Inheritance and bitcoins: a complex undertaking
A nine-point bitcoin inheritance plan to deal with jurisdiction risks, conflict of laws, custody and privacy issues, and the increasing risk of draconian taxes.
Inheritance planning is probably the most disregarded topic by bitcoiners. It is human nature. Crypto holders are generally young and tend to consider death a remote possibility. Statistically, most bitcoiners are millennials, and only 22% of millennials seem to have a will in place. The family of young bitcoin miner Michael Moody has learned it the hard way. More recently, the fortune of another bitcoin multimillionaire — 41-year-old Mircea Popescu, who drowned in Costa Rica — might have been lost forever. Therefore it is prudent to plan for the inescapable event sooner rather than later to make sure that at least our bitcoins will benefit our families and not only the bitcoin community, which gains from the increased monetary scarcity of the cryptoasset.But making a good crypto inheritance plan is not easy.
Inheritance planning is complex, there are jurisdictional, tax, and privacy issues. In addition, self-custody of cryptocurrencies/cryptoassets is far more complex compared with that of any other asset.
Making sure that your family can gain access to your bitcoin wallet requires foolproof and careful planning.
Recently some companies, such as Casa and Unchained Capital, have launched new custodial services dealing with the technical handling of multi-signature addresses to enable crypto holders to share the custody of their wallets among a number of trusted parties to avoid a single point of failure.
Although such services have good merit — especially for those who do not hold substantial values in cryptos and are technically proficient to handle the process — they are, in my opinion, not suitable for anyone holding more substantial amounts of cryptos.
The reason is that in such cases, additional issues come into play, which must be carefully considered and which are more important than the fairly straightforward technical implementation of multisig addresses. These issues are (a) the need for privacy, (b) the need for specialized advice on inheritance applicable laws, and (c ) the choice of the most suitable jurisdiction to protect the cryptoassets to be inherited.
For any serious bitcoiner the above-mentioned services have the following limitations and downsides:
- you will disclose your bitcoin holdings to a company that is not bound to you by any confidential duty, nor it will be capable, if needs be, to legally resist a writ issued by a government authority or by a judiciary court regarding your cryptoassets.
- such companies are based in the USA and they will be subjected to any restrictive regulations, which may be enacted in the future by the US Government. There are currently a lot of regulatory uncertainties both in the US and in the EU and I would consider, for the sake of safety, both regions as “risky” for crypto holders. Such regulations can strongly impact the “privacy” of the crypto holder via mandatory KYC or mandatory reporting for tax purposes. Any such company could also be subjected to a subpoena issued on behalf of a third party acting in a judicial case against the crypto holder.
- by interacting with such a company, the crypto holder needlessly exposes himself to a third-party weakness. If dealing with such companies cannot be avoided, then it can be done by interposing additional layers of protection such as a trust, a fiduciary corporate vehicle, or a lawyer. An attorney will be acting under a professional mandate and he/she will be bound by the legally enforceable attorney-client privilege.
Although the attorney-client privilege and the work-product doctrine can at times be waived, this generally means that a lawyer cannot be forced to disclose to the authorities or third parties the details of his professional dealings with his client, much less of course how many bitcoins the client holds, and its inheritance planning. While the attorney-client privilege originates from different traditions in both common law and civil law countries, it is however mostly statutorily recognized worldwide. For a detailed analysis of the attorney-client privilege internationally see here.
Accordingly, for anyone holding a more substantial amount of cryptos, I would suggest to take a different and more cautious approach to inheritance planning. How much is “substantial” is clearly subjective. For someone could be US$ 50.000, for a multi-millionaire, it may be above US$ 500.000, while for a billionaire might be US$ 50M. Regardless, in my experience, there is a threshold above which the costs for the specialized consulting and the setting up of the inheritance plan are fully justified, and this is a market value of the cryptoassets to be inherited of roughly US$ 500.000. But already for cryptoassets worth above US$ 200.000, it may still make sense to get specialized advice if the client expects the cryptoassets to increase in the future or if he/she puts a higher value in being able to secure the assets for the future of the heirs. After all, both the planning and the structures can be modular and based upon the clients’ needs and budget.
A nine point plan to crypto inheritance.
1. The law applicable to the inheritance must be carefully considered. International conflict of laws come also often into question. Unless you are based in one of the few traditionally progressive and crypto-friendly jurisdictions (like Switzerland and Liechtenstein) or in some upcoming jurisdictions (such as El Salvador, Cyprus, or Portugal), always assume that you are based in a “risky” jurisdiction as far as cryptoassets/cryptocurrencies are concerned.
The risks are twofold: (i) the risk that local authorities might ban or strictly restrict the ownership of cryptoassets, and (ii) the much broader risk that governments will use regulations to “disincentivize” the adoption of cryptoassets by either making it too burdensome (via regulatory compliance) or too expensive (via disproportionate taxation). Leaving aside the risk under (i) above — which is easy to evaluate and is currently limited to a few known countries worldwide — most crypto holders should be concerned with the risk under (ii) above, as it was confirmed by the recent US regulatory developments in the last Senate Infrastructure Bill. Unfortunately, this type of risk is difficult to forecast. This is why I would suggest considering the US and most EU countries to be a currently high risk under (ii) above for the foreseeable future.
