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Bitcoin Inheritance
Planning – What You Need
to Know (and do…)
By STEVEN HAY

Last updated on June 6, 2018 at 20:20

& No Comments

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It’s said that in this world, only two things are
certain: death and taxes. While the invention of
Bitcoin may cast a little doubt on the certainty of
taxes, death remains sadly inevitable. However, one
consolation of mortality is the ability to pass on
one’s values, knowledge and accumulated wealth to
others.

When it comes to passing the baton of wealth to

loved ones or favored projects, even here some
governments demand their cut. Estate or
inheritance taxes are perhaps the most odious of all
taxes, combining death and taxes into a single grim
package and turning bereavement into a financial
windfall for the state.

Fortunately, Bitcoin offers the opportunity to pass

on wealth in an untaxed form, at least until
legislators start drawing up crypto estate tax laws…
So, while Bitcoin greatly aids the possibility of
building multi-generational wealth, doing so
effectively requires a well-formulated process and a
degree of crypto-financial knowledge on the part of
the inheritors.

Planning

Distributing crypto assets via a third party will only

work if the executor of your instructions is able to
perform the necessary actions. This means they’ll
need two things:

1. Access to all relevant private keys, passwords,

seed phrases, exchange accounts, software or
hardware wallets, and everything else needed
to distribute your assets.
2. Comprehensive knowledge of how to handle
all the above.

If your chosen executor has incomplete access or

lacks familiarity with cryptocurrency, a regrettable
outcome is likely.

The steep cryptocurrency learning curve means that

the traditional choice of executor – a trusted lawyer
– is less than ideal (unless they’re familiar with
crypto). While a lawyer should be tremendously
helpful with the rest of your will, you should
arrange the cryptocurrency distribution personally
or entrust it to a reliable crypto expert.

Keep in mind that if you don’t create a workable

plan, it’s highly likely that the people you intend to
receive your cryptocurrency will be completely
unable to access it. Unlike traditional assets, a court
has no power to distribute your cryptocurrency
holdings should you pass on without a will in place.
Unless you make some provision to share your
private keys and passwords when you’re gone, your
former coins will remain locked up forever.

Key Considerations

Your inheritors will only be able to access crypto

assets which they know about it. This means you
need to lay out a detailed “map” to where all your
assets are held. The best way to do this is to
compose a message to each of your heirs,
describing all relevant assets and how to access
them.

Keep in mind that the message and any sensitive

information which it contains (such as private keys,
device locations and passwords) it contains, may be
intercepted if sent via email or the postal service.
Unless your intended heirs are familiar with public
key cryptography as a means to securely transmit
messages, it’s probably best to store your messages
with a trusted executor or within a sealed safe, to
be accessed only in the event of your passing.

In terms of assets, there are 5 major possibilities to

consider:

1) Exchange Wallets

Although far from the recommended storage

method, coins you’re actively trading coins may be
located on exchanges. In this case, case you’ll need
to share the exchange’s name, URL and your login
details with heirs.

Keep in mind the necessity of also granting access

to applicable 2 factor authentication devices. This
means you’ll also need to share access info for any
2FA devices related to the exchange, such as the
PIN for a phone or the login details to an email
account.

Warning: Phones which use facial recognition or

fingerprint authentication for access control could
be a major problem. While bypassing these
measures is possible, it’s complex.

If contacted under normal circumstances, an

exchange’s support staff should allow 2FA to be
reset or bypassed, however this could prove to be a
very troublesome process in the case of
inheritance. Without a legally-enforceable will which
explicitly states that inheritors have access to your
account, an exchange’s support staff could deny
your heir’s request to remove 2FA obstructions.

2) Hot Wallets

While you can point heirs to wallets installed on

your computer, phone or other devices, access to
such devices may prove inconvenient method for
distant heirs.

Seed Phrase Backups

Further coins may be held in software wallets. Most

modern wallets, including Bitcoin Core 0.16 and
later versions, use a seed phrase for backup
purposes rather than a wallet.dat file.

