Estate Planning for Cryptocurrency & Digital Assets

By: Thomas P. O’Neill, Esq., LLM

The Rise of Digital Assets

Digital Assets Are Here to Stay – Many people now own digital assets like cryptocurrencies and NFTs, but many traditional or outdated estate plans fall short of addressing the unique ownership and inheritance issues associated with transferring digital assets after death.​

Documentation Issues – Traditional assets like retirement accounts and life insurance policies come with beneficiary designation forms and follow established procedures for transferring assets at death – but digital assets often lack the same established legal frameworks. Without proper planning, digital assets can be lost or become inaccessible to beneficiaries.​

Real-Life Example – The CEO of the cryptocurrency exchange, QuadrigaCX, passed away in 2018 without leaving behind the password necessary to access the private keys for $190 million in cryptocurrency. Without this key password, the estate had no way to recover the funds. This story was reported by ​ABC News.

Securing Access & Storing Credentials

Private Keys = Ownership – Unlike traditional assets, access to many digital holdings is entirely dependent on private keys or passwords. Losing these means the assets are permanently inaccessible.​

Safe Storage Options -  One option for crypto investors might include the use of a traditional safe-deposit box to hold and store documents or drives that contain access codes and other vital digital records. More modern options such as hardware wallets, multi-signature wallets, and encrypted digital vaults are also becoming more prevalent.​

Real-Life Example – In 2013, an IT worker from Newport, Wales, accidentally discarded a hard drive containing the private key to 8,000 Bitcoins. Despite efforts, the device has not been found, resulting in a loss worth hundreds of millions. This story was taken from this ​Wikipedia page.

Valuation & Distribution Issues

Extreme Price Volatility – As many are aware, cryptocurrencies can experience extreme fluctuations over short periods. Owners of crypto and digital assets should include instructions in their estate planning documents that address this issue and facilitate liquidation or retention of these assets in various circumstances.​

Lack of Distribution Instructions – Without explicit guidance, executors and personal representatives may have limited options for dealing with digital assets. Establishing trusts or other predetermined distribution methods can avoid conflict and improve flexibility for executors, trustees, and beneficiaries.​

Real-Life Concern: Estates or trusts that own cryptocurrency and digital assts may face issues when values drop substantially during the probate process. A lack of clear instructions may lead to forced liquidation at a low valuation point due to uncertainty by beneficiaries and asset managers.

Legal & Tax Implications

Estate & Capital Gains Tax Considerations – Cryptocurrency and digital assets are not treated the same as traditional currency by the IRS. Unlike traditional currency, cryptocurrency is considered property that is subject to estate and capital gains taxes. See the IRS web page on Digital Assets.

Compliance With Changing Laws – Tax authorities are increasing scrutiny on crypto holdings. Trustees and personal representatives (executors) will need to account for reporting requirements and address liquidation and transfer issues.

Real-Life Example: The IRS has emphasized the need for taxpayers to report all digital asset transactions. Failure to do so can result in penalties and back taxes, reducing the estate's value. See ​IRS web page on reporting crypto.

Appointing a “Digital” Executor

Why a Digital Executor Matters – A trustee or executor without direct knowledge and experience with cryptocurrency or digital assets may lack ability to handle digital assets properly. Clients might consider appointing a trustee or executor with blockchain and crypto expertise specifically for the purpose of handling digital asset management during incapacity or after death.

Legal Authority & Documentation – Wills and trusts should explicitly authorize access to digital asset. There are many different crypto platforms with different sets of rules. Beneficiaries and advisors may need explicit authority and legal documentation before gaining access.​

Conclusion: Many have already confronted the challenge of accessing or managing the digital assets of a deceased loved one, and many more will face similar issues as more people make digital assets part of their portfolios. Consider creating an estate plan to specifically address how your beneficiaries should deal with  your digital assets after death.

By:        Thomas P. O’Neill, Esq., LLM

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