The risk of millions of dollars disappearing after cryptocurrency holders' death: The importance of cold wallets and inheritance planning

If you hold cryptocurrencies, secure storage methods such as cold wallets are essential to protect your assets. However, did you know that estate planning is equally important? When the owner passes away, without proper preparation, digital assets worth millions of dollars could be lost forever. This article explains the key measures cryptocurrency holders should take and how heirs can ensure they inherit the assets securely.

What is a Cold Wallet and Its Role in Estate Planning

Cold wallets (cold storage) are commonly used to securely store cryptocurrencies. A cold wallet refers to storing private keys offline, in an environment not connected to the internet. This significantly reduces the risk of hacking and cyberattacks.

However, from an estate perspective, cold wallets introduce new challenges. If hardware devices (like Trezor) or printed private keys are used, and the location or details are unknown to family members, access to the assets could be completely blocked after the owner’s death.

According to Christopher Nekvinda, Director of Global Learning Operations at Canon Financial Institute, digital assets add complex layers for many advisory professionals, and estate planning is no exception. “For a long time, there has been hesitation at the advisor level when determining whether digital assets are part of the family’s estate,” Nekvinda states.

Holding Methods and Key Management: The First Step in Preparing for Inheritance

The initial challenge in inheriting cryptocurrencies is clarifying how they are held. When the owner passes away, heirs and estate administrators need to know where and how the assets are stored.

There are several options for storing cryptocurrencies. If you have an account with an exchange like Coinbase, Coinbase, BitGo, or Fireblocks manage the digital assets. With proper estate planning, the revised Uniform Fiduciary Digital Asset Access Law (RUFADAA), enacted in the US in 2024, allows executors and trustees to legally access these assets.

Many owners also manage private keys using hardware devices like Trezor. If the device and its passphrase are not clearly communicated to heirs, access could be lost forever. Some store private keys printed on paper in safes; if heirs do not know where this information is, the same problem arises.

Ariel Bear, an estate planning specialist at Farrell Fritz law firm in New York, who has experience with cases where millions of dollars in crypto assets did not pass to heirs due to improper planning, points out key considerations: “It is extremely important to designate someone knowledgeable about social media accounts, online transactions, and blockchain-based assets. Even an organized uncle or cousin can face major issues in probate if they don’t know how to extract Bitcoin from a wallet.”

Risks of Heirs Being Unable to Access: The Necessity of Information Organization and Legal Preparation

Some cryptocurrency owners prefer to store account details and passwords digitally, such as in emails or cloud drives. While seemingly efficient, this can lead to complicated situations akin to a “detective story” during inheritance. Heirs may have to search through endless emails and file systems to find the necessary information.

Bear advises: “It’s recommended to list all important account information and share it with your children or store it securely in a safe. I’ve seen heirs desperately searching through file cabinets or computer files for crucial data.”

Another critical issue is the risk when there is no will. Without a will, probate can take 6–10 months until a court appoints a trustee. During this period, no one can manage the crypto assets, which could lead to significant value loss, especially for volatile assets like Bitcoin (BTC). Even if quick sale is needed, heirs may be unable to make timely decisions.

Trusts and LLC Strategies for Fast Inheritance

One of the most effective ways to ensure heirs can access assets quickly and act promptly is establishing a trust. “In the US, especially in New York, setting up a trust and designating it as the death beneficiary or current owner of the assets allows immediate access upon death,” Bear explains. “This eliminates the need to wait for court intervention.”

For rapid liquidity or to avoid market fluctuations, utilizing a Limited Liability Company (LLC) is also effective. “Transferring cold storage wallets into a trust is different from moving an LLC into a trust. Transactions are simpler, but the digital assets are owned by the LLC,” Bear notes.

Additionally, it’s important to remember that in New York, once a will is filed, it becomes a public record. “Therefore, you should not include actual encryption details (private keys or wallet addresses) in your will. Since wills are public, there’s a risk that this information could be exposed to others,” warns Bear.

Practical Estate Planning: Actions to Start Now

Over 50 million adults in the US are said to hold cryptocurrencies. It’s highly likely that digital assets needing transfer to heirs are involved when an average American passes away.

The most important actions asset holders can take now include:

1. Clarify Storage Methods: Precisely identify where and how your cryptocurrencies are stored—cold wallets, custodians, hardware devices, etc.

2. Organize and Secure Information: List critical account details, passwords, private keys, and store them in a safe or share with trusted individuals.

3. Designate Experts: Appoint someone knowledgeable about social media, online transactions, and blockchain assets as estate administrator or trustee.

4. Prepare Legal Documents: Establish a will or trust with clear instructions regarding digital assets (but do not include private keys).

5. Understand Relevant Laws: Know how estate laws in your state, such as RUFADAA, apply to digital assets including cold wallets.

Without proper planning, inherited cold wallets and other crypto assets can be lost due to probate delays, private key loss, or inexperienced trustees. However, by implementing these measures, owners can ensure their assets are transferred securely to their families.