Digital assets have largely rendered traditional estate planning elements obsolete. Crypto-assets may comprise significant individual wealth in the forms of cryptocurrencies like Bitcoin and noncurrency blockchain tokens. If you own any of these asset classes, addressing complex challenges to secure, transfer, protect, and ultimately gift crypto-asset wealth is crucial to your estate plan.
Estate planning may seem incompatible with decentralized cryptocurrency systems. Joel Revill, CEO of Two Ocean Trust, says, “The idea of handing over your crypto-assets or your private keys to someone else goes against that original ethos of the self-sovereign asset.” Continuing about the asset class, he admits, “A self-sovereign asset is a wonderful concept, but when you put it into the context of succession planning or multigenerational planning, you begin to appreciate the fragility of that custody.”
Understanding Crypto-Assets
Whether you bought Bitcoin early and are managing millions or have more modest sums, it is important to formalize a plan for your crypto-assets. These assets are vulnerable to being lost forever without conveying the access information to a beneficiary.
A private key (public/private key encryption), typically alphanumeric characters, is known to the crypto-asset owner and permits access to the currency’s value through a distributed digital system called a blockchain. If your spouse or other heir is not crypto- or technically savvy, they may have no clue how to access your crypto-assets without explicit instructions.
If you have a small number of crypto-assets on an exchange such as Kraken, Binance, Coinbase, or others, the focus of your estate plan should be to leave a comprehensive trail of information to your fiduciary so they may locate and access the account. This trail can be as direct as a list of the crypto-assets on your schedule of trust assets, with the certainty that the successor trustee has login protocols for the client’s account on the exchange.
Does My Cryptocurrency Need to Go into a Trust?
For those with extensive cryptocurrency assets, seeking professional help to establish a custodian and trustee may be necessary. You can use one or a combination of the following solutions to protect and integrate your digital assets into your estate plan:
| Strategy | Description |
|---|---|
| Share seed phrase and private keys | Share your seed phrase (master password) and private keys with a very trusted family member or friend. |
| Divide keys among trusted individuals | Divide your seed phrase and private keys among multiple trusted individuals so no single person has complete control. |
| Create a trust | Create a trust and transfer crypto-asset ownership into it, with a designated loved one or corporation serving as trustee. |
| Use custody services | Use custody services, such as a software application or hardware wallet. |
| Dead man’s switch app | If you have the technical expertise, use a dead man’s switch app. |
| Multi-signature wallet | Implement a cascading multi-signature wallet to divide responsibility rather than relying on a single self-sovereign wallet. |
Digital asset custodian services such as BlockFi, Unchained Capital, Anchorage, Casa, Genesis, and others provide secure protection alongside trustee services. Many trusts created for cryptocurrency are lifetime discretionary trusts. However, no widely accepted digital asset estate plan template currently exists. Some owners prefer simple solutions, others complex, while many favor flexibility.
Considerations for Beneficiaries
Beyond safe storage and transfer of digital cryptocurrency ownership, beneficiaries must consider what to do with the asset. Tax implications apply when transferring or selling digital assets. Traditional capital gains tax strategies may be relevant, including:
- Holding assets until short-term gains convert to long-term gains to reduce tax impact.
- Offsetting capital gains with capital losses.
- Selling assets in a low-income year.
Each beneficiary will need to assess their financial situation to identify the best approach.
Why Estate Planning Must Adapt for Cryptocurrencies
Cryptocurrencies are ushering in a new era where primary estate planning documents, like a will, are insufficient for digital assets. Cryptocurrency’s volatile nature means improper transfer of digital requirements could result in total asset loss.
An elder law estate planning attorney can provide options and recommend the best ways to transfer your cryptocurrency assets to heirs safely.
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We hope you found this article helpful. If you’d like to discuss your particular situation, please contact us here or call us on 501-834-2070 to schedule a consultation. We have offices in Sherwood, Searcy, Little Rock, and Benton and look forward to working with you.