2. In many jurisdictions, there are statutory limitations as to which law can be chosen to apply to the inheritance. If you are based in the EU for instance, you should be aware that regardless of other factors — such as your citizenship — the EU Regulation 650/2012 has established that by default the law governing the inheritance should be that of the “habitual residency” of the deceased. However, under Art 22 of Reg 650/2012, the testator may opt-in his/her will for the law of the State of his/her citizenship to apply to the succession. To add more fuel to the potential conflict of laws, the EU Reg 650/2012 does not regulate the tax treatment of the inheritance goods, which remain mostly a matter regulated either (i) by the tax law of where the goods are located or (ii) by any existing Estate Tax Treaty between two countries.
So what about the taxation of the inherited bitcoin wallet?
This will depend on the countries involved and the provisions of the relative tax treaty if existing. Tax treaties do not discipline nor define cryptoassets nor cryptocurrencies. If one interprets the existing provisions and compares cryptocurrency/cryptoassets with fiat currencies, then the applicable tax law will be the law of where the crypto wallet is located. Otherwise, it will be the law of the country of the domicile of the deceased.
Since, as mentioned under 1(ii) above, the greatest risk affecting both US and EU crypto holders in the future will be that of disproportionate taxation of the asset, the testator may be better off avoiding altogether such a confusing environment and the potential conflicts and risks and store the wallet/private keys in a foreign jurisdiction which is both crypto-friendly and tax-efficient. This is independent of his/her citizenship and his/her habitual residency. Just imagine if your heirs will have to face a draconian 50–60% withholding tax on the cryptoassets inherited. Think this is fantasy? That it may not happen?
I would rather err on the side of safety, be seriously concerned and plan accordingly when looking at who the politicians in charge in most EU countries and the US are and their affiliations with special interest groups such as the Bilderberg Group, Trilateral Commission, Soros Open Society Foundation, WEF, and their oligarchic driven totalitarian agendas.
3. Privacy issues must also be carefully considered, as well as the history of the crypto holdings. If you bought your bitcoins on a KYC crypto exchange, you will plan differently from someone who bought his/her bitcoins without KYC.
4. Hire lawyers who are familiar both with international inheritance matters and crypto matters. Avoid tax consultants who are non-qualified lawyers and financial consultants. As explained above, the reason is that you want to be statutorily protected by the attorney-client privilege to avoid leaking key information to third parties or even to the tax authorities or within judicial proceedings.
Better still, if such a lawyer is a resident of a crypto-friendly and tax-efficient jurisdiction and can handle the whole procedure securely away from the tax authorities of your country of residence.
5. If you are based in a NO-bitcoin jurisdiction in which your crypto assets will be at risk under 1(i) above, you should make sure that when needed, your family can get access to your crypto holdings offshore, out of reach of the government.
Say you are a wealthy Chinese who has stacked lots of bitcoins despite the prohibitions of his government. In this case, the amount of information that will be left to the heirs to get hold of the cryptoassets must be kept to the very minimum. No quantities, no wallet addresses, no private keys. Just the indication to contact a trusted attorney offshore will suffice.
6. Set up an M of N multisig address scheme to custody the cryptos which you wish your heirs to inherit. Carefully plan how many trusted parties are needed to share the custody of the wallets and where the wallets and the backup seeds will be held and stored.
Just as an example, you may custody only one wallet in your country of residence with written instructions for your heirs to find it and act upon. A second wallet can be held by your crypto inheritance lawyer offshore, and the third can be stored always offshore in a safe box of which you hold one key and your lawyer the other. In this way, you can always access your coins without the need of a fiduciary. The same can do for your heirs. But if something goes wrong and your home wallet is lost, or it is confiscated by the local authorities, your heirs can still access the bitcoins offshore and reclaiming possession of the wallet custodied by the fiduciary together with the one stored in the safe box. The same clearly goes for the backup seeds of each address in the multisig wallet.
7. Consider interposing legal structures if needed, like a trust or a fiduciary company, to custody one or more of the multisig wallets.
8. Plan carefully what types of incentives you can grant to your fiduciaries to act for the best interest of your family in the future. A success fee to be paid out of the crypto stack upon successful distribution to your heirs will work wonders to motivate someone who might otherwise sit at his desk waiting for the heirs to contact him.
9. Critically evaluate the technical competencies of your heirs to successfully act upon your inheritance plan. If you think that their crypto literacy is insufficient, think of a trusted person who can help them in the process and plan for his/her involvement.
A reliable, competent, and capable crypto lawyer and a multisig wallet scheme based in a crypto-friendly and ta- efficient jurisdiction might be, after all, the best and safest solution, though likely not the cheapest.
I can be contacted confidentially using this “contact form” on my website.
#crypto #blockchain #bitcoin #cryptocurrencies #inheritance #taxation #conflictoflaws
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© www.bianconiandrea.com — 2021
Originally published at https://andreabianconi.medium.com on August 17, 2021.