A shocking 14-17% of Americans are unknowingly leaving their digital assets unclaimed, according to recent surveys. With the rapid rise of cryptocurrency adoption, this issue is only going to grow more prominent.
Many crypto investors make the mistake of overlooking their digital assets when planning their estates. They either fail to include crypto in their wills or neglect to inform their heirs about accessing these holdings.
"Leaving behind traditional assets is straightforward, but with the increasing popularity of crypto, a significant portion of inherited wealth is at risk of being forfeited," warns Azriel Baer, a partner at Farrell Fritz.
One potential solution is crypto ETFs, which provide investors with exposure to the crypto market without direct ownership. These ETFs, like the iShares Bitcoin Trust and Fidelity Ethereum Fund ETF, are gaining traction and can help mitigate the risk of losing actual crypto assets.
However, estate planning mistakes among crypto owners are prevalent. Here are some critical issues that cryptocurrency owners should address:
Wills and Digital Assets:
Only a quarter of Americans have a will that outlines their estate management wishes post-mortem. Even those with wills may not have updated them in years, which can be problematic. An outdated will may not reflect an individual's current intentions, especially regarding crypto assets.
Court Battles Over Crypto:
A standard will is suitable for many, but a revocable living trust is often recommended. While drafting a will is less expensive, a revocable trust offers more privacy and can expedite the probate process. Baer advises transferring crypto to a revocable trust, ensuring the trustee has immediate access upon the owner's death. This can prevent heirs from being locked out of assets during probate, especially during periods of rapid price decline.
The Cost of Secrecy:
You don't need to reveal your crypto wealth to heirs, but ensuring they know how to access your digital assets is crucial. Baer highlights a case where tens of millions in crypto were lost because heirs didn't know the private keys, which function as digital passwords to access and prove ownership of blockchain assets. Instructions should be kept securely, whether in a safe box, a home safe, or with a lawyer or crypto inheritance service.
Choosing the Right Fiduciary:
The person you trust to handle your traditional assets may not be equipped to manage your crypto holdings. Not everyone understands crypto, its volatility, or how to transact with digital currency. The recent volatility in bitcoin's price underscores the importance of choosing someone who can quickly navigate these assets. "Uncle Bob may be trustworthy, but he might struggle with an asset class he's unfamiliar with," Baer cautions.
Institutional Trustees and Crypto:
Even institutional trustees may not be able to handle crypto responsibilities. Owens recounts a client with half a million dollars in bitcoin and ether, whose institutional trustee refused the crypto responsibility. A special trustee was named, but finding a suitable replacement can be costly and time-consuming.
Estate Taxes and Crypto:
With the exponential growth of cryptocurrency values, many people have substantial crypto holdings that could be subject to significant taxes. Jonathan Forster, a shareholder at Weinstock Manion, emphasizes the importance of planning for these taxes to protect one's family. The federal estate tax exemption for 2025 is $13.99 million per individual, and some states have their own estate taxes.
Forster highlights a client with over $50 million in crypto holdings who wanted to gift money to their children efficiently. They created a limited liability corporation, transferred the crypto into it, and then gifted an interest in the LLC to an irrevocable trust for the children's benefit, with an independent trustee.
Tracking Cost Basis:
Many crypto investors fail to keep track of their cost basis, which can be problematic for various reasons, including when considering gifting digital assets. Baer emphasizes the importance of having the cost basis if you want to gift assets during your lifetime, as it ensures the recipient can properly account for the crypto if sold.
So, what's your take on these estate planning issues? Do you think crypto investors are doing enough to protect their digital assets? Feel free to share your thoughts and experiences in the comments below!
