Bitcoin Estate Plan

Some thoughts on generational wealth transfer

One of the advantages of holding Bitcoin is that over a long timeframe, due to its inherent scarcity and network adoption effect, Bitcoin has the potential for significant appreciation and therefore can not only be a source of retirement income as I wrote here, but a very important generational wealth building and transfer tool.

A quick reminder about why Bitcoin is such a remarkable financial innovation:

• Absolutely scarce (21M maximum coins)

• Transfers are peer to peer without an intermediary; you can send value to anyone, anywhere in the world with a computer and internet connection

• The Bitcoin network operates independently of all legacy financial systems; it is the first digital global payments infrastructure

• No counter party risk when self-custodied

• Trustless; Bitcoin is not controlled by any person or group

• A hedge against fiat currency debasement / collapse in the same way that gold is, but doesn’t have gold’s drawbacks of difficulty to validate, store, transfer and secure - especially in large amounts

Here are a few thoughts on Bitcoin estate planning:

1. Create a comprehensive inventory of your Bitcoin holdings: It's essential to create a detailed inventory of your Bitcoin assets, including all private keys, seed phrases, passwords, and any other relevant information. Make sure to document this information in a secure location (paper is best for private keys), and consider creating multiple copies of the inventory in case one gets lost or damaged. You may also want to consider providing copies to your designated executor or agent, along with any other relevant parties, such as your lawyer or family members.

2. Choose a secure storage solution: Since Bitcoin is decentralized, and there is no central authority to regulate or protect it, securing your Bitcoin holdings is crucial. Consider using a reputable hardware wallet, which is a physical device that stores your private keys offline, making it less vulnerable to cyber-attacks or theft. For most people a single signature solution with a passcode is fine, but you can also find collaborative custody multi-signature setups that have advantages in estate planning. As I have said many times before, I’m a big proponent of holding your own keys, which is how Bitcoin was meant to operate. It's important to document the details of your storage solution, including the name of the provider, the account number, and any relevant passwords, in your estate plan.

3. Designate a trusted executor or agent: Bitcoin estate planning requires careful consideration and understanding of the cryptocurrency's technical and legal aspects. Therefore, it's crucial to designate a trusted executor or agent who has a good understanding of Bitcoin and can manage your assets according to your wishes. This person should have access to your inventory and storage solutions and be able to transfer or sell your Bitcoin holdings if necessary. Make sure to document the name, contact information, and responsibilities of your executor or agent in your estate plan. This is where a collaborative multi-signature custody model comes in handy, because your collaborative custody provider can help a less technical person like your successor trustee / attorney access your coins and execute your instructions. Here’s a piece I wrote on security setup:

   Bitcoin Security Setup

4. Consider including specific instructions in your will or trust: When creating an estate plan that includes Bitcoin, you may want to consider setting up a trust that holds your Bitcoin and designates beneficiaries. A trust provides several benefits, such as privacy, asset protection, and tax efficiency. Alternatively, you may choose to include specific instructions in your will, outlining how you want your Bitcoin assets to be distributed. I think a revocable living trust is preferable in almost every case and is worth the added cost of setup. Keep in mind that Bitcoin's legal and tax implications vary by jurisdiction, so it's essential to consult with a qualified attorney or financial advisor who has experience with cryptocurrency and estate planning to ensure that your instructions are legally enforceable.

5. Consider the tax implications: Bitcoin is treated as property for tax purposes, which means that your heirs may be subject to capital gains taxes when they sell or transfer the Bitcoin. Therefore, it's crucial to consider the tax implications of your Bitcoin holdings when creating an estate plan. You may want to consult with a tax professional to determine the most tax-efficient way to transfer your assets to your heirs. Additionally, you may want to consider including provisions in your estate plan that minimize the tax burden on your heirs, such as donating a portion of your Bitcoin assets to charity or setting up a trust that provides tax benefits, which is discussed below in more detail.

Title

One area that I was not really focused on until recently is the importance of how you hold title to your Bitcoin for estate planning. Most Bitcoiners just think they can simply give the keys to next of kin and that will take care of itself and while they can transfer the coins, it could potentially be challenged by an unhappy heir in court.

In an estate planning context, the ownership of Bitcoin can be categorized as either individual or co-owned. Individual ownership means that you are the sole owner of the Bitcoin, and the private key associated with the wallet is in your name only. Co-owned ownership means that you hold Bitcoin with another person, such as a spouse or business partner, and the private key associated with the wallet is held jointly.

The way you hold title to your Bitcoin can impact the transfer of ownership after you pass away. If you hold Bitcoin as an individual owner, it is considered part of your estate, and the transfer of ownership will follow the instructions in your will or trust. However, if you hold Bitcoin as a co-owner, the transfer of ownership will depend on the type of joint ownership.

