Why Your Crypto Seed Phrase Does Not Belong in a Will

Passing on crypto rarely fails because of the law. It fails because heirs hold a claim to the assets without knowing they exist, or know about them and cannot reach them. The legal position in Germany has been settled for years. The practical one has not.

The decisive dividing line does not run between Bitcoin and shares. It runs between an exchange account and a self-custodied wallet. With an exchange account there is a contracting party you can write to with proof of inheritance. With self-custodied coins there is nobody, only a private key that either can be found or cannot.

Under section 1922 of the German Civil Code the estate passes to the heirs as a whole. In 2018 the Federal Court of Justice held, in a case about a blocked Facebook account, that contractual relationships with online services are covered as well: the heirs step into the contract and are entitled to access the account together with the communications stored there. The court found no reason to treat digital messages differently from letters and diaries.

Applied to crypto that means a balance held at an exchange is a claim against that company, and the claim is inheritable in the same way as a bank balance. Coins in a self-custodied wallet likewise form part of the estate.

The catch sits inside the word "claim". A claim is directed at someone. With your own wallet that someone does not exist.

Here the classic route works, and it takes time. Coinbase, for instance, runs a dedicated process for accounts of deceased users and asks for estate documents, the official death certificate, valid photo identification for the authorised person and a signed instruction on where the assets should go. The provider does not support beneficiary designations for personal accounts, so the route runs through the estate. The documents named there follow US succession law; in Germany the certificate of inheritance takes their place.

What you can do during your lifetime is mundane and still rarely done: a list of where anything is held at all. No passwords and no login details, only the names of the providers and the email address the accounts run under. Without that list heirs often never learn an account existed.

With self-custody there is no support desk to write to. There are only the recovery words. Once they are gone the balance is gone, and the heirs can prove ownership in full while never reaching it.

Access must not be too easy during your lifetime. A slip of paper with twelve words in a desk drawer is access for anyone who walks into the flat. The task reads: findable for exactly one person at exactly one moment, useless to everyone else.

A Shamir backup breaks the wallet secret into several shares with a threshold, three of five for example. Each share consists of its own words and carries metadata on the threshold, the group structure and a checksum. Anyone holding fewer than the threshold learns nothing about the secret, as the specification states in as many words. Trezor supports the procedure directly on the device in the Model T and the Safe series.

In practice: one share with you, one with a person you trust, one with a notary or in a safe deposit box. The succession works while a break-in at any one of the three locations does not.

A wallet that demands two of three keys to spend is another option. You hold two, a third party holds one. During your lifetime your two are enough; after death the key held by the trusted person plus one from the estate will do. More work to set up, and free of the delicate moment in which a complete secret is lying around somewhere.

The simplest route, and often sufficient for small amounts: instructions on where the words are and how to use them, deposited under seal with a notary or in a safe deposit box. The important part is the addition almost everyone forgets, namely how to restore a wallet. Heirs who have never carried out a recovery otherwise founder on twelve words they are holding in their hands.

Which form of storage suits which amount is worked through in our guide to storing a seed phrase safely, where a steel plate, a passphrase and multisig each solve a different problem.

This is the mistake that turns out most expensive because it is well meant.

A will is not a private document. Under section 348 of the FamFG the probate court opens a testamentary disposition held or delivered to it as soon as it learns of the death. It may set a date and summon the statutory heirs and other parties concerned; those present are told the content orally. Anyone who was absent is notified in writing of the part that concerns them.

A party concerned is not everyone who appears somewhere in the will. It is anyone the disposition grants a right to or takes one away from, and even they receive only the part that concerns them. That still does not save your secret. Under section 357 of the FamFG anyone who credibly asserts a legal interest may inspect the opened disposition: passed-over statutory heirs, those entitled to a compulsory share, creditors of the estate.

Then there is the path the document itself travels. It is opened, recorded, copied and added to the probate file. Twelve recovery words in a will are therefore twelve words in an official file, over a period of weeks in which nobody is moving the coins.

The right approach is separation. A will should say who inherits and where something can be found. The secret itself belongs somewhere else. A sentence such as "the access documents for my crypto assets are deposited with notary X" serves its purpose in full without giving the key away.

For inheritance tax the value of the coins on the date of death counts rather than the value at a later sale. With volatile assets that is a real difference, and it is why heirs should document the holdings as early as they can instead of waiting.

Which allowances apply, how lifetime gifts work and what applies when the heirs later sell is set out at length in our article on the tax rules for crypto gifts and inheritance. For taking stock itself a portfolio tracker that reports historical prices on the relevant date helps, and we have compared the usual tools in our crypto tax software comparison. This article replaces neither legal nor tax advice; with larger holdings both belong in the picture.

Can heirs have a wallet opened if the seed is missing? No. There is no body that could reset a private key, and that is how the system works rather than a gap in service. Providers who promise it against advance payment are running a scam.

Is it enough if my partner knows the passcode to my phone? For an app wallet often yes, as long as the device still works and has not been replaced. As the only provision it falls short: if the phone is lost or breaks, the recovery words are needed all the same.

What about a passphrase on top of the seed? It has to be passed on as well, otherwise the twelve or 24 words lead into an empty wallet. That is the most common silent total loss, with the heirs holding a correct backup in their hands and seeing nothing.

Do I even need to mention crypto in my will? In law it falls into the estate anyway. In practice mentioning it still matters because otherwise heirs do not know they have to look. A pointer to its existence and its storage location is enough.

How do exchanges handle an estate when the provider sits abroad? The process is similar while the required evidence differs. With EU providers the European Certificate of Succession helps, although Denmark and Ireland do not take part in the underlying EU succession regulation, and Ireland of all places is home to several large crypto providers. Outside the EU a certified translation of the certificate of inheritance may become necessary.