Module 10: Estate & Inheritance Planning

Traditional Assets vs Bitcoin

• Bank accounts: Executor presents death certificate → bank grants access. Process is slow but reliable.
• Brokerage accounts: Transfer-on-death designations or probate process. Custodian cooperates with legal authority.
• Real estate: Title transfers through probate or trust. Property cannot disappear.
• Bitcoin (self-custody): No custodian. No reset mechanism. If heirs cannot access the private key or seed phrase, the Bitcoin is gone. Permanently.
• Bitcoin (exchange custody): Similar to bank accounts — heirs contact exchange with death certificate. But exchange may have limited support, and the client loses the sovereignty benefits of self-custody.

Core tension: The same properties that make Bitcoin secure during a client's life (no third-party access, no password reset) make it dangerous after death without proper planning.

Pillar 1: Access — Can Heirs Reach the Keys?

The heir must be able to physically and technically access the private keys or seed phrase. This requires:

• Location knowledge: Where are the seed phrase backups stored? (Safe deposit box, home safe, geographic split)
• Technical ability: Can the heir use a hardware wallet? Do they know how to restore from seed?
• Passphrase access: If the wallet uses a 25th-word passphrase (Module 7), that must also be transmitted
• Device access: PIN codes for hardware wallets, passwords for software wallets

Pillar 2: Documentation — Does a Guide Exist?

Even if heirs know where the keys are, they need step-by-step instructions to recover the funds. Most heirs have never used a hardware wallet.

• Inventory of all Bitcoin holdings (on-chain, exchange, custody provider)
• Wallet type and software used (Sparrow, Electrum, BlueWallet, etc.)
• Derivation path if non-standard
• Recovery procedure: seed phrase → wallet software → verify balance → transfer
• Contact information for any collaborative custody provider (Unchained, Casa)

Pillar 3: Security — Is the Plan Itself Safe?

The inheritance plan must not create new attack vectors during the client's lifetime.

• Risk: Giving a family member the seed phrase means they can access funds at any time, not just after death
• Risk: Storing detailed instructions in a will makes them part of public probate record
• Risk: A letter of instruction in a safe deposit box may be inaccessible if the box is frozen during estate settlement
• Mitigation: Separate access components — no single person or document should contain everything needed to steal funds

Option 1: Letter of Instruction (Simple)

Best for: Clients with smaller Bitcoin allocations held in single-sig self-custody.

• A sealed letter stored with the estate attorney (not in the will itself)
• Contains: wallet type, seed phrase location, passphrase (stored separately), recovery steps
• Referenced in the will: "Refer to my Letter of Instruction for digital asset recovery procedures"
• Updated annually or after any custody changes

Limitation: Relies on a single point of trust. If the attorney loses the letter or the heir cannot follow the instructions, access may be lost.

Option 2: Multisig Inheritance (Recommended for HNW)

Best for: Clients with significant Bitcoin holdings who want security and redundancy.

Multisig (Module 8) naturally supports inheritance by distributing key access across parties:

• 2-of-3 example: Key 1 with client, Key 2 with spouse/heir, Key 3 with estate attorney or custody provider. Client uses Key 1 + Key 3 during life. After death, heir uses Key 2 + Key 3.
• 3-of-5 example: Client holds 2 keys, heir holds 1, attorney holds 1, collaborative custody provider holds 1. Any 3 can sign. Client operates independently during life. After death, heir + attorney + provider coordinate.

Critical detail: The heir must know the multisig setup exists. Store the wallet descriptor file (which defines the multisig configuration) in the letter of instruction. Without it, heirs cannot reconstruct the wallet even with the keys.

Option 3: Trust Structures

Best for: Clients using revocable or irrevocable trusts as part of broader estate planning.

• Revocable living trust: Bitcoin titled in the trust avoids probate. Successor trustee receives access instructions through the trust document or a separate memorandum.
• Irrevocable trust: Can provide asset protection and estate tax benefits. The trust holds the keys (practically, a trustee manages them). Useful for long-term generational wealth transfer.
• Bitcoin-specific trust services: Some collaborative custody providers (Unchained) offer trust-compatible structures where the trustee holds one multisig key.

Important: The trust document should reference digital assets specifically. Many older trusts were drafted before Bitcoin existed and may not clearly cover it. Review with the estate attorney.

Option 4: Timelock and Dead Man's Switch (Advanced)

Technical solutions that automatically transfer access after a period of inactivity:

• Bitcoin timelocks (CLTV/CSV): Transactions can be pre-signed to become valid only after a certain block height or time period. Client periodically "refreshes" the timelock. If they stop refreshing, the pre-signed transaction executes.
• Liana wallet: An open-source project implementing inheritance-friendly timelocks. After a configurable period of inactivity, a recovery key (held by an heir) becomes able to spend.
• Limitation: Requires technical sophistication to set up and maintain. If the timelock expires accidentally, funds become accessible to the heir prematurely.

Advisor guidance: Mention these as emerging options but recommend multisig or letter-of-instruction approaches for most clients today.

Step-Up in Cost Basis

Inherited Bitcoin receives a stepped-up cost basis to the fair market value on the date of the decedent's death (or alternate valuation date if elected).

• Example: Client purchased 10 BTC at $5,000 each ($50,000 total basis). At death, Bitcoin is $80,000 each. Heir's new basis is $800,000 — eliminating $750,000 in unrealized gains.
• If heir sells immediately: Little to no capital gains tax (gain calculated from $800,000 basis)
• If heir holds and price rises: Only gains above $800,000 are taxable

Planning implication: For clients with large unrealized gains who plan to pass Bitcoin to heirs, holding until death may be more tax-efficient than selling during life and gifting the proceeds. This is a significant consideration for long-term Bitcoin holders.

Estate Tax Considerations

• Bitcoin is included in the gross estate at fair market value on date of death
• Federal estate tax exemption is $13.61 million per individual (2024). Amounts above this are taxed at up to 40%.
• Some states have lower exemption thresholds (e.g., Oregon at $1 million, Massachusetts at $2 million)
• Bitcoin volatility complicates valuation: If the client dies during a sharp price movement, the date-of-death valuation may be significantly different from values a few days earlier or later. The alternate valuation date (6 months later) may be beneficial.

Gifting vs Inheriting: A Comparison

• Gifting during life: Recipient inherits the donor's original cost basis (carryover basis). No step-up. Capital gains tax applies when the recipient eventually sells. (See Module 9)
• Inheriting at death: Recipient gets stepped-up basis. All unrealized gains eliminated. More tax-efficient for highly appreciated Bitcoin.
• When gifting may still make sense: If the client is well above the estate tax exemption threshold, gifting during life reduces the taxable estate. The carryover basis is the tradeoff.