How do I make sure my family gets my bitcoin when I die?
Let’s say bitcoin does rocket to the moon…the last thing you want is for it to be hit by the proverbial bus and your children or other heirs not be able to locate or access your bitcoin.
As the bitcoin network is monetised as a long-term store of value it is increasingly important to holders that their bitcoin is incorporated into their overall estate planning. Other digital assets such as other cryptocurrencies, social media accounts and any online assets need to also be considered.
How this might be done in practice will depend on how the bitcoin is owned.
How can bitcoin be owned?
Essentially there are two ways to “own” bitcoin. Firstly, through a custodian and secondly, through ‘self-custody’. The first is to have your bitcoin held in the custody of an appropriate financial institution. In this instance they control the keys to the bitcoin and hold the bitcoin in their custody on trust for you. This point was recently considered in the New Zealand High Court case Ruscoe v Cryptopia LTD (IN LIQUIDATION) [2020] NZHC 728. The author does not see why this line of reasoning would not be adopted by an Australian court if this matter comes under consideration. In Australia, the Australian Tax Office has also considered bitcoin as property.
The second way to own bitcoin is through self-custody. That is, you generate a private keys/seed phrase that controls access to a certain part of the bitcoin blockchain. Please use your preferred browser to search for a more in-depth explanation for blockchain, private and public addressed, private keys and seed phrases! For the purpose of this article though, if you have a wallet that you send bitcoin to, and you hold the private keys/seed phrase (usually in the form of 24 words), you are the one to have total control of your asset. Without the private keys, bitcoin cannot be transferred away from your control.
Why bitcoin?
Bitcoin and other cryptocurrencies have been legally recognised as “Property”. Bitcoins special characteristics such as it having no known issuer and it being decentralised, that is, without a controlling entity, means it also likely reaches the definition of a “commodity”. A commodity is a “bearer” asset or a raw material. Raw materials such as metals, agricultural goods and energy sources are commonly noted commodities. Essentially, a commodity is not ‘backed’ by anything, it is the ‘thing’ itself. This has not yet been codified into law however public proclamations by key figures such as the heads of the US Commodity Futures Trading Commission (CFTC) and Securities Exchange Commission (SEC) mean it is likely to be recognised as such.
Being a property and a commodity means it is very likely that it is both legally and ethically an appropriate choice for trustees to hold as an asset on their balance sheet. Currently, some corporations, nation states and family trusts hold bitcoin as part of their reserve asset mix. It may be in the future, as regulatory clarity emerges, that trustees for superannuation, disability trusts and other pension funds may hold this digital commodity as a reserve asset. Of course, many individuals are now choosing to put a portion of their net worth into this scarce digital commodity.
Using gold as a traditional comparison
An analogy to these two options of ownership is how one might own gold. Interestingly, bitcoin has until now most often been compared to gold, earning the moniker of “digital gold”. The Perth Mint has actually produced its own crypto-type token the Perth Mint Gold Token which is redeemable for physical gold at the Mint.
Like bitcoin, gold can be held either by custodial or self-custodial options. An example of holding your gold with a Custodian would be to have gold bars held at a secured storage facility or in a bank vault. While not exactly the same, people may also hold gold derivatives such as gold ETF’s and gold miner stocks. The self-custody of gold would involve you actually having physical possession of your own gold by storing and securing it yourself. For example, some people store gold in a safe at home.
Like bitcoin, there are pros and cons for either option. History is replete with examples of gold heists either by thieves or governments seizing their own citizens gold or a country seizing a fallen enemies gold. Of course, in modern Australia we hope this is an extremely low risk. There have certainly been examples of modern liberal democracies seizing gold though, the most famous example being in 1933 when President Franklin D. Roosevelt forbid the ‘hoarding’ of gold by his Executive Order 6102. Anecdotes from the time suggest that people who held gold at home were relatively safe from confiscation however those with gold held at large banks for example, where more likely to have their gold seized.
Custodial options also involve additional fees and charges which the custodian reasonably charges to offer the custodial services. The benefits of a custodian looking after your gold is that you pass the responsibility for the storage and security of the gold to the custodian. The custodian might also offer ancillary services such as producing annual reports. A custodian presumedly will also have the proper insurance policies in place. Convenience and peace of mind are also things that many people value.
