According to Investopedia, a Bitcoin is currently worth $39,544, with a collective value of $742.3 billion worldwide. Although Bitcoin and other cryptocurrencies aren’t worth as much as gold yet, it’s still a force to be reckoned with. Exploding Topics reports that 46 million Americans, or roughly 22 percent of the adult population, own a share of Bitcoin.
However, research shows that despite the pandemic, most adults have not established an estate plan. It may not have even occurred to them to protect their Bitcoin and leave it to heirs. Cointelegraph reports that 90 percent of cryptocurrency owners are worried about what will happen to their crypto when they die, and yes, they are four times less likely to use Wills for inheritances.
In this guide, we’ll introduce the basics of Bitcoin estate planning: how to prepare it for inheritance and how to leave it heirs using safe, reliable practices.
Prepare Your Bitcoin for Inheritance
Before you begin the process of Bitcoin estate planning, it’s a good idea to prepare your cryptocurrency so that it can be passed on to your heirs more easily.
What does this mean? One of the largest risks surrounding Bitcoin is that it could be lost to the ether. This is usually a result of one of two things: either the loved ones have no idea that the deceased person invested in Bitcoin, or they are aware of it but have no way to access it.
We’re not kidding. There have been several stories about investors losing their Bitcoin, including James Howells who lost a hard drive that contained over $60 million in Bitcoin. In another story, Matthew Mellon died without leaving any access to $500 million in cryptocurrency.
These should serve as cautionary tales that Bitcoin is something that can easily be lost, and thus requires plenty of care.
The first item on the checklist is making sure your Bitcoin remains secure, even after you’re gone. When you purchase Bitcoin, you’re issued two keys: a public key and a private key. These keys are a long string of letters and numbers. These two keys are interconnected, meaning that they must be used together. The public key can be used to buy, sell, and trade cryptocurrency, but you need the private key to authorize those transactions. Most people use digital wallets to store and secure these keys.
One way to prepare your Bitcoin for inheritance is to simply share your secret keys with your heirs. Rather, you would inform them of how to access those keys if you were to pass away.
Because digital files are at risk of getting hacked or lost, prominent Bitcoin traders have recommended the old-school method of writing down your keys, along with access codes to your digital wallet on your piece of paper. Then, you would secure this piece of paper, and possibly other backups, in safe and secure locations. Options included a locked desk drawer, a safety deposit box, a family safe, vault, and the like.
Second, you’ll want to create an inventory of your digital assets. This is so that your heirs know what digital assets were in your possession. You won’t want to include any information about your keys here, but you can write down where your backups are stored.
For example, you could write down that the keys to your Bitcoin are stored in ‘the family safety deposit box’. Now, this information wouldn’t be helpful to a stranger or a hacker. They wouldn’t have any clue as to what the keys are, nor any idea where your family safety deposit box is, or how to get into it. However, a trusted family member who knows this information will. This way, you can have peace of mind knowing that your Bitcoin will be found, and by the right person.
We provide further guidance on how to prepare digital assets for an estate plan.
3 Ways to leave bitcoin to heirs
In this next part, we’ll discuss Bitcoin estate planning and how to leave your Bitcoin to heirs.
Earlier, we talked about how critical it is to prepare your Bitcoin in a way that it can be discovered and accessed by the right people. You can think of this as the logistical aspect. Estate planning covers the legal aspect. It’s a process that ensures that the individuals of your choosing are legally entitled to your Bitcoin when you pass away.
In these next sections, we’ll go over 3 different ways you can leave Bitcoin to your heirs, plus a bonus tip:
Name your beneficiaries
Set up a Trust
Create a Will
Write an instruction letter
1. Name beneficiaries
One of the simplest, straightforward ways to leave Bitcoin to an heir is to name a beneficiary designation. Other similar categories include “transfer on death,” “pay on death” and “Totten Trust” designations.
This means that you name a beneficiary directly with your cryptocurrency exchange. Naming a beneficiary is favorable, because these assets then would not be categorized as a probate asset, and thus wouldn’t have to go through probate court. The asset would be passed directly to your beneficiary.
Although this method may seem the most favorable, it’s unfortunately not the most secure or feasible. This is because most cryptocurrency exchanges do not support beneficiary designation. In addition, your assets would be paid directly to your heir upon your passing. You would not have any control over the manner or timing in which your account is paid out, leaving your assets vulnerable to market volatility or irresponsible behavior.
2. Set up a trust
Next, consider setting up a Trust. A Trust is a fiduciary agreement in which you designate a third party (the Trustee) to manage and distribute your assets.
We at Trust & Will love Trusts because they are a powerful and dynamic estate planning tool. First and foremost, assets owned by a Trust do not go through probate. We talk about all the reasons why you want to avoid probate in this guide.
A Trust allows you to provide specific instructions on what assets you want distributed to whom, when, and in what increments. You can also include any special stipulations, such as requirements you want for your beneficiary to meet before they become eligible to inherit an asset. Last but not least, you could also appoint a cryptocurrency advisor to assist your heir so that they can better manage their inheritance. In other words, setting up a Trust will give you the greatest amount of control.
Trust & Will now offers probate help. Learn more about our different plan option, today.
3. Create a will
An alternative estate planning option is to create a Will. This particular document is the most common, and thus more familiar. When you pass away, your estate will enter probate.
Your local probate court will determine the validity of your Will, and then conduct an inventory and valuation of your assets. After any debts and fees are paid, the remaining estate is distributed to your heirs based on the instructions you left in your Will. The court will apply state intestacy laws in case your Will left anything out.
We go into detail about How to leave cryptocurrency in your Will.
Don’t forget an instruction letter
Time for a bonus tip! Whatever Bitcoin estate planning option you choose, we highly recommend writing out an instruction letter.
This is because most adults will not know the first thing about what Bitcoin is, how it works, how to use it, and how to access it. It’s possible that your heir will be in the same boat.
In your letter of instruction, use simple terminology that can be understood by anyone who is new to cryptocurrency. Be sure to include any necessary checklists or task lists, plus tips on how to avoid common mistakes.
Your heir will be sure to thank you for setting them up for success!
Create a trust for your bitcoin today
Bitcoin estate planning is a new frontier. If you’ve never heard of it before, it’s because it’s a new realm that is rising to the forefront. If you think about it, Bitcoin was invented just over a decade ago, and it didn’t rise in popularity until much later.
Unfortunately, laws and regulations surrounding cryptocurrency are far from catching up. That’s why it’s up to you to take matters into your hands. If you’ve had any success with investing in Bitcoin, then you probably want to protect this investment and make sure it doesn’t get lost in the ether.
By incorporating your Bitcoin into a Will or a Trust, you’ll be able to sleep at night knowing that your cryptocurrency will get passed on to a loved one. We’re biased, but we’re partial to the Trust option.
Also, don’t forget to address the logistical practicalities of leaving Bitcoin to your heirs. A Bitcoin estate plan will give your loved ones the legal entitlement to your digital coin. However, that doesn’t necessarily mean they’ll know how to access it or use it. We also highly recommend thinking through how to leave behind instructions and backups to your keys so that they can only be found by someone you trust.
Do you feel ready to start your Bitcoin estate planning? Trust & Will can help you set up a Trust today!
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