Estate Planning for Crypto Assets in the US: Complete Guide
Estate planning for crypto assets means making sure your digital assets, like Bitcoin, are safe and can be passed on to your loved ones. You’ll need to securely store your private keys on a paper or hard drive—maybe in a safety deposit box—and make sure someone you trust knows how to access them. It’s also a good idea to leave simple, clear instructions and update your plan as your crypto holdings change.
Planning for the future is already tough, but when it comes to passing on your crypto assets, the challenge can feel even bigger.
According to a 2022 report, 12% of all crypto holders in the US are above 55 years of age. By this time (probably even earlier), one should start thinking about their estate and legacy planning.
The problem? Unlike traditional assets, crypto requires private keys for access, and if those keys aren’t handled correctly, your heirs might be left with nothing. And you’re not alone—many crypto investors are grappling with how to ensure their digital assets are securely passed on to their loved ones.
But don’t worry—this article is here to help. We’ll break down the unique challenges of estate planning for crypto assets and guide you through the steps to make sure your digital wealth ends up exactly where you want it.
Understanding Crypto Assets
Crypto assets are digital items that you own online, like Bitcoin or Ethereum. Unlike regular money, they aren’t controlled by banks or governments. Instead, they use a technology called blockchain, which is like a secure digital ledger that records transactions. People buy, sell, or trade these assets for various reasons, like investing, making purchases, or storing value. Think of them as a new type of currency or investment that exists only on the internet. Their value depends on various factors, such as supply and demand, their use, and market trends.
The following are the most common forms of crypto assets:
- Cryptocurrencies: Digital money that operates on a decentralized network, with Bitcoin being the most popular example.
- NFTs (Non-Fungible Tokens): Unique digital items representing ownership of a specific piece of content, like digital art or collectibles. Check out some of the best NFT artists and their work here.
- Tokens: Digital assets that can represent anything from a stake in a project to voting rights in a decentralized organization.
But if you’re here, you likely already know what crypto assets are. What you’re probably wondering is how they differ from traditional assets when it comes to estate planning.
How Crypto Assets Differ from Traditional Assets (In the context of estate planning)
When it comes to estate planning, one of the biggest differences between crypto assets and traditional assets is how ownership and control are handled. Traditional assets, like real estate or stocks, usually have clear legal processes for transferring ownership through wills, trusts, or beneficiary designations. These processes make it relatively easy to ensure your assets go to the right people after you pass away.
Crypto assets, on the other hand, are a bit trickier. Ownership of crypto is tied to something called a private key—a string of code that gives you access to your digital assets. For example, owning Bitcoin doesn’t mean your name is attached to it; it means you have the private key to access the wallet where it’s stored. If you lose that key, your Bitcoin is gone forever, no matter what your will says.
This creates unique challenges for estate planning. You need to make sure your heirs not only know they’re inheriting your crypto but also have the means to access it—without making that information vulnerable to theft.
Properly planning for this involves more than just legal documents; it requires secure and technical methods of passing on your private keys.
Understanding Estate Planning for Crypto Assets
As we just went over, estate planning for crypto assets isn’t as straightforward as it is with traditional assets. Unlike your house or stocks, you can’t simply name a beneficiary for your crypto in the same way. The key challenge here is that crypto assets are controlled by private keys. If those keys aren’t passed on effectively, your assets could be lost forever.
Imagine your private key as the only key to a safe filled with gold. If you don’t tell anyone where the key is or how to use it, that gold is as good as gone. The same goes for your crypto.
So, what should you do? First, choose someone you trust who also understands how crypto works. This could be your executor, trustee, or another fiduciary. They need to know not just that you have crypto, but how to access it. If they’re not familiar with crypto wallets, private keys, or the general landscape of crypto, there’s a real risk they won’t be able to manage your assets effectively.
One approach is to leave detailed instructions in your estate plan. For example, you might store your private keys in a secure place, like a safety deposit box or a hardware wallet, and include the location of these keys in your plan. Another option is using a multi-signature wallet, which requires multiple keys to access. You could distribute these keys among trusted individuals or store them in different secure locations to add an extra layer of security.
Speaking of hardware wallets, there is an important distinction between tangible and intangible assets that we must point out when discussing estate planning for crypto assets.
