Estate Planning for Cold Storage Crypto

Your client just told you “I have a cold storage device for my cryptocurrency”, what do you do?

In the inevitable cycle of life and wealth, a recent reality has become clear: if living people own cryptocurrencies, so do the estates and legacies of deceased individuals. As a professional working with wealth planning, it is imperative to understand how to best serve clients facing this issue. In this post we will explore the specifics of planning for one form of cryptocurrency wallet: the cold storage wallet. We will study what cold storage is, what the status quo solutions are for planning, and how you can accommodate cold storage planning into your practice.

Firstly, it’s important to clarify what a cold storage wallet is. Unlike hot wallets, which are connected to the internet, cold storage wallets are offline. To be more precise, hot wallets store the private key, the exclusive point of entry to any crypto wallet, online, while cold storage keeps it offline. This leaves hot storage wallets vulnerable to remote hackers, while cold storage is only at risk of being stolen by people with physical access to the wallet. Cold storage wallets are more secured than hot storage wallets. Some examples of cold storage wallets include: writing a private key on a piece of paper (paper wallet), memorizing your private key (brain wallet), and a cold storage hardware device which closely resembles a USB stick (Ledger, Trezor.)

One more important distinction to make is between centralized and decentralized storage. Centralized storage refers to any storage arrangement in which more than one party to know the private key. There are varying degrees of centralization, but as soon as a private key is shared the cryptocurrencies held in the wallet are at risk. Keeping a wallet decentralized requires that only one person have access to the private key. Centralized and decentralized cold storage wallets need to be planned for differently. For example, a centralized crypto wallet that uses a centralized custodian, like a Coinbase account, will face titling issues.

You can brush up on the differences between hot vs cold and decentralized vs centralized wallets in our previous blog post here.

The major hurdle in bequeathing a cold storage wallet is it very nature of security and anonymity. Cryptocurrencies like Bitcoin do not reside in physical form and are not governed by traditional banking laws. They exist on the blockchain and are accessible only through private keys - long strings of numbers and letters that allow the owner to access and transfer their digital currency. If this key is lost, the assets become irrecoverable. But, if the key is shared, decentralization is lost, the assets are put at risk, and the new key older faces significant liability.

Your client just told you they have a Ledger, a cold storage device that looks like a USB stick. What do you do? Well, the good news is Ledger are decentralized, which makes it much easier to plan for them. These accounts inherently have no titling: Ledger does not maintain a database linking a user’s identity to their Ledger crypto wallet. This means titling a wallet to be held in trust is as easy as making an assignment or a deed of gift. You could also make a reference to the wallet in the list of assets or attachment section at the end of the trust. If your client has a Will-based plan, the Ledger wallet should be listed in the Will.

However, the biggest issue still remains: how do you give a fiduciary access to the wallet without impeding on your client’s security and burdening the fiduciary with liability, not to mention the technical know-how they must have to make distributions? Well, in the status quo, there are roughly two options available (besides Bequest). Unfortunately, neither of them work that well.

The first option involves having your client write down their private key and store it somewhere like a safety deposit box. A plan should then be made for the fiduciary to eventually recover the key. Of course, having an additional copy of the private key that may be compromised is never a great idea. The second, and much greater, issue, however, involves the liability and technical undertaking placed on the fiduciarie’s shoulders. A fiduciary who holds a private key is now exclusively responsible of keeping it safe – if they lose it, the assets will be locked away forever. They are also solely responsible for the recovery and distribution of assets. They will likely need to use decentralized exchanges, understand how gas fees work, and administer assets across multiple blockchains, all of which is confusing and very easy to get wrong. For example, a non-crypto-savvy person trying to use a decentralized exchange could easily fall victim to one of the plethora of crypto scams and lose all the assets in the wallet. In fact, four out of every ten dollars lost to scammers are from crypto scams. Seeing as your client is likely to choose a friend or family member as their fiduciary, this fiduciary will likely have a very difficult time trying to administer the cold wallet.

Even if the fiduciary is very technical, cryptocurrencies are bearer assets, meaning if someone wants to steal them, they will get away with it. There is no way to prevent a fiduciary from being malicious if they hold the private key. Similarly, if beneficiaries are non-technical, they may become suspicious or confused by the crypto administration process, which could also cause problems for the fiduciary.

There are also more complex options that involve writing portions of the key down and keeping each piece in a separate location, each of which can only be accessed by one person. This is a disaster waiting to happen, as asset recovery hinges on near perfect human coordination. If any of the recoverers pass away, become incapacitated, or decide they no longer want to contribute to the wallet recovery, the assets may once again become irrecoverable. This blurs the lines of control over the assets.

So, writing down a private key and getting it to a fiduciary for administration is clunky and laden with issues.The second option, which is better suited towards professional trustees, involves moving the assets pre-emptively into a centralized account that supports trust accounts. However, if a client is choosing cold storage in the first place, they likely do not want to give up the security that comes with decentralization. If they are comfortable moving their assets into a centralized account, the cryptocurrencies they can hold will be limited, international planning will be limited, and their ability to use their assets will be limited. That being said, the security that they lose in centralizing the wallet, they gain in knowing that a professional trustee is much less likely to be malicious. Note, however, that most trust companies currently turn away crypto accounts.

Bequest’s platform solves for all of these pain points. Not only can we hold a cold storage wallet in trust or carry it through an estate plan, we don’t require private keys be shared, we don’t impede on your client’s user experience, and our easy-to-use fiduciary portals allow for easy and compliant administration. We even allow beneficiaries to receive bank transfers if they are not crypto-savvy.

Fiduciairies using our platform have no choice but to comply with the estate plan or court directives. We are also a non-custodial solution, meaning no one part ever has unbridled access to the assets (besides Powers of Attorney and specific Trustees depending on the Trust.) You can learn more about our solutions by booking a quick demo or sending us a message!

Cryptocurrency wallet administration is tricky, and cold storage wallets pose unique hurdles to every party involved in an estate plan. The nature of digital custody is delicate, and at Bequest our secure software protects all parties while maintaining flexibility to flow with an estate plan.