Cryptocurrency and Estate Planning: Navigating Digital Wealth

Cryptocurrency has moved from the fringes of the internet to the core of many portfolios.  Bitcoin, Ethereum and other digital assets are now worth billions. Unlike cash in a bank account or stocks held at a brokerage, crypto is held on decentralized networks that rely on cryptographic keys for ownership. These qualities make cryptocurrency both exciting and uniquely challenging for trustees and estate planners. Without careful planning, it can disappear forever—there’s no help desk to call if you lose the keys. This post explores why every modern estate plan should address cryptocurrency and how trustees can responsibly manage digital wealth.

Understanding Crypto as Property

Under U.S. tax law, cryptocurrency is treated like property, not currency. Whenever crypto is sold or used to purchase goods and services, the owner must recognize capital gains or losses. Gains are calculated from the time the asset was acquired until it is disposed of. Because crypto markets are extremely volatile, gifting or selling at different times can produce dramatically different tax results.

More importantly, ownership of cryptocurrency hinges on possession of private keys. The phrase “not your key, not your coin” means exactly what it says: whoever holds the private key controls the asset. If a trustee cannot locate these keys after the owner’s death or incapacity, the assets may be unrecoverable, effectively creating a "probate by computer" where digital wealth vanishes. Trustees must therefore understand both the legal classification of crypto and the practical realities of access and storage.

Unique Challenges for Trustees

Several features distinguish cryptocurrency from traditional trust assets:

• Security and Accessibility:  Private keys must be stored securely—preferably offline in a hardware wallet or with a reputable custodian. Multiple backups are essential because a single corrupted device can mean complete loss. Trustees should establish a documented procedure for locating and accessing the keys if the original owner becomes incapacitated or dies. Without a succession plan, surviving relatives have no legal means to retrieve cryptocurrency.

• Volatility and Timing:  Digital assets are highly volatile. A coin’s value can rise or fall by 50 percent in a single month. This creates both opportunity and risk in estate planning. Gifting cryptocurrency during a market downturn (known as “crypto winter”) locks in a lower fair market value, potentially reducing transfer taxes. However, transferring crypto to a trust when values are high might consume a significant portion of your lifetime exemption.

• Technology and Expertise:  Trustees must be comfortable with digital technology. Fiduciaries who lack technical knowledge may be unable to secure wallets, verify transactions, or understand the nuances of decentralized finance. Many fiduciaries are not prepared to handle the volatility and security issues associated with crypto. When selecting a trustee or successor trustee, grantors should consider someone with a working knowledge of blockchain technology or plan to engage professionals who specialize in digital assets.

• Regulatory Uncertainty:  Laws governing cryptocurrency are evolving. Tax reporting requirements, anti‑money‑laundering rules, and fiduciary standards continue to develop. A trustee’s risk of liability increases if they hold or transact crypto without understanding these obligations. Keep an eye on federal guidance and state laws to ensure compliance.

Best Practices for Including Crypto in an Estate Plan

Incorporating digital assets into an estate plan involves several deliberate steps:

1. Create a Comprehensive Inventory

Document all digital assets, including the type of cryptocurrency, wallet addresses, purchase dates, and approximate values. Avoid listing private keys in the inventory. Instead, reference where keys are stored—for example, “Ledger hardware wallet in safe deposit box” or “multi‑signature wallet with instructions held by attorney.” Regularly update this inventory as you buy or sell assets.

2. Establish Secure Storage and Succession Procedures

Use secure storage methods such as hardware wallets or multisig arrangements that require multiple approvals to move funds. Set up a process for releasing keys to the trustee or designated digital executor upon your death or incapacity. For example, an attorney or corporate trustee might hold one key, while a family member holds another. When drafting trust documents, specify how and when keys may be accessed to avoid unauthorized use.

3. Designate a Knowledgeable Fiduciary

Because digital assets are easy to mismanage, select a trustee with technical competence or provide for a co‑trustee who specializes in crypto. Fiduciaries face significant volatility and security challenges. Alternatively, name a “digital executor” solely responsible for digital assets, leaving the traditional trustee to handle other property.