Tangible vs. Intangible Assets
How your crypto is classified plays a big role in your estate plan. Tangible assets, like jewelry or art, are usually easier to hand down directly to heirs. Intangible assets, like stocks or financial accounts, often need more complex legal steps, like setting up trusts or having an executor manage them. Getting this classification right helps prevent confusion or disputes later on. That’s why it’s important for your estate plan to clearly define how your crypto assets are classified and include clear instructions on how to access them.
Crypto can be classified as either tangible or intangible, depending on how you store it:
Cold Wallets: If you keep your crypto in a cold wallet, like a USB drive or an external hard drive, it might be considered tangible property. This is because it’s a physical item you can hand over, similar to giving someone a valuable piece of jewelry.
Hot Wallets: If your crypto is stored in a hot wallet, which is online or tied to an exchange, it’s generally seen as intangible property, more like a bank account or digital investment account.
Check out our complete guide on hot wallets vs cold wallets.
These assets might need to be placed in a trust or managed by an executor. The key here is making sure your heirs know how to access these accounts and have the necessary information, like passwords or private keys. For example, you might write down your private key on a piece of paper and keep it in a safety deposit box along with the cold wallet.
Remember, crypto assets are bearer instruments, meaning whoever has the private key controls the asset. If your private keys aren’t properly secured, someone other than your intended heir could end up with your assets, no matter what your legal documents say.
Common Pitfalls to Avoid
When it comes to estate planning for crypto assets, there are a few common pitfalls that can really throw a wrench in your plans. Here’s what to watch out for:
1. Not Updating Your Estate Plan Regularly
Crypto is a fast-moving world, and your estate plan needs to keep up. If you don’t update your plan regularly, you risk leaving out important assets, missing beneficiaries, or having outdated instructions that no longer apply. Make it a habit to review your estate plan at least once a year or after any major life changes, like a marriage, divorce, or the birth of a child.
2. Poor Documentation and Access Control
One of the biggest mistakes is not properly documenting how to access your crypto assets. Unlike traditional assets, crypto relies on private keys for ownership and access. If your heirs can’t find or use these keys, your assets could be lost forever. To avoid this, keep detailed, secure records of your private keys, passwords, and instructions on how to access your digital wallets. Consider using a password manager, safety deposit box, or another secure method to store this information.
We recommend using Bitcoin.Tax to streamline the process of keeping track of all your crypto transactions while also automating the tax calculation and reporting process.
3. Ignoring the Prudent Investor Act
The Prudent Investor Act requires executors and trustees to diversify investments to reduce risk. This makes sense most of the time, but if a big part of your estate is in crypto, it could cause problems. The law might force your executor to sell off a chunk of your crypto to diversify into more traditional investments, which could go against what you really want—especially if you want your beneficiaries to hold onto that crypto.
To avoid this, you can add a specific provision in your estate plan giving your executor the green light to keep your crypto as is, without having to worry about those diversification rules. This way, your wishes are respected, and your executor isn’t pressured to sell off your assets. Plus, it protects them from any legal trouble for not following the usual investment guidelines, making sure they can focus on carrying out your wishes.
Tax Implications of Crypto Assets in Estate Planning
When planning to pass on your crypto assets, it’s important to think about the tax implications. Crypto comes with its own set of tax rules, and they can get tricky. If you don’t handle it right, taxes could eat into what you leave behind. In this section, we’ll cover the key tax issues to keep in mind when including crypto in your estate plan.
Understanding Estate Taxes for Crypto
When you pass down crypto assets, taxes are something your heirs will need to think about.
First, there’s capital gains tax. If your crypto has gone up in value since you bought it, your heirs might have to pay taxes on the profit when they sell it. However, there’s a helpful rule called the “step-up” in cost basis. This means that the value of the crypto is reset to what it’s worth on the day you pass away, which can lower the taxes your heirs owe when they sell.
Let’s say you bought 1 Bitcoin years ago for $10,000, and by the time you pass away, it’s worth $50,000. Normally, if your heirs sell that Bitcoin, they would have to pay capital gains tax on the difference between the purchase price and the selling price—in this case, $40,000 in profit.
However, with the step-up rule, the cost basis for your heirs is “stepped up” to the Bitcoin’s value on the date of your death, which is $50,000. So, if your heirs sell the Bitcoin for $50,000, they wouldn’t owe any capital gains tax because there’s no profit based on the stepped-up value.
