Congratulations! You’re Thinking About Bitcoin Estate Planning

Presumably, you’ve stacked enough bitcoin to warrant a hard look at how you’re holding it and what will happen to your coins after you’re no longer here. This is good news! You are far enough down the rabbit hole that bitcoin estate planning is not only relevant but also extremely necessary. The not-as-good news is that the current state of bitcoin infrastructure hasn’t completely caught up to your estate planning needs. This means you have additional planning work ahead of you. While bitcoin held in an ETF can follow the same guidelines as your other financial assets, this article will focus on bitcoin held outside of an ETF.

To start, let’s establish some key terminology everyone needs to understand for estate planning:

• Decedent: The person who has passed away.
• Will: A legal document specifying how assets are to be distributed.
• Executor: The person named in the will to manage the estate.
• Administrator: Appointed by the court if no executor is named or no will exists. Do not do this! Create a will! 
• Heirs: Individuals entitled to inherit under state law when there is no will.
• Beneficiaries: Those named in the will or trust to receive assets.
• Trustee: The person or institution responsible for managing a trust in accordance with its terms.
• Grantor: The person who creates a trust and transfers assets into it.

What Happens to Assets After Death?

When someone dies, assets (other than those listed below) go through a legal process known as probate. Probate is a court-supervised procedure where the deceased person’s assets are inventoried, debts are paid, and remaining assets are distributed according to their will (or state law if no will exists).

Accounts or Assets That Avoid Probate:

• Assets held in a revocable living trust.
• Joint accounts with rights of survivorship.
• Accounts with a Transfer on Death (TOD) or Payable on Death (POD) designation.
• Life insurance policies and retirement accounts with named beneficiaries.

However, bitcoin is a probate asset by default. This means that if you haven’t planned carefully, your Bitcoin holdings could become subject to probate, potentially exposing sensitive information and undermining your privacy.

Why Bitcoin Estate Planning is Critical

Everyone values financial privacy, yet probate can make asset details public through court dockets. To ensure privacy, careful planning is necessary. Here are some strategies:

1. Revocable Living Trusts

A revocable living trust is a legal entity where you transfer ownership of your Bitcoin during your lifetime. Upon your death, the trust allows for the direct transfer of assets to your beneficiaries, bypassing probate entirely. These kinds of trusts work well when you are leaving assets to adults or adult children. However, if you have minor children, you will need to ensure the revocable living trust is properly structured. This involves having your attorney create a sub-trust within the main trust, appointing a trustee to manage the sub-trust, specifying how the trustee should use the funds for the children’s benefit, and setting an age or conditions at which your children can inherit the assets outright.

2. Irrevocable Trusts

If your estate exceeds estate tax limits and you anticipate significant growth in your Bitcoin holdings, consider an irrevocable trust. This strategy moves assets out of your estate prior to death, reducing potential estate tax liability.

3. Joint Account Agreements

An attorney can draft an agreement that creates a legal framework for holding Bitcoin in a joint account (via hardware wallets and multisig setups). However, this approach is less common, and it’s often more practical to use a revocable living trust.

4. Transfer on Death (TOD) Accounts

A TOD designation allows assets to bypass probate and go directly to a beneficiary. Unfortunately, Bitcoin stored in single or multisig wallets does not support TOD arrangements, making this option impractical for most Bitcoin holders.

Public vs. Private Probate Processes

Some states have private probate processes, while others have public probate processes.

• Public Probate: Asset details, including inventories, are made public through court records.
• Private Probate: Asset details remain confidential unless creditors are involved in Delaware, Nevada, and South Dakota.

The distinction is critical because after death, your holdings could become public information unless proper planning is in place.

Texas Exception

Although Texas has a public probate process, it is the only state where executors can seal the decedent’s asset records, ensuring privacy. To leverage this, the decedent must ensure the executor knows to request sealed records prior to their passing.

Choosing Executors and Trustees

The most crucial part of Bitcoin estate planning is selecting executors and trustees who:

1. Understand Your Wishes: Executors and trustees should know and follow the instructions laid out in your documents.
2. Understand Bitcoin: If your executor or trustee can’t operate your hardware wallet, your planning may fail.

Tips:

• Train your family on how to locate your hardware wallets and get them their own so they can practice using one.
• Use a multisig setup with a third party holding one key (without custody) to prevent asset loss if family members are uncertain about using wallets.
• Simplify your setup and ensure it’s documented clearly for your heirs.

Trusting Your Team

Your spouse and heirs are on your team. Ensuring they are prepared with adequate knowledge and confidence is crucial for passing down your Bitcoin. If you lack trust in family members, consider more elaborate multisig setups or leaving your Bitcoin to charity.

A Disclaimer

Morgen Rochard is not an attorney, but a financial planner. While these are guidelines to help you on your way, you should consult an attorney experienced in estate planning to develop a strategy tailored to your needs.