Why is recovering lost cryptocurrency almost impossible?


It is a feature, not a bug. 

Cryptocurrencies are designed to offer you ultimate financial freedom and true ownership over your assets. To achieve this, cryptocurrencies are based on a decentralized network called the blockchain that secures your assets. On this decentralized network, you own a private key and a recovery phrase that make you the verifiable owner of your assets and allow you to use those assets.

The private key and the recovery phrase are the only ways you can access your crypto assets, and the best part is that neither of these is stored by any central entity, making you the one true owner of your assets. So, as long as you securely store your key and recovery phrase, no other person or entity can ever access your assets. And that’s very unlike fiat currencies stored in bank accounts, where banks have the ultimate control over your funds.

This ownership, this freedom that cryptos offer is exciting and much-needed, but it comes with great responsibility. As no one else can access your keys or funds, your cryptos may never be recovered by your family members if something were to happen to you under unforeseen circumstances. To prevent that from happening, you must plan ahead of time.

Best practices for passing on your crypto assets

1. Name a beneficiary for your crypto assets in your estate plan.

A beneficiary is the person or organization you want to inherit an asset when you die. Make sure to list all your crypto assets in your estate plan, where they’re stored, and which beneficiaries should receive them.

In addition to naming beneficiaries for your crypto assets in your will, you should also name an executor: the person you appoint to administer your last will and testament. You could also name a separate digital executor and task them with protecting and preserving your digital assets and digital property. To make the process easier for everyone involved, consider nominating an executor or digital executor who is familiar with crypto. (

If you plan to name co-executors in your will, consider choosing individuals who get along and work well together, and delineate their responsibilities clearly in your will so there isn’t any confusion.

As new laws and regulations transform the landscape, revisit your estate plan frequently to ensure that your nominated executor is well-equipped to access and oversee your crypto investments and facilitate their transfer to your chosen beneficiaries without unnecessary cost and delay.

2. If you own large amounts of crypto, consider establishing and funding an irrevocable trust.

If your estate is valued above a certain threshold, it could be subject to estate tax when you die. The current federal estate tax exemption is $12.06 million for individuals and $24.12 million for married couples. A handful of states also impose a state-level estate tax (the lowest threshold being in Oregon and Massachusetts, currently at $1 million).

If you own enough crypto that your estate could be subject to estate tax, you may want to consider  establishing an irrevocable trust. A properly structured irrevocable trust can remove these valuable assets from your taxable estate. However, as a general rule, the crypto you transfer to an irrevocable trust during your lifetime won’t receive a basis adjustment (or step-up in basis) when you die.

3. Understand and document where your crypto is stored.

How your executor and beneficiaries will retrieve your crypto after you die depends on how you store it.

If your crypto is stored in a custodial account on a crypto exchange like Coinbase, Gemini or eToro, your executor or beneficiaries can contact these exchanges directly to facilitate the transfer of your assets. To start this process, they will need to provide your death certificate, probate documents (such as a copy of your will), proof of identification, and a letter signed by the executor instructing what to do with the crypto in the account.

If your crypto is stored offline in a cold wallet (a physical storage device that often looks like a USB drive), posthumous access will depend on how well you document your assets. Here are some generally accepted best practices:

  • Document the location of the wallet itself (ideally stored in a fireproof safe or safe deposit box).
  • Document your private and public keys for each wallet you own. Both are needed to access your crypto. Keep both keys in secure but separate locations.
  • Document any other information that may be needed to access your wallet, like a PIN code or recovery phrase.

Where you ultimately store this information is up to you. You may consider keeping it in a safe deposit box, listing it in your estate plan, or entrusting it to an attorney, family member or friend.

Even though the crypto landscape is evolving rapidly, having an estate plan is critical to protecting your crypto assets when you die. Because of the decentralized nature of crypto, the onus is on you to keep stock of your investments and communicate access instructions to your executor and beneficiaries in the event you pass away.

Having an up-to-date estate plan is important for everyone, but it can be especially critical for crypto owners who don’t want their loved ones to lose access to their crypto assets.

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