A mnemonic or seed phrase is far easier and safer

for your heirs to use to recover your coins. Seed
phrases can be easily transcribed onto physical
media which can be stored in a safe, vault or similar
secure place. Paper seed phrase backups are a
possibility but rather too easily damaged by fire,
flood and the like. As a superior solution, we’d
recommend the CryptoSteel or any other highly-
resilient seed backup method. Engraving or
stamping your own stainless steel plates can also
work well.

If you encrypt your seed phrase with a password, as

described in the BIP39 standard, ensure that you
also record this password along with the phrase
itself. Without this password, the seed phrase is
useless.

Wallet.dat Backups

Unless you extract the private keys from the

wallet.dat – something which requires a fair degree
of technical competence and will prove
burdensome to restore for heirs unfamiliar with
crypto – then wallet.dat backup files need to be
stored on digital media.

Digital storage is risky, as all storage media (USB

sticks, DVDs, hard drives, etc.) is fragile and
unstable over a long timeframe. If your current
Bitcoin or altcoin wallet(s) use a wallet.dat file,
consider upgrading to an HD (Hierarchical
Deterministic) wallet which uses a seed phrase
instead.

For a better understanding of Bitcoin wallets watch

this video.

3) Online Wallet Backups

Online wallets are not ideal for storage of significant

value, due to the custodial risks (i.e. the site also
has access to your private key…). Online wallets will
generally provide a seed phrase for backup
purposes, which should be handled as described
above in 2).

While the seed phrase can be restored to any

compatible Bitcoin wallet, heirs may find it easier to
skip the restoration process and use the online
wallet directly. In this case, you should provide
access details as described in 1) above – keep in
mind potential 2FA problems.

An online wallet should be treated the same as an

exchange wallet; keep in mind the 2FA challenges.

4) Hardware Wallets

We regularly recommend hardware wallets for

people wanting to securely store their
cryptocurrency. Hardware wallets make it easy for
newcomers to achieve a very high-security
standard. This makes them ideal to transfer
cryptocurrency to your heirs, particular those
unfamiliar with crypto… The last thing you’d want is
to leave a valuable amount of crypto to a loved one,
only for it to get stolen due to unfamiliarity with
proper security measures.

Bequeathing a hardware wallet is fairly easy, as it’s

a physical device which can be placed in a safe. The
hardware wallet’s PIN code and password (if set)
should be transferred too. With this information,
your heir can then use the hardware wallet directly.

However, it’s not essential that the device itself, nor

its PIN or password, be transferred to your
inheritor. Provided you arrange for them to receive
the hardware wallet’s seed phrase (which you
should have securely backed up in any case, as a
matter of priority), they’ll be able to restore any
coins controlled by the device to any Bitcoin wallet
of their choice.

For safety’s sake, it’s best for your heir to receive

everything; device, PIN, password and most
importantly, seed phrase.

5) Paper Wallets

Due to the difficulty of securely creating and

properly managing a paper wallet, this cold storage
method is best left to experts. Unless your heir is
very well-versed in the technical aspects of Bitcoin,
we don’t recommend this method.

The major problem with paper wallets is that, in

order to spend from them, you need to import the
private key they hold into an online hot wallet. If
less than the full amount contained by the paper
wallet’s private key is then spent, the “change” will
return to an address controlled by the hot wallet
and unassociated with the address of the paper
wallet.

The security of the paper wallet (assuming it was

created properly and there was any security to
begin with) will also be potentially compromised by
entering the private into a hot wallet.

Paper wallets are a deceptively simple means to

leave money to an heir; just tell them where to find
the paper wallet. However, in practice they’re likely
to lead to problems for any heir who’s not a crypto
expert. While you could leave detailed instructions
on the proper use of paper wallets, it’s probably a
lot easier to transfer your cold storage funds to a
hardware wallet instead.

Single vs. Multiple Heirs

The above guidelines will work best with a single

heir or multiple heirs whose cooperation can be
relied upon. In the case of multiple uncooperative
heirs, the best approach will likely be to set aside
the intended amount for each heir in separate
wallets.

If you want an in-depth guide for planning your

crypto inheritance you can also find dedicated
guides on Amazon.

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