Bitcoin Estate Plan

It's always important to have a good plan!

I’m not a lawyer and I’m definitely not providing any legal advice, but I have been through the estate planning process myself and most recently have incorporated Bitcoin and other digital assets into my plan. The purpose of this post is to provide a high level overview that might be helpful to those who have Bitcoin or other digital assets and want to secure a plan for generational wealth transfer.

First and foremost, it’s important to have an estate plan because without one (or at least a will) the courts will decide who gets your assets when you die through a process known as probate. The worst part is that it takes a very long time since it’s done through the court system and can also be very expensive. Not ideal for the loved ones you leave behind, especially if they need access to your money to pay necessary bills, etc. I would recommend hiring a good estate attorney. Although there are some fees involved, I think it’s totally worth it to be able to have peace of mind knowing that all your bases are covered when you are no longer here.

Every jurisdiction is different (I live in California), but my basic estate plan included the following things:

• Revocable Living Trust

• Durable Power of Attorney

• Advanced Healthcare Directive

• Guardianship Designation (for young children)

• Will

The revocable living trust is basically a holding tank for all your assets while you are alive. It’s “revocable” because you (and your spouse if you are both named settlors / trustees) can modify or amend the terms during your lifetime. You have full use of everything in the trust during your lifetime. In fact, it’s ignored for federal and state tax purposes since you would report any related income on your personal tax return each year. After you (and your spouse) die, the revocable trust becomes irrevocable (meaning it can’t be changed) and will ensure your assets are distributed to your heirs in accordance with your wishes (i.e., spouse, kids or grandkids) with the help of the person you appoint as Successor Trustee upon your passing. The trust at that point will also have to file separate trust tax returns and the beneficiaries will receive K-1’s from the trust for as long as it exists.

The Durable Power of Attorney names someone who will make your financial and other important decisions if you are unable to. Normally that’s your spouse, but alternates can be named.

The Advanced Healthcare Directive names someone who will make your healthcare decisions, including end of life decisions, in accordance with your wishes. Normally, that’s also your spouse, but alternates can be named.

The Guardianship Designation is really important because it stipulates who you want to take care of your kids if both you and your spouse pass. It can be close family members (maybe adult children, brothers /sisters or cousins) and this area deserves a great deal of thought.

The Will specifies any personal property that you want to leave to specific people, like jewelry, artwork, family heirlooms and the like. With a proper estate plan, these types of assets will “pour over” into the trust at your death so the Trustee can handle their valuation as part of the estate settlement process and distribution to heirs.

When you have a Revocable Living Trust set up, you need to “fund” it by moving assets from your own name into the name of the trust. You can have a small amount of assets held in your own name (like a small bank checking or savings account), but normally your estate attorney will recommend that all of your assets are held in the trust to ensure there are no issues with having to go through probate. For traditional financial accounts it’s pretty straightforward. You open a new account in the name of the trust, transfer assets from your old account to the new account and close the old account. This is fairly easy for brokerage accounts, investment accounts, etc. The banks may request additional documentation like a summary of the trust that your attorney can prepare for you, but lately it seems like they want to see the entire trust document including beneficiary information. For real property, you have to record a deed to convey the property from your name (or you and your spouse if held jointly) to the trust. This might entail getting approval from your lender, which should not be a problem since this is pretty routine and the borrower is still the same, but they may make you sign some additional documents.

It’s probably also important to note that life insurance policies and retirement plans like IRA’s and 401(k)’s have their own beneficiary designations and you can make the revocable trust primary for a life insurance policy and secondary for IRA’s / 401(k)’s since spouse would need to primary beneficiary in those cases and they would get those accounts directly when you pass. It’s always a good idea to make sure your beneficiary designations are up to date on those accounts.

For digital assets that are self-custodied, it’s not so straightforward to fund the trust with these assets, since they are not held in centralized bank or brokerage accounts. As I have written about extensively in the past, that is indeed one of the benefits of self-custodied digital assets - no counterparty risk. Where I landed with my attorney (and you may get different advice from yours), was a Letter of Instruction to the Successor Trustee. Once signed, I sent the original to my attorney for safekeeping with the rest of my estate plan documents and filed a copy with my own set of estate documents. The letter has the following basic elements:

• Explicitly states that the digital assets, including Bitcoin held in cold storage wallet, are included in the Revocable Living Trust

• Digital assets are to be handled the same way as other assets as stipulated in the Trust documents in terms of distribution to beneficiaries (i.e. equally to the kids)

• Specific instructions about the location of the hardware wallets and passcode/key phrases

• Specific instructions to Trustee on how to handle (i.e., don’t sell Bitcoin before selling other assets to pay estate taxes, etc.)

I didn’t want to include my seed phrase in the letter, so instead I have two safe deposit boxes with two different banks that have some other items in them. In one box, I deposited the hardware wallet and in the other box, I deposited the seed phrase. The letter notes the location of the physical keys to the safe deposit boxes. Once the bank provides access to the boxes to the successor Trustee (which they will need anyway for the aforementioned other items), then they will have the hardware wallet and the seed phrase. From that point, they can access the wallet and move the coins to the beneficiaries’ wallets as required.

Alternatively, you can use a non-custodial multi-signature wallet setup such as the ones offered by Unchained Capital. Each wallet has three keys, one held by the company and two held by you. You need two of the three keys to access your coins, which is more secure than single signature. Your attorney can hold the third key info and then provide that to your successor Trustee. After verifying everything is correct, the successor Trustee can work with the company to move your coins from the multi-sig wallet to your beneficiaries even if your third key is lost. Otherwise, they can just use your two keys to access the coins. This is an intriguing option since it doesn’t rely on only one key (which if lost could be disastrous) and also is definitely more secure.

I hope this brief overview was helpful for you as you think through the generational impact of your Bitcoin investing. Clearly, if you have the forethought to invest in Bitcoin for the long term, it makes sense to follow through with a good estate plan.

Not financial or legal advice, for entertainment only, do your own homework.  I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2022.  To see all my books on investing and leadership, click here.  

Always remember: freedom, health and positivity!  

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