Crypto inheritance is something you should consider if you have built a substantial crypto portfolio.
The growing popularity of cryptocurrency cannot be ignored these days, as it has become a serious contender for being one of the best options to invest money in.
It is not like people are looking to put money into them for a short while, make some profits, pull everything out, and find something else to do with those profits.
We have seen many investors who have declared that they are in for the long run when it comes to investing in crypto, and by the looks of it, they have done well for themselves.
No one is ignoring their experience, the skills they have learned or taught themselves, and the problematic scenarios they have faced over the years, as it is vital to familiarize yourself with all these facts before you jump into investing in crypto.
However, the question arises: if you have done well in this field and built an excellent financial portfolio, what would happen to your crypto assets when you pass away?
While it sounds very personal or complex to discuss, you cannot take anything you own to your grave. Therefore, you need to have some information on what your options are if you cease to exist in this world.
Just like in financial planning, where you devise strategies on what sort of trades you want to take or which investment opportunity you want to grab on, to improve your financial portfolio, you need to, at some point in your professional or adult life, start to do some Estate planning as well.
It is common practice to ensure that their traditional assets are distributed according to their desires. However, planning how to pass on your crypto to another person or an entity after your demise is entirely different, as it involves some unique challenges that must be considered.
There are numerous options in terms of software, hardware, or crypto exchanges where you can store your crypto assets. The first hurdle for anyone to whom you want to pass these assets is to locate these assets.
Once they can locate them, they need the required credentials to access them, like private keys, seed phrases, PINs, etc. And if they cannot access these credentials, they cannot access the funds, and your crypto assets could be lost forever.
Therefore, not only do you need to assign a beneficiary who would inherit your crypto portfolio in case of your demise, but you also need to plan for the eventuality of what steps you can take, what resources you can select, from where you can pass these assets to your chosen party.
Ensuring Crypto Inheritance: Passing on Your Digital Assets
While we wish for all our readers to have a long, healthy, and prosperous life, if you plan to pass on your crypto inheritance, then you need to devise your strategy early to ensure that the person you intend to pass it to doesn’t miss out on receiving them, just because you didn’t plan for it beforehand or didn’t select a beneficiary.
Here are different ways you can choose from, each with its benefits. Some are considered less technical options, while others are in line with the modern standards we expect to see, especially in the realm of cryptocurrencies:
The Pen and Paper Method
The first and primary option to pass on your crypto assets is to write down your private keys and seed phrases on paper and store them somewhere safe, preferably a vault or a safe, with instructions on accessing them upon your death.
The drawback of this method is that if this piece of paper gets into the wrong hands, they might try to steal these funds, and your nominated successor won’t need them. Another trade-off is that if you lose this information, you would be at a significant risk of losing those funds if you need to remember the information written on them.
A better option if you are persistent in using this method is to store the information written on paper in a security vault in a bank that offers insurance protection and have a process where the information will be passed onto your nominated successor after your death.
Storing Private Keys on a USB or Hard Drive
Compared to the pen and paper option, a more modern method is to store the information of your seed phrase and private key into a password-protected USB or a Portable Hard Drive. The precautions are the same: you don’t give this information to anyone apart from the person you want to pass these assets to.
The most significant risk this method carries is the possibility of the USB or hard drive getting corrupted or damaged for any reason. If they do indeed get damaged, then your information might be hard to access, and the after-effect would be that you might lose access to your funds for good.
In this case, the extra precaution you can take is to make multiple backups and store them separately so that you may have some redundancy if your original device suffers from any problem.
Encrypted Email
Now, we are heading towards more technologically advanced solutions. The first option in your arsenal of storing your private keys and seed phrases is to share them in an encrypted email that will be sent to your trusted recipient.
Along with the private keys, you would also be required to send the recipient instructions on how these funds can accessed in case of your death. The success of this method relies heavily on the recipient’s ability to follow the instructions to the letter without compromising the securities you have set for the encrypted email during your lifetime.
Another option for accessing encrypted emails is through a third-party hosting site, which might necessitate a password for entry. However, if the hosting site shuts down, the encrypted data could become inaccessible and lost forever.
Dead man’s switch
The dead man’s switch method involves setting up a mechanism that automatically transfers access to these keys or phrases to designated individuals or beneficiaries if the original owner becomes incapacitated or passes away.
Here’s how it typically works:
- Setup: The crypto asset owner configures a system, usually through specialized software or services, to monitor their activity or verify their status periodically.
- Activation Trigger: The system is designed to activate if certain predetermined conditions are met, such as the owner not logging in for a specified period or failing to respond to regular check-ins.
- Transfer of Control: Once triggered, the system will initiate the transfer of access to the private keys or seed phrases to specified recipients. The process could involve providing them with decryption keys, passwords, or other necessary information to gain control over the assets.
- Secure Access: The designated recipients can then access the crypto assets and manage them according to the owner’s wishes. This access is typically facilitated through specific channels to prevent unauthorized access.
Using the dead man’s switch method, crypto asset owners can ensure that their digital assets are not lost or inaccessible in unforeseen circumstances such as incapacitation or death.
The method, however, does contain some inherent risks with it as well. The original owner of the crypto assets might suffer from premature activation from technical issues that would release his assets ahead of time.
He can also face susceptibility to hacking along with dependence on third-party providers. Users must evaluate providers carefully to mitigate potential data breaches and ensure the reliable functioning of the system.