4. Utilize Advanced Trust Strategies

Grantors can use trusts to transfer crypto while minimizing taxes. One effective method is to freeze the value at transfer so that any future appreciation passes to beneficiaries free of estate tax. Certain “freeze” techniques like intentionally defective grantor trusts (IDGTs) and spousal lifetime access trusts (SLATs) can lock in the fair market value at the time of transfer and shift future growth out of the estate. Under an IDGT, the grantor makes a gift of crypto to the trust and continues to pay income taxes on the trust’s earnings, effectively increasing the net gift to beneficiaries. A SLAT allows a spouse to receive distributions, providing flexibility while still freezing the value for estate tax purposes.

Another strategy is to place crypto into an LLC and then transfer membership interests into the trust. This structure can create a valuation discount because fractional interests in an LLC are typically worth less than the underlying assets. By using an LLC, families can save estate taxes while maintaining control through operating agreements. However, caution is needed—retaining too much control can undermine the valuation discount and result in estate inclusion.

5. Consider the Timing of Gifting

Crypto markets swing wildly. Grantors who gift during a downturn may significantly reduce the amount of their lifetime exemption used. For example, giving $1 million worth of Bitcoin when each coin trades at $25,000 uses the same exemption as gifting the same number of coins when the price is $50,000—but with half the taxable value. On the other hand, if the asset appreciates after the transfer, all of that growth occurs outside of the estate, benefitting heirs.

Be aware of the risks. If values decline after you transfer cryptocurrency to a trust, you have used up a portion of your exemption without receiving a step‑up in basis. Additionally, estates with concentrated crypto holdings might lack liquidity to pay estate taxes. Selling crypto quickly could trigger substantial capital gains, undermining planning goals.

6. Incorporate Charitable Giving

Donating cryptocurrency directly to a charity allows you to deduct the fair market value of the gift and avoid paying capital gains tax on appreciation. Charitable remainder trusts can also be funded with crypto, providing a stream of income to a beneficiary for life and leaving the remainder to charity at death. Because charities can sell cryptocurrency without paying tax, this can be a tax‑efficient way to donate highly appreciated assets.

7. Review and Update Documents Regularly

Crypto regulation evolves quickly. Review trust provisions, wills and powers of attorney often to ensure they still reflect your intentions and comply with current laws. Confirm that beneficiary designations on exchange accounts, wallets or any digital-asset platforms align with your estate plan. Laws regarding digital asset access vary by state and may require specific authorization.

Selecting the Right Trustee: A Case Study

Imagine Samantha, a 45‑year‑old engineer who holds a substantial amount of Bitcoin and Ethereum. Concerned about market volatility and her family’s understanding of crypto, she wants to ensure her digital wealth is preserved for her two children. She consults an estate attorney and creates an irrevocable trust funded with a portion of her crypto portfolio. Her attorney structures the trust as an IDGT and appoints a corporate trustee with experience in digital assets to manage the trust’s investments. Samantha gifts the crypto to the trust during a market dip, freezing the lower value and allowing future appreciation to pass to her children free of estate tax. Her estate plan includes detailed instructions about accessing her hardware wallets, identifies a co‑trustee who is a tech‑savvy friend, and directs the trustee to maintain a diversified allocation rather than holding only one coin. By planning ahead, Samantha ensures her digital wealth won’t be lost to forgotten passwords or unexpected tax bills.

Conclusion: Plan Now or Risk Losing Digital Wealth

Cryptocurrency offers enormous potential for wealth creation, but it also introduces unprecedented complexity. Trustees must balance security, regulatory compliance and tax strategy while respecting the grantor’s wishes. The key lessons are clear: inventory digital assets, secure and document access, select knowledgeable fiduciaries, and use trust structures strategically. With proper planning, crypto can enhance an estate rather than complicate it. Without planning, it can evaporate, leaving heirs with nothing but the knowledge that their inheritance was locked away behind a lost password.