Estate planning and cryptocurrency: 5 tips for leaving your digital assets to someone else

Cryptocurrency has changed the nature of what can be considered an asset, and that’s affected estate planning, too, the process of allocating your assets to your heirs on your death. Experts say that while crypto hasn’t changed the principles of estate planning – after all, you still want to distribute your assets as you like – it has 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, Lyons Wealth Management.

Here are five tips for cryptocurrency owners as they’re planning their estate and what to watch out for.

5 tips for estate planning with cryptocurrency

1. Know where the crypto is held

The location of cryptocurrency can impact the pre-planning process in significant ways:

• Custody with an institution: Cryptocurrency held with traditional brokers or crypto exchanges can be handled exactly like other investment assets such as stocks, with a beneficiary named on the accounts or otherwise specified in a will or trust documents. While an owner may try to obscure an account, it can ultimately be discovered.
• Self-custody: Crypto assets that are self-custodied in an off-chain wallet, for example, can run into significant issues if the owner has not informed family members of its existence. Self-custodied cryptocurrency can be hidden – part of the appeal for many crypto fans – meaning the owner must inform family of its existence and provide a means to access the stored cryptocurrency.

“These assets are not discoverable via a title or probate search,” says Sean Foote, founder and CEO, Legacy Suite, an estate planning firm for traditional and digital assets. “Access to these assets is often safeguarded by passwords, private keys, and seed phrases, which can be easily lost and are usually not shared.”

If you’re preparing an estate, you need to let family members know that you have crypto assets and where they’re held.

2. Understand that your crypto could be lost forever

If you’re holding crypto on an encrypted hard drive – self-custodying it – then it could end up being misplaced forever if your estate pre-planning is not thorough.

“The main thing to keep in mind is that it’s possible the crypto could be lost entirely when not enough planning has been done beforehand,” says Joseph Fresard, attorney at Simasko Law in the Detroit area. “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.”

“If not properly managed, these assets can become virtually inaccessible to heirs upon the owner’s death,” says Foote.

3. Provide access to crypto accounts

Whether it’s traditional brokerage accounts or crypto held on an encrypted hard drive, it’s vital that you provide the means and info for heirs to access your assets when you pass. Naturally, you need to balance that with maintaining the security of your account, say experts.

Professionals recommend that anyone with digital assets – crypto and non-crypto alike – prepare access to their accounts for executors of their estate.

“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. “The only access for this should be the fiduciary responsible for the estate.”

And don’t underestimate how difficult it may be to access crypto accounts for those who are unfamiliar with the process.

“Put yourself in the shoes of someone inheriting crypto, what would you need to know to properly allocate those funds? Make sure to include all pertinent information about the crypto,” says Fresard.

4. 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. And it’s especially important for digital assets, because if cryptocurrency is sent to someone else, it’s basically unrecoverable, hurting the owner and potential heirs.

“Since wills are public documents, recording this sensitive information in them could unintentionally reveal confidential data,” says Foote. “A more prudent approach might be to utilize secure digital vaults or to rely on reputable third-party services adept in digital estate planning.”

Roun says it’s critical to eliminate access to family members who want to take advantage of any access they have and make a money grab before the estate is settled. “That’s another reason the digital succession plan is so critical in proper execution…. to set up and access well in advance, and maintain it yearly with the owner before passing,” he says.

5. Cryptocurrency taxes

It’s also important not to lose sight of any 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. And of course, if the estate is over certain thresholds, then it can owe estate taxes, even if the cryptocurrency is hidden.

“Tax implications, including tracking the cost basis and gain and loss metrics, are pivotal, particularly during the asset transition phase,” says Foote. “As the regulatory landscape for digital assets matures, these tax nuances will take on heightened significance in estate planning.”

If you’re an executor dealing with hidden cryptocurrency, you’ll want to tread carefully and ensure that you’re taking precautions to fully declare the estate’s taxable gains (and losses) and that the estate is handling all its financial obligations.

Bottom line

Properly planning an estate when you own cryptocurrency or other digital assets can require more planning ahead due to the assets’ decentralized nature. 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.