Cryptocurrency has changed the financial landscape in a big way, and that’s affected estate planning, too, the process of allocating your assets to your heirs after you pass away. Experts say that while crypto hasn’t changed the principles of estate planning — after all, you still want to distribute your assets to loved ones — it’s increased the complexity of the pre-planning process.
“The big hurdle is there is nobody to call to recover passwords, keys and locations of digital assets, making pre-planning more critical than ever before in estate planning,” says Corey Roun, senior director of trading and derivative strategies at Lyons Wealth Management.
5 tips for estate planning with crypto
Here are five tips for cryptocurrency owners as they navigate the estate planning process.
1. Know where the crypto is held
Where your cryptocurrency is held can significantly impact the pre-planning process. There are three primary ways to own crypto.
Custody with a traditional broker
Since the launch of Bitcoin ETFs in early 2024, an increasing number of Americans hold cryptocurrency in traditional brokerage accounts. If that’s your situation, you can assign a beneficiary for your entire portfolio in your account settings, and your crypto will transfer to the named heir after your death along with any other investment assets you own, such as stocks.
However, some investment apps that allow you to trade cryptocurrency — such as Robinhood — do not currently allow the transfer of cryptocurrency through a beneficiary designation. Until that changes, your crypto assets with Robinhood would become part of your estate after your death and subject to probate, a lengthy legal process.
Custody with an exchange
Surprisingly, major cryptocurrency exchanges, including Coinbase, do not offer beneficiary designations for account holders. Same goes for exchanges such as Kraken and Gemini. Your assets will go through probate, and if you don’t have a will, they’ll be subject to intestate laws, which means state law determines who inherits your assets.
Crypto exchanges typically don’t offer traditional trust accounts like many brokerages do either, so you can’t avoid probate that way unless you take your coins off the exchange and self-custody them inside a trust you create on your own. Otherwise, whoever ultimately inherits your coins will need to contact the exchange directly, provide proof of your death along with the proper court probate documents and wait for the company to sort everything out and transfer the assets.
Matt McClintock, founder of The Bespoke Group, a strategic wealth firm in Evergreen, Colorado, thinks major cryptocurrency exchanges will begin offering beneficiary designations in the future, though it’s impossible to say when.
“It’s about meeting the market where it is,” says McClintock, who has over 20 years of experience managing complex estate planning strategies for clients.
As cryptocurrency becomes ever more mainstream and exchanges grow in size, McClintock says customers will expect Coinbase and other companies to offer beneficiary designations, much like other financial institutions do.
Self-custody
Crypto assets that are self-custodied in an off-chain wallet, for example, can run into significant issues if the owner fails to inform family members of its existence. Self-custodied cryptocurrency can be hidden — part of the appeal for many crypto fans — meaning the owner must provide a means to access the stored cryptocurrency.
No matter where your crypto is held, if you’re preparing an estate, you need to let family members know that you have crypto assets and where they’re held. You also need to create a will or a trust that states who inherits your coins.
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2. Provide access to crypto accounts and wallets
If you’re self-custodying crypto on an encrypted hard drive, poor estate planning could mean it’s lost forever after you die.
Imagine your Bitcoin is stored on a password-protected hardware wallet. Your heirs might know it exists and get agonizingly close to your Bitcoin — but not close enough to access it.
To inherit crypto from a hardware wallet, a loved one must know:
- That the asset exists.
- Where to find it.
- Any necessary passwords.
- How to access it with the private key.
- How to transfer it to an exchange, if they choose to cash out.
“If the crypto is stored on a hard drive that goes missing, is destroyed or stolen, or if the key is lost, it may be that your heirs never receive the benefit of your investment.” says Joseph Fresard, an attorney who works in estate planning at Simasko Law in the Detroit area.
Naming a digital executor in your will can help ensure your Bitcoin doesn’t vanish into the void. This person is responsible for managing your digital assets, just as a traditional executor handles debts and ensures what’s left over is transferred to your beneficiaries.
Your will should explicitly grant your executor permission to access your accounts, but don’t list sensitive information, such as passwords or private keys, in the document itself.
Instead, make sure your digital executor knows where to go to access that information.
“There are many ways to set up a centralized location to secure all known seed phrases, keys and pass phrases for your digital assets, and then centrally locate them in the most secure places available, like a safety deposit box,” says Roun.