For example, if you hold Bitcoin as joint tenants with rights of survivorship, the surviving co-owner automatically becomes the sole owner of the Bitcoin when you pass away. In contrast, if you hold Bitcoin as tenants in common, each co-owner's share of the Bitcoin passes to their heirs according to their estate plan.

It’s fairly easy to delineate different title setups, but they almost always involve setting up a unique Bitcoin wallet address and doing an on-chain transfer of the coins to document the movement of the coins into the new wallet. For example, if you setup ownership of your Bitcoin in a revocable living trust, you would create a new wallet and move those coins into that wallet so it’s clear they are titled under the trust. As mentioned above, this would be my preferred way of holding Bitcoin for estate planning purposes versus individual ownership.

Trusts

By setting up a trust, you can transfer your Bitcoin assets to the trust, which is managed by a trustee of your choosing. You can also designate specific beneficiaries to receive the Bitcoin, as well as outline how and when they may access or use it. For example, you may want to set up a trust that allows your beneficiaries to access the Bitcoin assets only when they reach a certain age, or for a specific purpose, such as education or healthcare expenses.

Setting up a trust to hold your Bitcoin assets can also provide added privacy, asset protection, and tax benefits. Since Bitcoin transactions are recorded on a public blockchain, holding Bitcoin in a trust can help keep your ownership private, which may be important for some individuals. Additionally, a trust can provide asset protection against potential lawsuits or creditors, as the Bitcoin is held by the trust and not directly owned by your beneficiaries.

Finally, holding Bitcoin in a trust can provide tax benefits, as the trust can be designed to minimize the tax burden on your beneficiaries. For example, you may want to set up a trust that allows your beneficiaries to receive the Bitcoin assets over a period of time, which can help minimize the tax liability associated with a large lump sum inheritance.

Revocable or Irrevocable Trust?

Both revocable and irrevocable trusts can be used to hold Bitcoin assets, but each has its pros and cons, depending on your specific goals and objectives.

A revocable trust, also known as a living trust, allows you to retain control over the assets held in the trust during your lifetime. This means that you can change the terms of the trust, add or remove beneficiaries, and even dissolve the trust altogether if you choose to do so. Revocable trusts can be a good option for individuals who want to maintain control over their assets during their lifetime and have the flexibility to make changes to the trust as their circumstances change.

However, one potential downside of a revocable trust is that it does not provide the same level of asset protection as an irrevocable trust. Since you retain control over the assets held in the trust, creditors or lawsuits may be able to access those assets if they are seeking to recover debts or damages. Additionally, revocable trusts may not offer the same tax benefits as irrevocable trusts, as the assets held in a revocable trust are still considered part of your estate for tax purposes.

On the other hand, an irrevocable trust transfers ownership and control of the assets held in the trust to the trustee, and once the trust is created, it cannot be changed or revoked. This means that the assets held in the trust are protected from creditors and lawsuits, and they are not considered part of your estate for tax purposes. Irrevocable trusts can be a good option for individuals who want to ensure that their assets are protected and that their beneficiaries receive a predetermined amount of the assets.

It has occurred to me that perhaps setting up an irrevocable trust for the benefit of your children or grandchildren and funding it with Bitcoin purchased at current prices of around $28,000/coin (and within the annual gift tax exclusion of $16,000 per person or $32,000 if giving with your spouse to an individual) could be a great way to transfer wealth - the Bitcoin would be initially valued in the trust at your cost basis. The trust is better than giving to them directly because you can control through the trust how and when they are to get access to the Bitcoin.

It would have the added benefit of reducing the erosion of the estate tax exemption, versus waiting to give the Bitcoin to your kids at your passing (estate tax exemption is currently $12.06 Million, but expires in 2025 and unless extended reverts back to $5.49 Million). Let’s say you have three kids and you give each of your kids one Bitcoin today (assuming you are married, so you are well within the gift tax exclusion) and those coins are worth $1M when you pass. You would have removed $3M from your taxable estate (offset by the $84,000 basis of the gift). That’s a big deal, since you probably own other things of value that will be inherited and especially if the estate tax exemption returns to the lower level.

Of course, after paying any estate taxes, inherited Bitcoin along with any other inherited assets would pass to your heirs at the stepped-up fair market value basis at the time of your passing, which would reduce any taxes your heirs would face if/when they later sell the Bitcoin. This would not be the case if giving today (they would be liable for the gain from now until the time they sell).

One potential downside of an irrevocable trust is that you lose control over the assets held in the trust. Once the trust is created, you cannot change the terms or access the assets held in the trust without the approval of the trustee. Additionally, as discussed previously the creation of an irrevocable trust may trigger gift tax consequences, as you are essentially transferring assets to your beneficiaries during your lifetime.

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 Bitcoin Fortress in 2023.  To see all my books on investing and leadership, click here.  

Always remember: freedom, health and positivity!  

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