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

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

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

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

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!