Crypto Estate Planning and Trusts: A Comprehensive Guide

This comprehensive guide covers everything you need to know about including cryptocurrency in estate planning and setting up digital asset trusts, from wallet access to tax implications.

Including cryptocurrency in estate planning is essential to securely transfer wealth to heirs and beneficiaries. This in-depth guide covers everything you need to know, from wallet access to tax implications.

1. Introduction

Cryptocurrency represents a new asset class that has seen tremendous growth over the past decade. As the popularity of digital currencies like Bitcoin and Ethereum rises, an increasing number of investors now hold crypto assets. This introduces complexities when it comes to estate planning.

Unlike traditional investments, cryptocurrencies have unique attributes that require special consideration:

• Extreme Volatility – The value of crypto can fluctuate wildly day-to-day, making it difficult to appraise for probate or establish a cost basis.
• Permanent Loss of Assets – If private keys are lost or forgotten, crypto may be lost forever with no method of recovery.
• Unclear Regulations – Estate planning laws often fail to cover cryptocurrency specifically, creating compliance issues.

Proper planning is crucial for ensuring seamless, secure transfer of crypto wealth to future generations.

2. Passing Crypto to Heirs

Several options exist for passing on cryptocurrency assets through estate planning:

• Gifts While Alive – Directly transferring crypto to intended recipients avoids probate and establishes a recipient’s cost basis at time of gift. Annual gift exemptions apply.
• Payable on Death Tools – Some exchanges offer Payable on Death (POD) account options to automatically transfer crypto to a named beneficiary upon the account holder’s death.
• Wills – Details like wallet addresses and private keys can be enumerated in a will. However, crypto then becomes part of probate proceedings.
• Trusts – Placing digital assets into properly structured trusts ensures control passes to a designated trustee for the benefit of trust beneficiaries.

For larger, more complex estates, trusts often emerge as the best approach.

Case Study: Crypto Asset Trust

John Watkins has a sizable crypto portfolio of $2.5 million spread across various tokens. He wants to make sure this wealth passes securely to his wife and children when he passes away.

By placing his cryptocurrency into an irrevocable living trust, John can name a professional trustee to manage the assets for his family’s benefit. The assets held in trust avoid probate court entirely.

The trust also has provisions in place in case private keys are misplaced. Multi-signature access requiring approval from John’s wife or two eldest children prevents any unilateral decisions or theft.

3. How Crypto Trusts Work

There are several types of trusts that can hold digital assets, each with their own pros, cons, and fiduciary roles:

In any trust arrangement, three key roles dictate management and distribution of assets:

• Settlor – The individual funding the trust
• Trustee – Manages assets on behalf of beneficiaries
• Beneficiaries – Individuals receiving benefit of trust assets

Other common positions like trust protectors add oversight and accountability. Terms of the trust dictate exactly how and when beneficiaries receive distributions.

Crafting specialized trusts for cryptocurrency includes additional considerations like multi-signature protocols, smart contracts, and other technical integrations for managing digital assets. Retaining legal counsel well-versed in this emerging area is crucial.

4. Appointing Trustees and Beneficiaries

The ideal trustee for overseeing crypto assets exhibits technical competence in blockchain management as well as financial proficiency with investments and tax compliance:

Desired Trustee Traits

• Familiarity with cryptocurrency markets
• Understanding of wallet security protocols
• Ability to clearly communicate with beneficiaries
• Alignment with intended investment mandate
• Knowledge of tax reporting requirements

Ideally at least one or more backup or successor trustees should be named in case the primary trustee resigns or passes away. Contingency protocols should establish procedures if private keys are compromised or lost.

Carefully designated beneficiaries should have the temperament and knowledge to steward cryptocurrency assets responsibly after inheritance. Gradual distribution schedules can prevent reckless liquidation or spending.

Custodial Trustees

For large or complex crypto estates, naming custodial services as trustee may provide seasoned technical and security expertise. South Dakota Trust Company LLC and Anchorage Digital are examples of platforms providing custodial trust services tailored specifically for digital assets.

5. Tax Treatment of Crypto Trusts

While trusts allow centralized management of cryptocurrency assets, they do not eliminate tax obligations:

• As property according to IRS rules, cryptocurrency held in trust or inherited from an estate receives a step-up in cost basis to market value at time of trust funding or date of death.
• Trusts themselves are their own tax entity, subject to compressed trust income tax brackets. Cryptocurrency sales may trigger capital gains inside the trust.
• Distributions made to beneficiaries are typically not taxable events unless gains are realized when assets are liquidated or disbursed out of the trust.

Meticulous recordkeeping and compliance best practices are imperative, often necessitating professional tax expertise.

6. Estate Planning Specifics for Cryptocurrency Wallets

Because cryptocurrency estate planning hinges so critically on securing wallet access, establishing prudent security protocols is paramount:

Hot Wallets

• More vulnerable to attacks and unauthorized access
• Well suited for smaller amounts of crypto assets
• Consider multi-signature protocols and backup key holders

Cold Storage

• Kept offline in “cold” hardware wallets for better protection
• Manual authorizations needed for asset transfers
• Detailed procedures required for recovery seed phrases

No matter the wallet type selected, contingency provisions must address scenarios like lost or inaccessible private keys. Multisignature arrangements should be configured to restrict unilateral withdrawals or lockouts by a single trustee or heir.

7. Start Securing Crypto Assets

This quick checklist summarizes key steps to begin safeguarding your cryptocurrency for estate transfers:

✔️ Catalog wallet addresses, private keys, and recovery seeds

✔️ Consult estate planning and crypto tax professionals

✔️ Establish irrevocable living trust and name tech-savvy trustee

✔️ Authorize multisignature protocols for wallets

✔️ Draft instructions for fiduciaries to access and manage assets

✔️ Update estate plan annually and after major crypto purchases

By tackling cryptocurrency estate planning early on, digital currency investors secure control over their legacy and protect against complications like lost keys, punitive taxes, and intrafamily conflicts over assets. An ounce of prevention is truly worth a pound of cure when it comes to safeguarding crypto wealth for future generations.

Next Step: Schedule a Consultation

Our team of estate planning attorneys and financial advisors specializes in digital asset protection and fiduciary services. Book a consultation today to discuss tailored solutions for your crypto assets.