E304 Poor Man’s Multisig for Bitcoin Inheritance

What are some less costly alternatives for a managed multi-sig bitcoin inheritance plan?

Why poor man’s multi-sig?

A multi-sig setup is good for inheritance purposes, because multiple keys are needed to access your funds. This way, there’s no pressure on one single keyholder to have high-level security. In a multi-sig, if one person loses their key, an attacker or hacker can’t do much without the other keys. Of course, the keyholders should keep the keys secure. But if one leaves his 12 key words laying around, it’s not as risky as it would be if he was the sole keyholder. Also, the keyholders should be geographically distributed – don’t give them to people all living in the same house.

A drawback of using multi-sig is that it can be expensive, especially if your stack isn’t that big. Having 3 to 5 hardware wallets can cost several hundreds of dollars. It might not be cost-justified by the current level of your holdings.

Many of the good plans are through popular services (such as Unchained Capital, Casa, and Nunchuk). However, those are possible single points of failure. If a hacker knows that some of your keys are with these companies, they may find a way to access them. It’s easier for a hacker to hit one of these companies instead of hitting a computer in a random house.

These companies are also an easy target for subpoenas. Maybe you going through a divorce or a child custody battle, or maybe you have IRS or creditor issues. They may figure out that you are using a big company and figure out where to serve papers in hopes of getting your account information.

Separate seed from passphrase

What are some poor man options to avoid the expense of multiple hardware devices, as well as the small risk of using a centralized key-holding company?

One option is to separate your seed from your passphrase. If you have a wallet with 12 or 24 words, you can additionally add a passphrase (which is an equivalent of a 13^th or 25^th word). Now you need both the 12 or 24 words and the passphrase to access the wallet.

While you are alive, you can just transact normally with your wallet and passphrase.

But the plan is to give the seed phrase (the 12 or 24 words) to your executor and backup executors, while giving the passphrase to your heirs or someone else. After your death, those two parties need to team up to access your wallet. While you are alive, they cannot access your wallet unless they combine the seed and passphrase.

This is similar to multi-sig, where neither keyholder has to exercise extreme caution. But you should choose people who will keep these safe.

BUT what if your executors and heirs are the same people? In that case, you may want to hire a professional executor as a professional keyholder. Giving your adult children the seed and the passphrase makes it very easy for them to conspire together while you are alive.

Separate clone wallet from PIN

Another option is to separate your clone wallet from your PIN. You can load your seed phrase into a dedicated hardware wallet that is not directly connected to the internet. In order to turn on your device, you have to enter a PIN. During your life, you transact with your wallet and PIN as usual.

Here, the bitcoin inheritance plan is to give a clone wallet to your executor and backup executors without the PIN. Then you give the PIN to your heirs or someone else, creating your own 2 of 2 multi-sig. Again, neither keyholder needs to exercise extreme caution, since there is not much anyone can do with only one piece of the puzzle.

A huge drawback is that without the PIN, your executor cannot keep the clone wallet up to date (software updates, etc.). Depending how much time lapses before you die, he could end up with a very outdated device. To address this, you may have to do some periodic updates for the executor.

Probate (can apply to Bitcoin)

There’s no perfect plan; these are some options for folks who can’t cost-justify using a multi-sig, but like the idea of splitting up access for security reasons.

My book, “How Probate Works,” applies to your bitcoin inheritance planning because it explains the kinds of tasks your executor has to do when you pass.

I’ll be doing more talks to groups on this topic and we plan to post them shortly. In the meantime, keep your bitcoin questions coming!