At the same time, if your heirs sell the Bitcoin after years for $60,000, they have to pay capital gains taxes on $10,000 since the cost basis of the Bitcoins would reset to $50,000 for your heirs.
Learn more about cost-based accounting methods here.
Then there’s the estate tax. If the total value of your estate, including your crypto, is above a certain threshold, your heirs might have to pay estate taxes. As of 2024, the federal exemption is pretty high, but state estate taxes could still apply, and these thresholds can vary.
Check out our in-depth crypto inherited assets tax guide to learn more.
Strategies to Minimize Tax Liabilities
Estate planning for crypto assets also includes keeping taxes low for your heirs. Here are some simple strategies to help:
1. Gifting While You’re Alive – You can reduce the size of your taxable estate by gifting some of your crypto to your heirs while you’re still around. The IRS lets you give up to a certain amount each year without any gift taxes. By doing this gradually, you can lower your estate’s value and potentially avoid estate taxes. Just remember, your heirs will take on the original cost basis, so they might face capital gains taxes if the crypto has gained value.
Check out our in-depth crypto gift tax guide to learn more.
2. Setting Up a Trust – A trust is a great way to manage how your crypto gets passed down and can help with taxes too. For example, you could set up a charitable remainder trust that pays your heirs income for a while, and whatever’s left goes to charity. This gives you tax benefits and takes care of your loved ones.
4. Getting Help from a Tax Professional – Crypto taxes can be tricky, so it’s smart to talk to a tax professional who understands crypto and estate planning. They can help you find ways to save on taxes and make sure your estate plan is set up right.
Check out our in-depth guide on choosing the best crypto tax professional to learn more.
FAQ
How do you pass crypto to heirs?
To pass your crypto to your heirs, follow these steps:
- Include It in Your Will or Trust: Decide who should get your crypto and make sure it’s clearly written in your will or trust.
- Secure Your Private Keys: Crypto is all about private keys. Store them safely, like in a safety deposit box, and leave instructions on how to access them.
- Keep Good Records: Write down what crypto you have, where it’s stored, and how to access it. This helps your heirs know what they’re getting.
- Tell Your Executor: Make sure the person handling your estate knows about your crypto and how to get to it.
By doing this, you can make sure your crypto gets passed on smoothly to your loved ones.
How do I claim a deceased Bitcoin?
To claim a deceased person’s Bitcoin, follow these steps:
- Locate the Private Keys: Bitcoin is accessed using private keys. You’ll need to find where the deceased stored these keys—this could be in a hardware wallet, a written document, or a password manager.
- Check the Will or Trust: Look for any mention of Bitcoin in the deceased’s will or trust. This document should state who inherits the Bitcoin.
- Contact the Executor: The executor of the estate is responsible for distributing assets according to the will. Let them know about the Bitcoin and provide any necessary documents to prove you’re the rightful heir.
- Access the Bitcoin Wallet: With the private keys in hand, you can access the Bitcoin wallet and transfer the Bitcoin to your own wallet.
If the private keys are lost or unknown, the Bitcoin might be impossible to claim. That’s why it’s important for crypto owners to securely document and share how to access their assets.
What to do with crypto when someone dies?
When someone with crypto passes away, the first thing you need to do is find their private keys. These keys are the only way to access their crypto, so check if they’re stored in a hardware wallet, written down somewhere safe, or in a secure digital spot. Then, look at their will or trust to see who they want to inherit the crypto.
Next, get in touch with the executor of the estate, who handles distributing the deceased’s assets. Let them know about the crypto. Once you have the private keys, the executor or the rightful heir can access the crypto wallet and move the assets.
Also, don’t forget about taxes. It’s a good idea to talk to a tax professional to understand any tax responsibilities. Handling crypto after someone dies is all about making sure it’s passed on smoothly and securely.
What happens if you inherit Bitcoin?
If you inherit Bitcoin, you become the new owner of those digital assets. First, you’ll need to access the Bitcoin, which requires the private keys. These keys are essential for unlocking the Bitcoin wallet, so make sure you have them or know where they are stored.
Once you have access, you can decide what to do with the Bitcoin. You can keep it, sell it, or transfer it to your own wallet. Keep in mind that there may be tax implications. Depending on where you live, you might owe taxes if you sell the Bitcoin, based on its value when you inherited it.
It’s a good idea to consult with a tax professional to understand any responsibilities you might have. Inheriting Bitcoin means you take on the responsibility of managing it, just like any other asset.