It can be difficult to see your cryptocurrency as something you should talk to an estate lawyer about, if you are just dipping your toes in crypto. However, that $100 of fun money could quickly grow to a substantial percentage of your total investments. Sorry for being a downer. But YOLO! Make a plan to protect your crypto assets in the event of your death.
The crypto accounts are not like traditional investment accounts. You can’t name beneficiaries and they can be vulnerable to security problems. If you keep your crypto on a physical device at your home, and some friends have access to your key (a password that allows you to access a crypto wallet), one of those friends could enter your house and steal your crypto just as easily as your great-grandmother’s diamond earrings. Your crypto could also be lost forever if the keys were not shared with anyone.
It is important to know how to store crypto safely and to communicate your wishes to your loved ones just as you would with any valuable asset.
KNOW HOW YOUR CRYPTO IS STORED
Crypto can be stored and traded in wallets but not in the traditional leather type. You can have a digital wallet that you manage via an app or website or a physical thumb drive. Depending on your purpose, the type of crypto wallet you choose will depend on what you plan to do with it.
HOT WALLETS are used to trade and purchase crypto. They are convenient and free, but they have a downside: they are less secure as they are always connected to the internet.
COLD WALLETS – These are used for crypto storage that lasts longer. It’s like storing your crypto in the freezer.
The hot wallet can be thought of as a checking account with money moving in and going out. While the cold wallet is more like an investment account where money is kept for a longer period of time, it is more like a savings account. Both can be used simultaneously.
The keys are held by the person who has custody of the password and can access your crypto. You, a third party crypto exchange, or a combination of both could be the keyholders.
Alex Mejias is the founder and managing attorney of James River Law in Richmond. You don’t have the keys. They could freeze your funds, or attack you.” Mejias suggests a self-custody option or hybrid option as your crypto gains in value.
KEEP YOUR CRYPTO SECURE, YET ACCESSIBLE
A cold wallet is a small, portable storage device that can be lost or stolen. For access to your cold wallet, you will need a PIN code. You can also set up a recovery phrase in case you lose the key. Mejias recommends a safe place to keep your cold wallet, including your PIN, key and recovery phrase. It’s bad news for Bitcoin if you find all those items together.
Design a storage system that makes sense. Mejias warns against getting too cute and creating a complicated storage system that is difficult to remember. Mejias has heard of people writing down their keys, cutting three pieces of paper and hiding each one in a different location. It sounds great, but it is a terrible idea. It’s lost forever if you lose any one of these three. Your risk has tripled.
MAKE A DETAILED PLANNING FOR YOUR LOVED ONES
Add a document to your estate planning that lists your crypto assets, keystrokes and passwords. Your beneficiary can notify customer service if you have an account on a cryptocurrency exchange.
A Coinbase representative said that there is a process to help next-of-kin. This includes one-on-one assistance by a Coinbase analyst. Gemini will need a power of attorney and a death certificate to transfer funds from a deceased person’s accounts.
Gemini representatives stated in an email that they hope to make this process easier in the future. They also plan to add account beneficiary functionality to their platform.
UPDATE YOUR PLAN & YOUR WALLET
Keep your estate plan current to ensure your assets go to the right people, especially after a life event such as a divorce or marriage. Make sure you give your beneficiaries current instructions to access your assets. Regular firmware updates are also necessary for cold wallets. This will help reduce the burden on your loved one and prevent any fights when they settle your estate after you have passed.
Mejias states that “Crypto can be very explosive because the value is so high so quickly.” “We could be talking about a lot of money if we think about five to ten years in the future.”
This article is intended to be used for education purposes. NerdWallet is not a brokerage or advisory service. It does not recommend any specific investments.