Last updated on March 3rd, 2023 at 01:03 pm
Introduction
In the digital age we live in now, the dead will be remembered by things like their iPhone photo albums, Spotify playlists, and cryptocurrency wallets.
Whether you have $100 in your crypto wallet or a lifetime’s worth of crypto savings in cold storage, you should have the plan to help your family access the money if you die. There are a maximum of 21 million Bitcoin coins, so early buyers who died without a clear plan to pass on their digital assets have probably already lost many of them.
If you have been in the crypto arena for a while, I am sure you would have thought about what will happen to your crypto when you die.
Kate Waltman, a certified public accountant in New York who specialises in crypto and blockchain assets, says, “It’s likely that there will never be 21 million Bitcoin in existence because so many of the early adopters have either died (without a succession plan) or lost their wallet keys and can’t get their money back.”
If you have cryptocurrency in your investment portfolio, here’s what you should know about what happens to it when you die and how to set up your digital wallets so your loved ones can access them safely.
How to Plan Your Crypto Estate: The Basics
Experts say that crypto estate planning is a careful balancing act between security and ease of access. Bitcoin and all other cryptocurrencies are decentralised, which means a central bank or authority didn’t make them.
When a loved one dies, no one can help them get into their account unless they have their security key (password) and/or seed phrase to unlock their wallet.
“It can be hard to find the right balance between making security and setting up a good way to share knowledge,” Waltman tells NextAdvisor.
A 2020 survey by the Cremation Institute, an online resource for funeral planning services, found that about 85% of crypto investors don’t know how to include crypto in their estate planning.
Waltman says that you should first set up safe places to store your crypto and NFTs. Take advantage of the extra security that hot and cold wallets offer. But then you’ll have to explain how everything works to your family and friends.
The Layers of Crypto Security
The first step in planning for crypto when you die is to set up accounts with different levels of security to store your crypto assets.
Brittney Castro, a certified financial planner at Mint, says that many people bought cryptocurrency for the first time this year. She thinks that most of them bought it online through an exchange.
But if you start to buy and sell more crypto, you might want to upgrade your storage. Choose how much crypto you want to keep in an online crypto exchange that you can use to invest, buy, sell, and trade daily.
Your loved ones can access this exchange by logging in to your exchange, just like any bank portal or member website. To get a two-step verification code, they will need your password, username, and maybe your phone or email passwords.
Experts recommend that people with a lot of crypto move a certain percentage of it to either or both of the more secure backup options. There, it will be less likely to be hack, but it will also be harder for other people to get to.
In short, the options for storage, from least safe to safest, are:
- Centralized exchanges for crypto (like Binance)
How to enter: Usernames and passwords - To get account information back or make a copy of it: Two-step verification and/or call customer service.
- Unhosted hot wallets (also called mobile wallets) (not on a centralized platform)
- How to enter: Private wallet key
- To get account information back or make a copy of it: You’ll need a 12–24-word secret seed phrase.
- Cold storage, also called a “hardware wallet,” is a USB drive that works like a digital safe.
- How to enter: Private wallet key
- To get account information back or make a copy of it: You’ll need a 12–24-word secret seed phrase.
You should give the information to people you trust like your family or friends. Even for your cryptos in your cold wallet, such people should have an access to them.
Find out how to take care of your wallets.
How to Make a Good Crypto-Based Estate Plan
You don’t have to plan for the end of the world, but you should have a fireproof safe and a hard copy of your security phrases.
Waltman has a step-by-step plan for making sure your wallets are safe.
- Keep your cold storage hardware wallet in a lockbox that can’t catch fire.
- Keep physical documents in one or more places that describe each wallet, where it is, and how to get to it.
- Explain if each wallet in your document is a mobile wallet, a hardware wallet, or an exchange wallet.
- Include all the security keys, seed phrases, usernames, and passwords, along with instructions for each. Also include the cell phone codes for the mobile wallets that are on your phone.
- Waltman says, “Never put any of this information on the internet.” “You make it easy for someone to steal from you.”
Lastly, go over everything in detail with your partner and/or close relatives: “I showed my wife how to use the seed phrases and get into the wallets,” says Waltman.
You can save, invest, or sell cryptocurrency.
Once your family and friends know how to get to your cryptocurrency, they’ll need to know how to spend, invest, or save it. Waltman says that you shouldn’t assume that everyone will be as good at crypto as you are. Keep things simple.
Waltman says, “I might feel okay if I had some exposure to different altcoins and NFTs.” “But if I died, I would want my wife to move our money into Bitcoin and away from more volatile tokens, since I know she won’t be as interested in the markets as I was.”
Another option is to move the crypto back to a centralised exchange from the wallet and then sell it for U.S. dollars. The Internal Revenue Service (IRS) sees selling crypto as selling assets, so this choice has tax consequences.
What all users of crypto should do?
Once you’ve decided who you want to be the recipient of your crypto funds, the next step is to explain how to find them and claim them.
The first thing you’ll want to say in your instructions is where your assets can be found. This includes the physical location of any hardware wallets you own and where your crypto is stored in “hot wallets.”
Suppose your assets are spread out in decentralised finance (DeFi) liquidity pools, centralised exchanges, and non-fungible token (NFT) marketplaces. In that case, moving them all into crypto wallets that can store more than one type of asset might be a good idea. MetaMask is an example of a service that lets you store both fungible and non-fungible tokens in a single, easy-to-access wallet.
Codes, passwords, and backup codes
Second, you’ll need to write down all the passwords, private keys, and seed phrases for your crypto wallets, email accounts, and exchange accounts that you’ll need to get to your money.
If you have two-factor authentication (2FA) turned on, you will also need to provide either the location and password for the device where the app is stored or a list of 2FA one-time backup codes.
Suppose your accounts are set up to get SMS security messages. In that case, you’ll also need to include information about where your current mobile device is and what its password is (updated periodically as you change handsets).
Help with the details
You might want to tell your beneficiary how to take care of or sell your assets. This could include telling them which exchange is the best or giving them a short walkthrough of how to set up their own wallet and move the money.
You should also be aware that some platforms come and go over time, and some have security holes that could force you to move your money to new wallets. This means that your instructions will likely need to be changed over time.
How to write down your secret crypto data
- To make copies of your private crypto information, you can’t just write your seed phrases on a Post-It note and stick it on the fridge or send the information in an email.
- These details should be written down and copied over and over again. Then, each copy should ideally be kept in a different place so that there isn’t just one place that could go wrong. For instance, if you only kept one paper copy on your bedside table and your house burned down, your beneficiary would never be able to get to the money. This might sound crazy, but it can happen.
- Some companies sell kits for storing seed phrases and passwords on metal plates, which is the safest way to do it. These offer extra protection against house fires, water damage, and other things that could hurt a paper copy. Some of the top providers are:
Stack of Cryptosteel Crypto Keys
Also, the British law firm Farrer & Co says that if you do end up making a list, you shouldn’t put it in your will. That’s because anyone can legally access any information in your will, including your crypto passwords after you die.
