Some of these are indeed interesting questions -- with the exception of the first one: if the key is lost, nothing can be done. You could create some more complicated setups with multisig or a "recovery key", but in the end, all keys could be lost. But that would also be the case if a traditional will is executed on a Bitcoin fortune and the original key is lost.
- Can legal systems recognize a Bitcoin-based inheritance? Would governments eventually regulate or challenge the legitimacy of self-executing digital wills? And in a case where the legitimacy is challenged, what could be the way out?
My take on this is that a Bitcoin timelocked transaction would not be a traditional inheritance, but have instead the character of a gift transaction, because it was already created when the original owner was still alive. This may of course not be interpreted this way in all jurisdictions, so the question indeed can be raised.
Probably you may be referring to situations where a minimum inheritance e.g. to the children of the deceased person is required. In this case however we have a similar situation than with a house: there's one person in control of the house (the person possessing the keys) and a person which is the legitimate heir, and both may not be the same person. The person holding the BTC thus could be required to transfer part of the BTC to the legitimate heir(s), e.g. the children of the deceased person.
- What if circumstances change? Traditional wills allow for modifications, but a time-locked Bitcoin transaction is irreversible.
Timelocked transactions are not irreversible, if they use traditional Locktime then they can always be double-spent. If they use a CLTV or CSV contract then it would be best to create a separate branch to allow for a reversal.
- Could future technological shifts make old Bitcoin addresses unusable?
This is indeed possible. There was a discussion recently about
"burning" funds vulnerable to quantum computer attacks (when quantum computers become a problem) and a shift of Bitcoin to quantum safe cryptography. However, if the contract is made correctly, then the funds (from the point of view of today) would not be vulnerable because the heir has never spent funds from the address. The timelock should also not be set too far in the future, it's better to renew it every 6 months or so, so any long-term developments putting in danger the funds can be ruled out.
As a conclusion, I still think timelocks are a good idea for inheritances, but you should of course not do it without thinking about some of the issues raised in these questions.