Using Custodial Services for Social Recovery
In this method, the custodian employs a social recovery mechanism, where he picks up a predetermined group of trusted individuals (such as friends or family members) who collectively hold fragments of the recovery key.
If the owner loses access to their account or passes away, they can initiate a recovery process through the custodial service.
The custodian then verifies the owner’s identity and coordinates with the trusted individuals to reconstruct the recovery key.
Once the key is assembled, access to the crypto assets is restored. The method provides an additional layer of security and ensures asset access in emergencies or unforeseen circumstances.
However, it also involves relying on the custodial service and trusting the designated individuals with fragments of the recovery key, which may pose risks such as data breaches or collusion.
Smart Contract Wallets on Ethereum
Smart contract wallets on Ethereum offer a decentralized method for storing crypto assets’ private keys and seed phrases.
In this method, users interact with a smart contract deployed on the Ethereum blockchain instead of relying on a centralized entity or service to manage access.
The smart contract is programmed to manage the wallet’s functionality, including receiving, storing, and sending crypto assets.
Notably, the smart contract is designed to be accessed and executed only by individuals with the corresponding private keys or seed phrases.
When creating a smart contract wallet, users typically generate a unique private key or seed phrase to authenticate and authorize transactions.
The user keeps the private key or seed phrase securely and never shares it with anyone else. Users can manage their crypto assets directly on the Ethereum blockchain without intermediaries by interacting with the smart contract using their private key or seed phrase.
The method provides enhanced security and autonomy, as users retain complete control over their assets without relying on third-party custodians. However, users must handle their private keys or seed phrases responsibly to prevent loss or unauthorized access.
Accessing Private Keys as an Inheritor
In case you are a holder of self-custody crypto wallets like software wallets, hardware wallets, or paper wallets, it is imperative to have a plan in place that allows for a few trusted individuals to access your private keys once you have passed away.
The owner of the assets must leave behind specific instructions for the inheritor of his funds that instruct him how to gain access to those funds. He could leave him the private keys and seed phrases written on paper or stored on a USB or hard drive.
He could also leave him the information required to access his safe or vaults where this information is stored.
Suppose he doesn’t leave the intended inheritor of his funds with any of this pertinent information. In that case, no good will come from him storing his crypto funds, as they might be lost forever because of the inherent nature of blockchain technology.
The irreversibility of transactions made on the blockchain network, the decentralized nature, and the extra security measures are some of the factors that make blockchain a very reliable solution for managing digital assets but also highlight the critical need for proactive estate planning and the secure transfer of private keys to ensure the continued accessibility of crypto funds after the owner’s passing.”
Integrating Cryptocurrency Assets into Your Estate Planning Strategy
Incorporating cryptocurrency holdings into your estate plan is essential for ensuring the seamless transfer of digital assets to your beneficiaries upon your passing.
Begin by compiling a comprehensive inventory of your crypto holdings, including private keys and seed phrases.
Next, designate trusted individuals to manage and inherit these assets per your wishes. Consider consulting with legal and financial professionals experienced in cryptocurrency estate planning to navigate the complex regulatory landscape and minimize tax implications for your heirs.
Document detailed instructions for accessing your cryptocurrency wallets and secure storage solutions to facilitate the transfer process.
By proactively integrating your cryptocurrency holdings into your estate plan, you can safeguard your digital wealth and provide peace of mind for your loved ones.
What Happens to Crypto Assets on Exchanges After Owner’s Passing?
After the death of an individual who holds cryptocurrency assets on exchanges, the fate of those assets depends on several factors.
Centralized Exchanges (CEX)
Generally, centralized exchanges require thorough identity verification procedures, making accessing the deceased’s account challenging for heirs without proper documentation. Access to the account is necessary for the cryptocurrency holdings to remain inaccessible indefinitely.
Additionally, retrieving the assets becomes even more complicated if the deceased did not leave behind clear instructions or access credentials for their exchange accounts. Some exchanges may have policies for handling such situations, but these vary widely and may involve legal hurdles.
Moreover, the decentralized nature of cryptocurrencies poses unique challenges. While individuals have complete control over their private keys in self-custody wallets, leaving assets on centralized exchanges means entrusting those assets to third-party entities.
In the event of the owner’s death, accessing these assets relies heavily on the exchange’s policies and procedures, which may not align with the wishes of the deceased or their beneficiaries.
Individuals should consider incorporating cryptocurrency holdings into their estate planning to mitigate these risks. It involves documenting access credentials, private keys, and instructions for accessing exchange accounts and appointing trusted individuals to manage these assets in the event of their passing. Taking proactive steps to address these considerations can help ensure the smooth transfer of cryptocurrency assets to heirs and minimize the risk of loss or complications.
Decentralized Exchanges (DEX)
Decentralized exchanges (DEXs) introduce an additional layer of complexities. Unlike centralized exchanges, where a third party holds assets, DEXs facilitate peer-to-peer trading directly on blockchain networks, allowing users to retain control of their funds through self-custody wallets.
In the event of the owner’s death, accessing assets on a DEX can be challenging due to the decentralized nature of these platforms. Since users manage their private keys, there is no centralized entity to facilitate account recovery or assist heirs.
Therefore, it becomes crucial for individuals to leave clear instructions and access credentials for their DEX accounts to ensure that beneficiaries can retrieve the assets.
However, the owner needs to do so. In that case, accessing cryptocurrency assets on decentralized exchanges may prove exceedingly difficult for heirs, highlighting the importance of proactive estate planning and documentation for managing digital assets effectively.
