E318 Bitcoin Inheritance Needs Layers
As you may know, Bitcoin does not have layers like legacy and traditional accounts do, so an inheritance plan needs to be created. We will discuss the drawbacks of constantly seeking and getting stuck on a “perfect” Bitcoin inheritance plan, and a few solutions for approaching the creation of these layers.
Legacy assets have inheritance layers, bitcoin does not
Legacy assets (banks and financial institutions) already have several layers or contingencies that you may not even realize. On the testamentary side (deciding who gets what), there may be a will, a trust, beneficiaries on the account, or payable on death designations. If you don’t have any of those, there are still default inheritance state laws called intestacy laws. Basically, even if you do nothing, there is a safety net of who gets what, and there are backup layers. You could name backup heirs, successor executors, etc., but even if you don’t, the intestate laws will dictate inheritance. This is not the case for Bitcoin.
The other side of inheritance is custody, since so many Bitcoiners self-custody. When you have Bitcoin assets on an exchange, you have a few failsafe layers. This includes password recovery. While you are living, you could contact the institution to gain access. When you pass, your heirs have a third-party custodian that they can turn to for assistance with accessing and liquidating. With self-custody, you don’t have this naturally built in to turn to.
Worst case, with traditional and legacy accounts, there is the process of unclaimed funds. This is where the assets go to the state after a certain amount of time if they are not accessed. This is in place, so the money doesn’t simply disappear or get lost. Bitcoin does not have anything like this yet.
Again, Bitcoin self-custody has few to none of these fail safes as of right now.
“Perfect” bitcoin inheritance solutions
Anthony has spoken with many Bitcoiners, and he keeps coming across the same problem – people are getting stuck waiting for the “perfect” inheritance solution. The plans, ideas, and visions for are different for each Bitcoiner, based on their level of security and knowledge. But for everyone it is important that you do not wait. While you’re working on your perfect plan, put in a satisfactory solution for the time being. You need a safety net.
If you worked really hard on your perfect inheritance solution and you believe it will work, great. But what if it doesn’t? There are no layers or fail safes in plan with Bitcoin self-custody. So, it’s up to you to create all of these layers, backups, safety nets, etc., so the funds aren’t lost.
How to make bitcoin inheritance layers
Start with a layer that you’re HIGHLY confident will work, even if you don’t love it (for example, it relies on a third party, exposes your KYC, etc.). Once you have that in place then add layers that increase your comfort and increase complexity. But keep in mind, increased complexity may increase the risk of not working.
Here is one example:
First is the base layer and one way to do this is to create a poor man’s multisig. If you have a single sig hardware wallet, you can give the seed phrase to your heirs and successor heirs (your wife and children perhaps), store a handwritten copy of your seed phrase in safe deposit box, and give your passphrase to bitcoin-savvy friend or professional bitcoin executor (executor and successor) named in your will. Again, you may not love this for privacy reasons, but you are fairly confident this would work.
Now, with the base in place as your safety net, you can do whatever you want. You can teach your heirs in hopes they will understand self-custody enough to take custody on their own with a letter of instruction and treat it as a family bitcoin wallet.
Again, remember you are not creating your perfect plan, you are creating your own safety net until you have your perfect plan.
Check out my book, “How Probate Works,” to get an understanding of the probate process. Then add all the extra steps your executor and heirs will need to do to administer your bitcoin. As always, please reach out with your questions and feedback!
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