Bitcoin Inheritance Planning:
Secure Key Management & Legal Title Transfer Strategies
Authors: Amanda Kita & Onramp
Amanda Kita is an attorney in the Trusts, Estates, & Personal Planning group at Stradley Ronon Stevens and Young, LLP. Amanda concentrates her practice in the areas of estate, tax, and business planning, as well as estate and trust administration, with a focus on estate planning for Bitcoin and cryptocurrency holders.
Bitcoin inheritance planning requires addressing both key management and legal title transfer to beneficiaries, necessitating comprehensive estate planning. This article provides a detailed overview of the intricacies associated with bitcoin inheritance planning, and the role of multi-institution custody in preserving bitcoin ownership across generations.
Please note: Onramp will be hosting a webinar with Amanda Kita to discuss these topics and more on May 22nd, register here.
Bitcoin is a multigenerational asset. For individuals who understand the long-term trajectory of its adoption and appreciation potential, bitcoin is more than a mere investment or short-term trade – it is a mechanism for avoiding the erosion of hard-earned economic value and propagating undiluted wealth to future generations.
As such, inheritance planning is a critical component of bitcoin ownership. However, given the relatively short existence of bitcoin as a preeminent long-term savings tool, the intricacies of bitcoin-specific estate planning have historically been an afterthought for the vast majority of bitcoin holders, as the realities of their mortality have yet to manifest in a significant manner.
As we enter bitcoin’s fifth epoch, this dynamic is beginning to shift. Inheritance and estate planning are rightly becoming an increasingly important topic within the bitcoin community as holders consider the gravity of their bitcoin wealth in the context of their loved ones and heirs.
In recent months, a handful of bitcoin companies have announced “inheritance solutions” aimed at addressing these growing concerns, with almost all of them acknowledging that bitcoin inheritance is a two-fold issue:
- Ensuring private keys are not mismanaged and the bitcoin itself does not become unrecoverable upon the death of its owner.
- Ensuring that legal title to the bitcoin passes to the intended beneficiaries.
Unfortunately, most solutions available in the market today have predominantly focused on secure key management (issue #1), while ignoring the legal and jurisdictional realities of ownership transfer (issue #2).
Providing solutions that solve for the accessibility of the asset by named beneficiaries is not enough to protect one’s bitcoin wealth. Holding access to someone’s bitcoin keys doesn’t give you legal title and ownership to the asset just as having a spare copy of a house key doesn’t give you the deed to the house. Ensuring your bitcoin is not lost or mismanaged is only half of the battle – the legal title is just as important.
Inheritance 101
As mentioned, the first issue with bitcoin inheritance is the logistical transfer of assets and accessibility of private keys by an individual’s loved ones or heirs. While there has been some progress made on this front, the reality is that most bitcoin holders have been left to their own devices – literally and figuratively – in passing along access to their bitcoin.
Individuals leveraging forms of self-custody which utilize hardware devices have been forced to rely on the technical competence of their loved ones or heirs in 1) following a proverbial “treasure map” to identity where and how private keys are stored, and 2) properly accessing hardware devices and managing control of those assets in perpetuity. Placing these burdens on your loved ones and heirs, particularly during a time of heightened stress and grief, represents a suboptimal solution.
Onramp Multi-Institution Custody allows clients to leverage the domain expertise of multiple financial institutions, none of which have unilateral control of the assets, in order to distribute counterparty risk, minimize trust, and ensure proper key management. This arrangement removes loved ones and heirs as single points of failure in an inheritance plan and replaces treasure maps with legal relationships and processes.
Moreover, when considering how to pass the legal title of your bitcoin to your heirs, it’s important to have a foundational knowledge of what happens to all of your assets when you die. For estate succession purposes, assets are divided into two categories: probate, and non-probate assets.
Probate Assets
Probate assets include all assets solely owned by the deceased person at the time of their death, including bank accounts, investment accounts, real and personal property, and other assets titled in the deceased person’s name.
Probate property does not include assets that are held in trust, were jointly owned with a right of survivorship, or that pass directly to a beneficiary outside of the probate process, such as life insurance policies, retirement accounts, payable-on-death bank accounts, or other brokerage or investment accounts that have a beneficiary designation.
Probate assets will pass pursuant to a decedent’s most recent, legally valid Will; therefore, it is crucially important that one is reviewing their Will frequently and updating all of their estate planning documents as their circumstances, relationships, or applicable laws change. If a decedent has no valid Will at death (“dies intestate”), then their probate assets will pass pursuant to the intestate laws of the jurisdiction where he is domiciled at the time of their death. Intestate laws can vary greatly from state to state.
For example, Pennsylvania’s intestacy laws provide that if a decedent dies intestate with a spouse and children, their spouse will receive the first $30,000, plus half of the remaining estate, and the children will receive the other half. This can be very problematic, especially if the children are minors, as their inherited assets would need to be held in a guardianship account and subject to court oversight.
Non-Probate Assets
Non-probate assets pass directly to the designated beneficiaries or joint owners without passing through probate or being subject to state intestacy laws.
While we have defined probate and non-probate assets, we have yet to discuss what probate is. Probate is lodging a Decedent’s Will with the Register of Wills, Surrogate Court, or Probate Court, depending on the State. During Probate, the Will is inspected and confirmed as valid, or in the case of an intestacy, it is proven to the court that no valid Will exists. An Administrator or Executor is appointed to handle the estate administration.
