Bitcoins and Estate Planning: Bequeathing Cryptocurrency

With the prevalence of Bitcoin as a form of digital currency, new considerations must be made when it comes to a variety of legal concerns. We recently looked at the repercussions of Bitcoin on divorce, but that is only the tip of the iceberg when it comes to the ways that Bitcoin is influencing how we must think about currency and transferring assets.

Another important consideration that should be made by those using bitcoins is what happens to this cryptocurrency after your death? When estate planning, you often take into account your assets, but what does this mean for bitcoins – an electronic currency that has only existed since 2009?

Bitcoin should be handled as would any other assets and should be passed to chosen beneficiaries. Yet, handling bitcoin is a bit different because it is digital currency that is protected with security measures that prevent others from accessing, even after your death – unless you make it a part of your estate plan.

One of the most straightforward ways of incorporating bitcoins into your estate plan is to make a copy of your bitcoin wallet. By doing this, you can easily allow access to another person, but this copy is now in need of its own security measures. It is important that if you go this route you have complete trust in the chosen beneficiary because it provides unconditional access to your wallet.

Another means of transferring your bitcoins to a beneficiary after your death is the use of M-of-N Transactions. Sending transactions becomes a bit more secure through the use of multiple signatures. For the purpose of estate planning, this transaction would be set up with three parties: you, your beneficiary, and a third party. For the transfer to be complete, two of the three would have to sign; upon your death, your beneficiary and the third party would sign to complete the transaction.

Because your beneficiary would not have access to the entirety of your bitcoin wallet (only this particular transaction), there is less risk involved. Yet, like any other estate planning component, research on the pros and cons should be done prior to putting the plan into place.

If you prefer to make the third party a computer server, this can be done using a ‘Dead Man’s Switch.’ With this transaction, a computer server with its own key can sign off on the transaction after your death. This server would evaluate whether you are alive via death certificate databases and/or periodic confirmation via an e-mail link. Only once your passing has been confirmed, will the server sign the transaction, transferring the bitcoins to your beneficiary.

Although this provides ease for all parties involved, while simultaneously protecting the entirety of your bitcoin wallet, it must be handled properly to be effective, including protecting the transaction, without which the bitcoins cannot and will not be transferred because of the level of security given to the transaction.

Ultimately, the world of estate planning is always changing with the law and technological advances, which is why you should be sure to reevaluate your existing estate plan at regular intervals. And it is important to remember that ones digital legacy should always be considered as part of any sound estate plan.