Bear these in mind as we read more about the pros and cons of the two broad types of bitcoin ownership.
Pros and cons for Self-custody or Custodial options
A primary benefit of self-custody is that you actually own your bitcoin. Having personal access to your private keys, to the exclusion of others, means you are in control of your bitcoin. Only you can send bitcoin.
Which option you choose will ultimately be a decision for you taking into account many different factors such as your financial literacy, whether you intend to trade your bitcoin or hold it as a long-term store of value, your technical ability, and your personal level of comfort in either option. You might also consider dividing your stack between the two options. You may also have personal values that more align with one option of the other. For example, some proponents of self-custody will note that the more coins are held in self-custody reduces the possibility of large institutions manipulating the price by rehypothecating the coins into derivative financial instruments.
There are several risks associated with custodial option (that is, your bitcoin is held by a third party like an exchange). The first is that the exchange may be undertaking fraudulent or risky trading activity. For example, during the recent FTX blow-up, it was revealed that FTX did not hold any of the bitcoin they said they did on their books. Unfortunately, there is a long list of exchange blow-ups notably Mt Gox, Luna, Celsius and FTX.
Custodial options are convenient though and for your executors, it should normally merely require them to obtain a grant of probate from the Supreme Court and this will authorise them to either receive the coins themselves, or have them sold and distributed to a nominated account.
There are several risks associated with self-custody. Many may have heard stories of people losing their private keys or throwing away old laptops and USB
s that contained their bitcoin keys.
In the event of death unexpectedly you want to make sure that your heirs are able to access your bitcoins. One issue that arises is that while you want your heirs (or more legally correct, your executors) to have knowledge of your bitcoin, you do not want them to be able to take possession prior to your death.
Practical suggestions
One might consider creating a step-by-step guide to accessing and using their coins which they could keep with their will or other important documents.
If someone wishes to take self-custody of their bitcoin they have two broad options – the first is a “hot” wallet and the second is a “cold” wallet.
A hot wallet is a program on your mobile phone or PC/laptop that generates and stores your private key. It has been suggested that this is much safer than having your funds on a centralised exchange because you do not face the risk of the exchange company becoming bankrupt or otherwise unable to transfer you your coins.
A “cold” wallet is typically made by using a specially designed hardware wallet that allows the creation of private keys but does not connect to the internet. This greatly reduces the attack vector for example you don’t need to worry about malware on your PC copying your private keys.
For both options it is generally suggested that people make a “back up” of their private keys. Stamping or engraving the private keys is often recommended. This protects the keys from fire and water damage. Other backups may include laminated paper with pencil marking or using an encrypted microSD card or encrypted password manager app.
An issue arises in that the holder does not want to have their keys stolen or lost. Generally speaking, one should aim to avoid any ‘single point of failure’. For example, if a burglar breaks into your house and see the 24 words, assuming they understand what it means, they could in theory then transfer your bitcoin.
To avoid this, many bitcoiners use collaborative methods of holding their keys. For example, by using a Shamir sharing protocol in which parts of the 24 words are distributed across different storage points.
Likewise, a multi-signature arrangement can work. This would involve some number of keys (usually 2-of-3) being generated and held in different locations. Again, this means if there is some accident or thievery for any one of the keys, the remaining keys can be used together to transfer the bitcoin. There are dedicated companies who can assist to set up these arrangements and hold copies of the keys for you as a backup. You might also use a trusted friend or a professional such as a lawyer or accountant as a key holder.
These can be relatively complex endeavours and should not be undertaken without serious personal research or guidance from an appropriately informed and qualified advisor.
For some people, as with most things in life, the simpler the better. You might stamp your keys into steel, keep it in your safe, and let your executors know where to find it in the event of your death. You might leave written instructions with your original will.
This article concerns general information regarding bitcoin and other digital assets and how they relate to estate planning. It does not constitute specific legal advice, nor does it make any representations regarding financial planning or investment strategy or risk.