multisig”) are two ways to transfer custody to your bitcoin executor upon your death. Let’s compare, so you can decide which best fits your bitcoin inheritance plan.
E304 Poor Man’s Multisig for Bitcoin Inheritance
What are some less costly alternatives for a managed multi-sig bitcoin inheritance plan?
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
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
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.
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
Here’s what I learned about bitcoin inheritance at the recent Adopting Bitcoin conference in El Salvador. Link to presentation
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.
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:
- Collecting documents;
- Court delays; and
- 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!
Request your free consultation
New Client v5 Free Bitcoin Chapter
"*" indicates required fields
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 book “How to Leave Bitcoin to Your Heirs.”
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