Without those instructions, your fortune of niche crypto coins could be worthless. Your loved ones will need to know the exact sequence of characters that make up your wallet along with how to transfer the assets out and sell them on an exchange.
3. But be careful how you give access to accounts
Experts say that keeping your accounts secure during this process is vital, and that it’s important to follow best practices by putting a proper digital succession plan in place.
It’s also critical to eliminate access to family members who might want to take advantage of any access they have and make a money grab before the estate is settled.
“Since wills are public documents, recording this sensitive information in them could unintentionally reveal confidential data,” says Sean Foote, founder and CEO of Legacy Suite, an estate planning firm for traditional and digital assets. “A more prudent approach might be to utilize secure digital vaults or to rely on reputable third-party services adept in digital estate planning.”
An entire cottage industry has sprouted up in recent years to help with the process. For instance, a company called Unchained helps Bitcoin holders address both access and legal ownership in estate planning.
For $250 a year, Unchained offers multisig vaults — short for multiple signatures — which require multiple keys to move funds, reducing the risk of loss or theft. And Unchained’s inheritance protocol takes care of key succession, helping even non-tech savvy beneficiaries navigate the process of retrieving assets.
4. Think carefully about who will inherit your crypto
Don’t underestimate how difficult it may be to access crypto accounts and other digital assets for those who are unfamiliar with the process.
McClintock recalls a case he handled in 2018 involving a mother who inherited an obscure token worth nearly $10 million from her son, an engineer who had worked on a smart contracts protocol.
The token was still held in company treasuries when her son passed, which McClintock says in some ways simplified the process. She didn’t need to wrestle with private keys or self-custody — she could work directly with her son’s former employer.
But she still had to deal with an asset she knew nothing about. Cashing it out was a laborious, confusing and stressful process, a winding maze of legal and financial checkpoints.
All told, it took over five months of “pretty heavy duty work” to get legal ownership of the token from the company, transfer it to Coinbase, convert it to dollars, cash it out, deposit it into her own brokerage account and finally invest it in assets inside her portfolio.
“At the same time, they’re also grieving,” says McClintock. “And you add to that the complication of dealing with this highly volatile asset that could be of tremendous value but is really confusing to understand.”
Dying without a will can lead to unintended beneficiaries. If you’re single with no kids — and no will — when you pass away, parents are usually first in the inheritance line, according to most state intestate laws. Do your parents have the technical know-how to retrieve your Bitcoin?
Maybe your younger brother would really appreciate a stockpile of Bitcoin — and know exactly how to follow your instructions and access it. Unfortunately, without a will, decisions like this are out of your control.
5. Keep cryptocurrency taxes in mind
It’s also important not to lose sight of tax issues that arise when dealing with cryptocurrency.
Any realized capital gain is taxable, as are purchases using crypto when the value of the goods is worth more than the purchase price of the cryptocurrency. So tracking the cost basis, along with gain and loss metrics, is crucial. And of course, if the estate is over certain thresholds, then it can trigger estate taxes.
If you’re an executor dealing with hidden cryptocurrency, you’ll want to tread carefully and ensure you’re taking precautions to fully declare the estate’s taxable gains (and losses) and that the estate is handling all its financial obligations.
For crypto whales with millions of dollars in Bitcoin or other assets, McClintock works with clients to establish a network of irrevocable trusts to help minimize estate tax obligations for beneficiaries.
It’s a complex process that involves creating a specific type of limited liability company. Custodial accounts are then opened in the name of the LLC and that’s where the crypto sits.
Then the client transfers the LLC to one or more irrevocable trusts, so that the trusts own the LLC and the LLC owns the crypto.
At the end of the day, what the trust owns is simply an LLC interest, with any trustee usually sitting on the LLC as a member, says McClintock. This way, the client can operate the actual financial investment at the LLC level.
“You can usually get significant value out of somebody’s estate for either state or federal estate tax purposes this way,” says McClintock.
He adds that the LLC nesting structure can also protect against future creditors coming after the value inside the trust.
“There are so many people out there who have tens of millions — if not hundreds of millions — of dollars in Bitcoin, and they’ve done zero planning,” McClintock says.
Bottom line
Properly structuring an estate when you own cryptocurrency can require more planning due to the assets’ decentralized nature and murky regulatory landscape. Smart pre-planning can help mitigate the biggest dangers of leaving crypto assets stranded in an account or greedy family members looking to siphon off your assets before they reach your intended heirs.
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