Don't let crypto legacy get stuck in the blockchain

Claiming the inheritance of Bitcoin or other digital currencies can be like hunting for buried treasure. It doesn't have to be.

In the United States, digital currency is considered a digital asset rather than money under securities and property law. With money and physical assets, you can sign a beneficiary form and create an estate plan or write a last will and testament about who should get what when you die. However, when it comes to digital assets, the law says we shouldn't assume a deceased person wanted their private stuff - from emails to photos - to be given to someone else unless they specifically said so. This puts digital currency at a disadvantage as a digital asset.

The options for arranging the transfer of cryptocurrency in the event of death or incapacity are broken down by a large segment: whether the cryptocurrency is held by a trustee or in an offline crypto wallet.

Custodian or custodian wallet means a third party, such as a bank or a cryptocurrency exchange, holds and manages the assets for you. Typically, it is much easier to transfer assets after death with a trustee, especially if it is a bank.

Non-custodial wallets remove the middleman and allow a person to hold their assets directly. For digital currency enthusiasts whose interest in digital currency stems from a distaste for the traditional banking system, using a physical wallet is kind of the whole point.

No-holds-barred wallets can be software or hardware. It can even be a piece of paper with instructions and passwords on it to access the digital currency. (I use "password" here and throughout to refer to any string of letters, numbers, and characters required to access a personal digital currency.

When you use a third-party custodian to hold your cryptocurrency, you can choose one that has a beneficiary process.

Charles Schwab and Chase are just two examples of large, well-known financial institutions that offer digital currency services and experience transferring assets after death. Schwab, for example, puts its digital currency services into brokerage accounts. Beneficiary signature form for brokerage account also applies to crypto account. One and done.

Another benefit of using a bank is that at least three entities know you have an account: the bank, the government, and the credit reporting bureaus. There are streets to find dead people's bank money. In the case of non-custodial wallets, this is not true at all.

Similarly, if you lock your online bank account, you can go to a bank branch with the ID (I had to) and log in again. This does not apply to non-custodial wallets.

Note that cryptocurrency accounts, even when held through a bank, are not FDIC insured.

Other custodians include crypto markets such as Coinbase and peer-to-peer payment services, such as PayPal. Neither Coinbase nor PayPal have beneficiary forms as of this writing, although they do have a clear process for proving entitlement to a deceased account. In both cases, you must have legal documentation that you are the executor (for PayPal) or have the right to inherit the account (Coinbase), as well as a death certificate and other documents. So the process is hard and requires advance planning, but it's still simple.

How much of a disadvantage it is to use a guard depends on your point of view. That being said, cryptocurrency enthusiasts who avoid traditional banking may not see any value in using a custodian. Banks require an ID, so you can't keep the cryptocurrency anonymous. Banks and many other custodians report your transactions to the federal government and hold you accountable to an honest tax filing. Security wallets also cost money. They usually charge a transaction fee, usually a small percentage of each transaction.

The main advantage of a non-custodial wallet is that everything is in your control. You hold the assets directly. You are responsible for knowing and keeping secure the information needed to access your assets. You should also provide a plan to notify your beneficiaries of the existence of a crypto account and ensure they have access to it.

The first and biggest problem is that if you get locked out while you're still alive, it's game over. "If you lose your encryption key, there's no company," says Benjamin Orzeske, senior counsel for the Uniform Law Commission and staff attorney for the revised Uniform Fiduciary Access to Digital Assets Act, the law that guides how digital inheritance is handled in most states.

In the case of a hardware key, a broken device or a device lost due to fire or theft may also permanently and irrevocably disconnect a person and their heirs from their encryption.

Another major hurdle is that your fiduciary needs to know that the cryptocurrency exists. None of the government or credit reporting agencies have a record of your holding this account. The only people who know are the ones you tell them.

Now let's go to the procedure. Because of the way blockchain works, you need to find a secure way to give instructions to your heirs to get the assets. Your system should be secure. It has no backups or failsafes unless you create them. And whether you can test your system to make sure it works before it dies takes a lot of trust.

Reddit users' ideas for how to create a system for transferring cryptocurrency include email dead-man switches, printed instructions given to a trusted person, and splitting instructions between two people who must get together to access them. All of these solutions can work, but they have obvious drawbacks: an email system failing, a trusted person dying next to you, someone forgetting you gave them instructions, etc.

The best option may be to include the bulk of the instructions in your estate plan, including your named fiduciary, but essentially remove any passwords. As Kathryn Hader, senior editor at FindLaw, explained to me, "a will is a public document," and you should never put a username or password in your will.

A great place to put your password is inside a safety deposit box at the bank. The existence of a trust fund should also be mentioned in your will. Some crypto owners have suggested stamping the password into a metal plate, which I think is a good idea if you don't trust ink and paper to last longer than you.

A potential downside is still that you can't do the hard work to make sure your system works unless you completely trust your fiduciary. Something as simple as requiring a fingerprint to unlock the device could be the end of your app.

The objection that some staunch anti-capitalist investors might have is that by including your digital currency in your estate plan, you are relegating it to the realm of traditional law and governance.