As with intestate laws, the probate process varies greatly from state to state. While in some states like California, New York, and Florida, probate is expensive, time-consuming, and cumbersome, it is a relatively affordable and streamlined process in other states like Pennsylvania and New Jersey. However, in almost all cases, probate is public – meaning that strangers could travel to the court and request a copy of your Will along with the names and addresses of the Executor and beneficiaries.
Once sworn in, the Executor or Administrator would be tasked with paying final debts and expenses, state and federal estate/inheritance taxes, if any, and holding or administering any remaining assets as required by the Will, Trust, or intestate laws.
Layer 2: Bitcoin Inheritance
Even without the additional challenges that bitcoin assets present, estate planning is complicated. There is no one-size-fits-all all solution, and planning techniques vary greatly depending on where a person lives, the value of their wealth, the nature of their assets, their exposure to state and federal estate or inheritance taxes, and their goals and intentions for passing on that wealth both during life and after death.
As set forth above, possession or access to a decedent’s bitcoin hardware signing devices and seed phrases, and legal title are not the same thing. Just because you give someone your keys or the ability to access your bitcoin after your death does not mean they legally have the right to those assets. Working with a qualified estate planning attorney to incorporate your bitcoin inheritance solution with your overall estate plan is important.
With that being said, how a person chooses to hold their bitcoin, and what companies they work with, could impact that estate plan. Generally speaking, self-custodied or collaborative custodied bitcoin is a probate asset – meaning that upon death, the legal title would pass either pursuant to the terms of the decedent’s will, or the laws of intestacy if the individual died intestate. Additionally, these assets would be subjected to the probate process, which one may wish to avoid for financial or privacy reasons.
Most of the non-KYC bitcoin inheritance solutions for self-custodied or collaborative custodied bitcoin fail to address the following issues:
- Ensuring the individual is actually deceased before allowing the successor to access the bitcoin.
- Ensuring that the bitcoin actually passes to the legal beneficiary; and
- Avoiding probate.
Accordingly, if you are self-custodying your bitcoin, it is important that you are vigilant in your succession plan. Every bitcoin holder needs to balance their unique situation and security risk profile with easy access for beneficiaries. While traditional financial institutions would require proof of death before allowing an Executor, Administrator, Trustee, or beneficiary to access a decedent’s account, no such safeguards are in place or available for self-custodied bitcoin.
These inherent risks may lead one to create complex and convoluted solutions which range from leaving a series of documents and instructions for access after one’s death (which could easily be lost, destroyed, misunderstood, disregarded, or fall into unintended hands), to the utilization of certain protocol level options, such as time locks. Time locks are not a great estate planning solution as they may still result in the bitcoin being lost or accessed by someone other than the legal beneficiary. Additionally, the time locks could tie up the assets for lengthy periods when they may be needed to pay taxes, expenses, and estate debts. Generally, these complex plans are unworkable and lead to significant problems and headaches for beneficiaries during a time when they are already overwhelmed and grieving.
Even if one has a key succession plan that they are comfortable with, more is needed to solve the probate issue. If avoiding probate is a goal, it is important to discuss with an estate planning attorney your options and legal and tax implications for holding your self-custodied in either a Revocable Trust, or creating an Irrevocable Trust.
Why Multi-Institution Custody is the Optimal Bitcoin Inheritance Solution
As set forth above, accounts with beneficiary designations are non-probate assets, meaning that upon proof of death of the account holder, the account will pass to the designated beneficiary without passing through probate and without being subject to local intestacy statutes or existing estate planning documents (if any). For this reason, we believe that Onramp’s Multi-Institution Custody arrangement with a beneficiary designation is the best solution for individuals with any substantial amount of bitcoin holdings.
By working with Onramp, clients can have confidence that (1) their bitcoin won’t be lost, (2) legal title and possession of the bitcoin will pass to their intended Beneficiary without the need to update estate planning documents or research local intestate statutes, and (3) the public probate process (with regard to this account at least) will be avoided.
When considering how to secure bitcoin wealth for future generations, one should research potential custodial solutions very thoroughly. Multi-Institution Custody with Onramp Heritage solves the inheritance predicament for the assets held in that account, but additional planning will be necessary for individuals who use additional bitcoin custody options to manage their entire portfolio.
Accordingly, having frequent conversations with loved ones and heirs and educating them about bitcoin holdings and other assets is important. Further, bitcoin holders should work with a qualified estate planning attorney (preferably one with bitcoin knowledge) to create a comprehensive estate plan to minimize taxes and ensure that all of their assets are efficiently passed to future generations.
Whether you’re at the beginning of your journey or looking ahead to the future, Onramp Heritage is here to help you navigate the complexities of long-term bitcoin ownership. Reach out to our team or schedule a consultation to learn more.
Please note: Onramp will be hosting a webinar with Amanda Kita to discuss these topics and more on May 22nd, register here.
Ready to secure your bitcoin legacy?
Onramp provides bitcoin investment solutions built atop multi-institution custody. To learn more about Onramp Heritage and our full suite of products, please schedule a consultation to chat with us about your situation and needs.