Death isn’t a happy topic to discuss, but it’s important to plan every scenario in advance, especially inheritance planning, also known as estate planning to ensure that all your assets – physical, and online – are financially inherited and transferred to your loved ones , after your demise.
Whether it is gold, cash or a house, typically someone inherits it after it was put somewhere in a will by the deceased. But, what happens to crypto-assets after a person dies? The answer to that is not as simple.
With cryptocurrencies, the risk of losing assets or misplacing them is higher than with traditional assets. In this week’s column, we explain what happens to your crypto and non-fungible-tokens (NFTs) when you die, and how to set up your digital wallets so your loved ones can access them securely.
No keys, no crypto assets
About 4 million Bitcoins have been out of circulation forever, as a result of people dying and not revealing their private keys. A private key is like a password. It is a string of letters and numbers that give you access to your crypto wallet—where your crypto coins and NFTs are stored securely.
Billions of dollars worth of cryptocurrencies have been lost forever, due to the owners dying and their family members or close ones not being able to retrieve the crypto assets from their wallets.
In 2018, Matthew Mellon, a Ripple investor who held $1 billion worth of XRP died and it was lost forever. In 2019, Gerald Cotton, the CEO of a Canadian exchange QuadrigaCX, died and he was the only one that had access to $190 million worth of Aetherium.
The bottom line is, in both of these cases, only the deceased had access to the cryptocurrency, and with them, their assets are lost forever.
Cryptocurrencies are stored in your crypto wallets built on blockchain technology— that stores digital assets cryptographically, making it impossible for someone to hack your private keys.
Without the private keys, you cannot claim ownership to any crypto assets. Court orders or any other legal document won’t be worth it, if you don’t have private keys.
Crypto estate planning
Before we delve into the details of securing your crypto assets, it’s important to plan whom you give access to your digital assets.
Remember, choosing the right person to give access to your crypto wallet is not just about trust, it’s about choosing someone who is technologically savvy and understands how to retrieve a crypto wallet.
For instance, say Raj has 2 Bitcoins that he wishes to leave for his brother Sham, in the unfortunate event he dies. However, Sham has no idea how to use a cryptocurrency wallet or an exchange. In this scenario, Sham would most likely employ someone to help him access the cryptocurrency and then liquidate it. This can pose a significant risk. The employed person could transfer all the funds in their wallet—and we are familiar that such crypto scams are quite prevalent in the crypto universe.
This is only one such scenario. Even if Sham learns how to use crypto-wallets, there are other risks associated: sending crypto to the wrong address, getting locked out of devices or withdrawing assets using the wrong token standards.
Another factor to consider is how much information you should give out? Obviously, you’d have to give out your private keys, but you can trust only one person with your crypto assets or could you divide the information among several people.
It is a safe bet to divide your bets across a group of people, although it has its pros and cons. An individual would not be able to withdraw your assets or steal your assets, but the drawback of listing multiple parties is that the whole system collapses if one person mislays any piece of the information.
Steps to take
The first thing to do before making a will is to transfer all your crypto assets to a hardware wallet. While online wallets are the easiest to set up and use but are also the most susceptible to cyber-attacks. One way to secure your cryptocurrency is to use a hardware wallet instead of an online wallet.
A hardware wallet stores private keys in a secure physical device, it is one of the best ways to protect your cryptocurrency. Moreover, they are immune to computer viruses, making it virtually impossible for hackers to steal your coins.
Make it easier for your loved ones to find and gain access to your crypto wallet. Write a step-by-step guide that explains how to access your cryptocurrency. Ensure that the provided information is stored somewhere on a password encrypted hard disk so that it doesn’t go in the wrong hands.
When writing the instructions, assume that your beneficiary knows nothing about cryptocurrency. Here is a sample of the instructions that could be given.
#Name of the exchange that hosts your cryptocurrency. (WazirX, Binance, etc)
#Steps to log in: Username and password
#For physical wallets: Private wallet keys
#For account recovery a 12- or 24-word secret seed phrase
#In case you have two-factor authentication (2FA) switched on, provide either the location and password of the device where the Authenticator app is stored.
#If your accounts are set up to receive OTP on mobile phones, include details of the location and password of your current mobile device.
#Password or pin to your hard-disk.
After finalizing the list, a complete walkthrough of these instructions will ensure that you include all the information your loved ones need to access your cryptocurrency.
Have a will drawn
Now that you have secured your crypto assets for your descendants, call up a lawyer and draft a will clearly stating who owns the access to your crypto assets, after you pass away.
In case you don’t list crypto in your will, it falls into the “residue” of your will. Residue or ‘remainder’ is a list of everything you own that isn’t accounted for in your will. This includes your clothing, subscriptions, any personal items, etc.
Lastly, in the will, make sure to mention where to find your cryptocurrency. Bequeathing cryptocurrency to your loved ones requires way more planning and effort than any other traditional assets. It is better to start off as early as possible, before it’s too late.