If someone you know has cryptocurrency that you might inherit, let me just say ahoy matey! I hope your pirate spirit is alive and your treasure-hunting skills sharp, because that’s what it might take to get those assets. And if you’re the one holding crypto, know that if you do nothing, it’s very possible those funds will die with you.
In the US, cryptocurrency is considered a digital asset rather than money in terms of probate and estate law. With money and physical assets, you can sign a beneficiary form and create an estate plan or write a last will and testament naming who should get what when you die. With digital assets, however, the law says we should not assume that a deceased person wanted their private materials—everything from emails to photos—given to another person unless they explicitly said so. This puts cryptocurrency, as a digital asset, in an awkward position.
The options for arranging a transfer of cryptocurrency upon one’s death or incapacitation breaks down by one big division: whether the crypto is held by a custodian or in a noncustodial crypto wallet.
Two Types of Wallets
A custodian or custodial wallet means a third party, such as a bank or a cryptocurrency marketplace, holds and manages the assets for you. Typically, transferring assets after death is much easier with a custodian, especially if it’s a bank.
Noncustodial wallets eliminate the middleman and let a person hold their assets directly. For crypto enthusiasts whose interest in digital currency is driven by a distaste for the traditional banking system, then using a noncustodial wallet is kind of the whole point.
Noncustodial wallets can be software or hardware-based. It can even be a piece of paper with the instructions and passwords for accessing the cryptocurrency on it. (I use “password” here and throughout to refer to any string of letters, numbers, and characters needed to gain access to someone’s cryptocurrency.) Whatever kind of noncustodial wallet you choose, passing on your assets will require a DIY solution.
Pros and Cons of a Custodial Wallet
When you use a third-party custodian to hold your cryptocurrency, you can choose one that has a beneficiary process in place.
Charles Schwab and Chase are just two examples of large, well-known financial institutions that offer crypto services and have experience transferring assets after death. Schwab, for example, houses its cryptocurrency services within brokerage accounts. Signing a beneficiary form for a brokerage account applies to the crypto account as well. One and done.
Another benefit of using a bank is that at least three entities know you have an account: the bank, the government, and the credit reporting bureaus. Avenues exist for finding the banked money of deceased people. With a noncustodial wallet, this is not at all the case.