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Fitting cryptocurrency into your estate plan

Key takeaways

  • Laws around estate planning and cryptocurrency are in their infancy.
  • The type of crypto storage you select may affect how it's treated for estate planning purposes.
  • Your estate plan should communicate where your crypto is stored and a plan for how to access it.

When the CEO of a crypto company died suddenly at age 30 holding hundreds of millions of dollars in cryptocurrency that was inaccessible to anyone else, it sparked many questions about how this asset would be transferred at death. The unique scenario illustrates how important it is for owners of cryptocurrency to factor it into their estate plans and understand the considerations it brings, according to David Peterson, head of wealth planning at Fidelity. "Many holders of significant crypto wealth are relatively young and may not be thinking about the possibility that they could die suddenly," Peterson says. "But not having a plan to transfer your crypto assets at death can potentially make the consequences even more devastating for your loved ones."

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While the crypto market is still small compared to many traditional asset classes and has been volatile recently, many expect it to grow swiftly to become a meaningful asset class. "The laws are starting to adjust and catch up to these novel assets, but a lot of them haven't yet been tested in a court," explains Mike Christy, regional vice president of advanced planning at Fidelity. "In many ways cryptocurrencies remain challenging from a planning perspective."

Why storage type matters

To understand the complexities of incorporating your crypto holdings into your estate plan, it helps to review the conventions around estate planning and personal property. Instructions for passing tangible personal property—that is, physical items, which may be anything from antiques to jewelry or an art collection—are usually included in most estate planning documents. It's less common for individuals to address intangible personal property, which in addition to stocks and bonds might include accounts receivable, copyrights, or patents; individual wills may not mention intangible property at all.

Crypto, however, could be viewed as either intangible or tangible personal property, depending in part on how it's stored. Typically, crypto is held in one of 2 ways—in a "hot" wallet, which is stored online, or in a "cold" wallet, which stores the information offline and often resembles a small external hard drive (read more here about strategies to store crypto safely).

For example, suppose one executive's estate documents leave all her tangible personal property outright to her heirs, and her other assets in a trust. She has $10 million in cryptocurrency on a USB drive. Since the crypto is stored offline on a separate storage device, it would arguably be considered tangible personal property upon her passing, and not become part of the trust.

Crypto in a hot wallet, on the other hand, is more likely to be considered analogous to a typical investment account, especially if it's held at an exchange. Therefore, care should be taken in identifying how to classify crypto under your estate plan regardless how the decedent stored his or her cryptocurrency. An additional concern relating to crypto is around titling and the ability to transfer the asset like traditional portfolio assets. However, investment accounts are titled to an individual or jointly and can have beneficiary designations assigned to them, allowing a simple alternative to transferring the assets upon the death of the owner. Cryptocurrency may have none of these features and is considered more of a bearer instrument, meaning that the person who possesses physical ownership of the asset is assumed to be the owner. "For crypto assets held in a hot wallet, for example, possession of the encrypted password, or key, is essentially possession of the crypto assets. This can have significant estate planning consequences if someone other than an intended beneficiary or a fiduciary acting on their behalf gains access to the key," explains Christy.

Your estate plan—questions to consider

"Given that crypto is such a new and rapidly evolving asset class, it's essential to discuss your cryptocurrency holdings with your estate planning attorney and keep them up to date on any changes," says Peterson. The following 3 questions are a good way to begin the discussion.

How would your heirs or fiduciary access your crypto? Traditionally, a decedent's assets held by a third party (for example, cash in a bank account) can be accessed by either a joint account holder, a named beneficiary that provides the supporting documentation (identification, death certificate, etc.), or a fiduciary appointed by a probate court. If crypto assets are held in an online account, it seems possible a fiduciary could gain access to that account by obtaining (if necessary) a court order forcing the third-party custodian to provide access.

For cryptocurrency held by the owner (for example, in a cold wallet), a fiduciary may have immediate access—if they have the relating private key and access to the wallet. Without the private key, however, even a fiduciary with full legal authority could likely not access the crypto wallet. Therefore, "there should be a plan in place to get the necessary information in the hands of your fiduciary in a timely manner," says Peterson.

As cryptocurrency continues to integrate into our financial ecosystem, the manner in which it can be owned, custodied, and traded will likely evolve as well, with some companies already offering trading platforms to hold the asset. Investors in crypto should continue to monitor these developments because, eventually, crypto may be able to be held in accounts that offer different forms of titling, beneficiary designations and reporting capabilities. This evolution should make transferring cryptocurrencies easier for investors and the tax and legal advisors that they work with.

However, it's important to keep in mind that crypto is a highly volatile space and may be more susceptible to market manipulation than securities. Crypto is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation, and investors in crypto do not benefit from the same regulatory protections applicable to registered securities. Crypto is for people with a high tolerance for risk and who understand they can lose the entire value of their investment.

What information should go in your estate planning documents? Though it's imperative to get the storage information and private key into the hands of the fiduciary or heirs, "including the location and private key in your estate plan may not be the wisest idea," notes Christy. After all, the whole point of a private key is that it remains private. And once someone has the private key there is no mechanism to verify if a person attempting to withdraw or liquidate the cryptocurrency is the actual owner through ID or signature verification.

Instead, Christy suggests, consider a letter of instruction informing the fiduciary or heirs how they can access the cryptocurrency. The letter should state a general inventory and if the cryptocurrency is held on an exchange, hot, or cold wallets. If the crypto is held by the owner, that person could clone their wallet and provide it to the fiduciary or heirs and give the private key to another person. There are also services that assist in requiring the cooperation of multiple parties to access a self-custodied wallet. Alternatively, they could consider using a "deadman" switch that sends out the private key to an individual at some point in the future if the owner fails to check in.

Should your cryptocurrency be held in a trust? It is possible to hold crypto in a trust, but there are considerations. A corporate trustee, for example, may have restrictions or policies that relate to cryptocurrency. While details about accessing your crypto probably should not be expressly stated in the trust agreement, you'll likely want to give that information to the trustee shortly after creating the trust.

In addition, keep in mind that, unless expressly excused by the terms of the trust, trustees have a duty to comply with the prudent investor rule which generally does not allow speculative investments. "The trustee has a duty to manage and protect trust assets," explains Peterson. Faced with the perplexing custody problems in the current crypto environment, many institutional fiduciaries may refrain from accepting trusts with crypto holdings and may not manage crypto assets either. You may want to consider disclosing your cryptocurrency investments to the drafting attorney, suggests Peterson, and ask them to include an exception to the prudent investor rule allowing the trustee to invest in cryptocurrency. 

And don't forget about taxes. Transactions in, and distributions of, cryptocurrency must be reported on the trust's income tax return. It's important that the trustee has information relating to the cryptocurrency's cost basis and date of transfer to the trust. Additionally, the transfer of crypto assets to a trust should be properly documented, including a trustee's formal acceptance of the assets.

Finally, always be sure to update your attorney on any changes to your crypto accounts. "As the crypto landscape evolves, financial professionals are working to stay on top of developments," says Peterson. "Our goal is for your assets to be distributed the way you want them to be."

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