Estate planning: how can I ensure my bitcoins are inheritable?

Question

What are good ways to ensure my bitcoins can be inherited by my family when I die or become permanently incapacitated?

I think there are probably two significantly different situations to account for, each with different requirements:

Hot wallet inheritability

I want my family to be able to inherit the bitcoins from my hot wallet, but I'm not worried about them stealing those bitcoins or monitoring my public transaction history while I'm still living.

Cold wallet inheritability

I also want my family to be able to inherit the bitcoins from my cold wallet, but I'd prefer a solution that prevents them from being able to spend the bitcoins while I'm still alive. If possible, I'd also like to prevent them from determining my balance while I'm still alive.

• It is acceptable for the solution to require periodic activity from me, such as moving my bitcoins every six months. For example, your answer may assume that OP_CHECKLOCKTIMEVERIFY has become consensus-enforced, as that's likely to happen within the next few months---and I hope to live that long.

• Because I tend to use strong encryption when available, assume that all my data will be lost at my death unless I've specifically backed it up for other people to use.

I use Bitcoin Core for both my hot and cold wallets (with separate wallet files), but solutions for other Bitcoin software are welcome.

Answer 1

Points for Hot Wallet Inheritability:

1. Lower exposure to risks - use hot wallets that are BIP 39 compliant and share your 12 to 24 recovery passphrase and associated password in advance.
2. Higher exposure to risk - share passwords on your devices that have hot wallets. BIP 32 compliant wallets make it easy to have the same logical wallet deployed on to multiple devices (e.g., cell phone and tablet).
3. Highest exposure to risks - preload multiple instances of hot wallets on their devices.

Points for Cold Wallet Inheritability:

1. BIP 38 compliant paper wallets allow your paper wallet's Wallet Import Format (WIF) private key (Base58Check encoded) to be AES encrypted, recoverable with a password. If you are worried about hiding the amount of the funds, just be sure your paper wallets do not have associated cryptocurrency addresses printed on them. (Cryptocurrency addresses are derived from associated associated private keys. If the private keys are encrypted, and an associated public addresses are not exposed, the amount of funds saved can remains a secret.)

2. A multi-party escrow service is required to ensure your funds don't get spent before the "big event". Either an on-blockchain multisig service can be applied with m of n signatures being required or an off-blockchain Shamir's Shared Secret can be applied. The take-away point is that a sealed will is used as a mechanism (or a trusted 3rd party) is used to release the funds.

3. High tech approach, less privacy where m of n signatures come together for an on-blockchain approach, which doesn't have the desired privacy.

4. Low tech approach, desired privacy where enough Shamir Shared Secrets need to come together to reconstitute a passwords used by BIP 38 compliant paper wallets. Each heir could have their own unique paper wallets with a common passwords shared across all the wallets. It is also easier to change a will using this approach. The redistribution of updated shared secrets also gets the point across that either you are upset or happy with the behavior of your heirs.

FYSA, Some hot wallet application directly support the importation of BIP 38 encoded keys.

WARNING: As with all backup and recovery processes, perform dry-run tests in advance to be certain the backup and recovery processes are working properly. Also, perform key generation on a computer (preferably a spare one) that will never be connected to a network again,
print on a network enabled printer private cryptocurrency keys unless they are encrypted using something like BIP 38.

Answer 2

At the time of writing (summer 2015), the uk jurisdiction has not defined a specific inheritance tax for bitcoins. There might be some catchall wording in the existing legislation so that it does not matter to HMRC whether your jewellry box contained gold, silver, rubies, greek bonds, or something else; if it is insured as worth some £ then the taxman will want £. Check with a solicitor in your own country for catchall wording in the applicable inheritance tax legislation.

If your wallet uses Electrum then your hot wallet and cold wallet passdown may be acheived by the same means: i) make sure that you have shown at least one of your next of kin how to install an Electrum bitcoin wallet, AND how to get a wallet recovered when it first runs and asks the question ?restore wallet from existing passphrase or create a new one? ii) in a sealed envelope, in good ink on acid-free paper, write down your passphrase. This may look like 12 or more words in lowercase separated by spaces. iii) stash that envelope at the bottom of your jewellrybox. Follow the 2006 tax advice of George Osbourne and you can't be doing anything which is wrong according to him.

Answer 3

well, i wouldn't make the whole process more complicated than necessary... if it is possible to bring in a notary in the whole process or however ensure to handover information (e.g. testament) to your family in case of your death, i would advise the following:

• first create and use a 1of2-multisig-wallet...
  so you can use your wallet like a normal "singlesig-wallet"... but as usual, backup your data safely!
• "encrypt" at least the 2nd seed with a seed extension aka. extension word.
• now give just the 2nd seed to your family (probably multiple times).
• and then add the password/seed extension/extension word with your 1st public master key to your testament and seal it.

now it is ensured that your family can access and spend your bitcoins after getting the seed-password and the 1st public masterkey;
on the other hand they can't see your transactions or holdings as long as you're alive, because they neither have the complete seed nor even one public key;
and even the notary can't run away with your bitcoins because he doesn't have a seed or any private key.

the only thing is: whoever holds the testament and breaks the seal can see all your transactions and holdings!

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perhaps it is worth mentioning some important points:

• check if the whole process works as expected and if all needed information is at the correct place by also restoring the second wallet at least once on a "virgin system" or a live system or whatever...
• your family (more than one member to be on the safe side) should know how to handle bitcoins AND how to restore a multisig-wallet. - ...and be good and confident at it's usage, that they still know it in decades!
• you should constantly check, if your system still works and save a copy of your used client at a place where also you family can get it (just to be on the safe side if the client vanishes or changes radically).
• maybe a full step-by-step tutorial at the same location will be a good idea. perhaps not just a "technical" tutorial, but even explaining the whole system and when they will get what and where resp. from whom... depending on the skills and memory of your family. ;-)