Planning for Loved Ones: Cryptocurrency Investments and Estate Planning

planning for a family

Executive Summary

“If you fail to plan, you are planning for failure” is a popular quote attributed to Benjamin Franklin. While this early American leader certainly had no idea about blockchain and digital assets, his words still ring true when planning to pass on your legacy to your heirs.

While few of us want to think about the inevitable passing from this world, it’s necessary if we want our heirs to benefit from our investments. That means making plans for the eventual transfer of our digital assets. Many details need to be considered, and in this piece on cryptocurrencies and estate planning, we give you all you need to know to begin making the necessary plans.

Putting Crypto Into Your Will

Estate planning ensures that those closest to us receive our wealth and assets after we’ve gone. The best time to do it is now, while you’re alive.

If you own cryptocurrency investments, you need to designate these assets the same as any other part of your estate. However, it’s a journey filled with unique challenges: navigating private key storage; understanding tax implications; getting your loved ones access after you go.

However, with clear instructions in wills and trusts, a knowledgeable fiduciary, secure storage for access information, and careful consideration of tax impacts, your digital assets can be just as planned and protected as traditional assets.

Be sure your crypto investments are included in your will, just like other assets (stocks, bonds, commodities, real estate, etc). Having a clear, legally binding will can be the difference between an easy transition and an incredibly stressful experience for your loved ones.

Unfortunately, many of us don’t think about our estate until something potentially devastating occurs:

Just as with physical assets (think houses, cars, and savings accounts), you need to specify what happens to your cryptocurrency when you're no longer here. Because crypto assets are decentralized and anonymous, they present unique challenges:

  1. Private key security and access: Cryptocurrencies are stored in digital wallets and accessed using private keys. If the owner passes away without sharing these keys, the assets may be as good as gone.
  2. Tax implications: Like any other asset, crypto adds financial obligations to those who inherit it. If a loved one doesn’t know how much that crypto is worth when they get it, they could end up with a bigger tax bill than expected when they sell it.
  3. Beneficiary identification: With traditional assets like a house or a bank account, there's usually a clear paper trail and legal framework to determine the rightful heirs. However, cryptocurrencies operate differently. If the cryptocurrency owner passes away without providing clear beneficiary information, it could be difficult for the rightful beneficiaries to claim the asset.

boquet of flowers

Here are some best practices for dealing with these issues, starting with your private keys.

Passing On Your Wallet Keys

To ensure your crypto investments are seamlessly transferred to your heirs, your first consideration should be secure access to your digital wallets. This means securing and passing on your public and private keys (and cold wallets, if you have them).

Your wallet’s public and private keys serve as essential components to the transfer of your digital assets to your beneficiaries:

  • Public key: Think of your public key as your email address. It's a string of letters and numbers that you share with others so they can send you cryptocurrency, much like you would share your email address for people to send you emails. On the blockchain, your cryptocurrency is associated with this public key.
  • Private key: Your private key is like your email password.  Only with this private key can you access and send the cryptocurrency associated with your public key. If someone else gets your private key, they can take all your cryptocurrency, meaning you (or your heirs) lose access to your assets. Because of this, it’s critical that you keep your private key private.

However, storing your private keys is only part of the process. Creating a secure authentication and key storage process is vital for protecting and backing up these keys. In many cases, wallets offer a recovery system, like a seed phrase (a list of random words), which you can use to regain access to your wallet if the keys are lost or forgotten. Like the private key, this seed phrase should also be securely stored.

happy family

You’ll want backups of your public keys, private keys, and seed phrases across multiple storage media. This can include physical copies stored in a safety deposit box or your own private safe, or digital copies stored on flash drives. Critically, all those copies of your keys must be kept secure, so that hackers don’t drain your wallet before it gets to your beneficiaries.

Other Barriers to Beneficiary Access to Cryptocurrency

Here are some of the significant technical and legal barriers that may make accessing cryptocurrency assets challenging for your loved ones:

  • Fiduciary limitations: People often appoint a fiduciary (a person you trust to manage your assets) to manage their assets after they pass away. But fiduciaries are generally bound by duties that require them to keep assets safe and manage them wisely. Many fiduciaries may need to be equipped or willing to handle the complex security requirements of storing and transferring cryptocurrencies.
  • State laws: While most states follow the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), the specific laws can vary. The RUFADAA essentially says that a fiduciary can handle your digital assets after you pass, but only if you have given explicit consent in a legal document. Without this, a court order is required, which can be a time-consuming and stressful process during mourning.
  • Terms of Service Agreements (TOSAs): When you create an account with a cryptocurrency service provider, you agree to a set of rules called Terms of Service Agreement (TOSA). These rules often include clauses about what happens when an account holder dies. Some TOSAs restrict access to the account, causing difficulties for those left behind who want to access the deceased's cryptocurrency.
  • Tax considerations: As mentioned, cryptocurrency, like any property, can have tax implications. Its value can change rapidly, which may complicate tax calculations. For example, if the value of the cryptocurrency skyrockets after the original owner's death, the heirs could face a large tax bill when they eventually sell it, which could take them by surprise.

Practical Tips for Cryptocurrency Estate Planning

Creating a robust estate plan that incorporates your cryptocurrency investments is possible with the right approach. This will save your loved ones unnecessary stress and complications after you're gone. So, let's look at some practical tips for cryptocurrency estate planning:

  1. Include cryptocurrency details in legal documents: Explicitly mention your cryptocurrency holdings in your will or trust. This includes clear instructions on accessing the digital wallets and knowledge about handling these assets (see below).
  2. Identify a knowledgeable fiduciary: When managing digital assets, appointing a fiduciary with a good understanding of cryptocurrencies is crucial. This way, you can ensure that your digital assets are in safe hands and will be managed effectively even after you’re gone. Here’s a simple way to locate a fiduciary, not just for your cryptocurrency, but for all your assets.
  3. Provide clear, secure instructions for wallet access: Consider not including your private keys directly in your will or trust documents for security reasons. Instead, provide clear instructions on how to access them.

For example, you might securely store your private keys or recovery phrases in a physical safety deposit box and include instructions for locating the box. Alternatively, you could use a multisig wallet (a type of digital wallet that requires multiple keys to authorize a transaction) and, in your will, explain the location or the identity of all parties holding the keys to this wallet.

  1. Consider the tax implications: Encourage your heirs to consult a tax professional before selling any inherited cryptocurrency. With their help, your heirs can minimize taxes and avoid unnecessary conflicts with tax authorities.
  2. Consider utilizing exchange ownership transfer procedures: Some established cryptocurrency exchanges, like Coinbase, have protocols to facilitate the transfer of ownership upon the account holder's death. While this can simplify the process, you must make all the necessary preparations in advance. Familiarize yourself with these procedures and ensure you've completed any required paperwork or documentation.

Investor Takeaway

The key takeaway is that proactive planning can make a difference. And the best time to do that planning is now.

By leaving clear instructions, choosing a knowledgeable fiduciary, ensuring secure and accessible storage of access information, and considering the tax implications, you can effectively integrate cryptocurrency into your estate plan. This preserves the value of your digital assets and spares your loved ones from unnecessary complications.


So plan wisely and seek advice when needed. And be sure to subscribe to the Bitcoin Market Journal newsletter for more insights on growing your investing wealth!

If you could only pick one crypto investment...

Sign up below to get access to our Blockchain Believers portfolio, with our top-rated crypto pick.

Comments are closed.