Don’t let the Dogecoin memes fool you into thinking crypto is an internet joke: cryptocurrency has become a staple in financial markets, and it’s not going anywhere anytime soon.

Having cryptocurrency assets can lead to some interesting questions for investors:

• Can I buy a cup of coffee with my cryptocurrency yet, or is that still sci-fi?
• Is there a way to mine Bitcoin from my phone while binge-watching Netflix?
• Can I print my Bitcoin and keep it in my wallet like cash?
• Will Elon Musk’s tweets really make me rich overnight?

However, crypto asset holders should also ask themselves this question: What do these holdings mean for estate planning?

The nature of cryptocurrency may bring complexities into your planning processes that might not fit traditional procedures, which take into account more conventional asset classes. If your portfolio includes Bitcoin, Ethereum, Dogecoin, or Polkadot (or all of the above)—or you are contemplating making those investments—there are a few key points you should consider.

The relationship between crypto and estate planning is still developing

Technology often outpaces lawmaking, and the cryptocurrency rules used in estate planning are still in development. Cryptocurrency is a relatively new asset class, and it doesn’t always conform to the conventional categories we think of for estate planning, like real estate holdings, bank accounts, or the tangible valuables stored in your safe deposit box.

In fact, some elements of traditional estate planning can even be rendered obsolete when it comes to your crypto.

While you can easily list traditional assets in your will or trust, there are additional considerations to ensure your beneficiaries can access and transfer your digital assets. The exact guidelines are still evolving, but cryptocurrency is considered personal property under the law, making it subject to probate.

So, while it might seem tricky to navigate, it is essential to include it in your estate plan and stay informed by working with professionals who track and understand the latest developments in regulations in your jurisdiction. 

Make sure to include crypto in your will or trust

You want to ensure that your crypto is handed down to your beneficiaries after your passing and doesn’t sit untouched in a wallet. How do you avoid this scenario? You can start by updating your estate planning documents to include your entire portfolio of digital assets.

The documents you want to update or create include:

• Wills and trusts: A last will and testament and trust should explicitly mention your cryptocurrency holdings and provide details on how you would like them to be managed and distributed. Consider creating a separate digital asset trust, which can help streamline the process for your beneficiaries by providing all relevant information on your digital assets in a single document.
• Power of attorney: This would give you the option to appoint a trusted individual as your power of attorney for digital assets to ensure that your cryptocurrency holdings are managed to your specifications or wishes if you become incapacitated and unable to manage them yourself.
• Letters of instruction: While letters of instruction are not legally binding, they can provide your heirs with helpful guidance on accessing and managing your digital assets. Your letters can include instructions on locating private keys, accessing digital wallets, and navigating the security measures you put in place.

Name a digital executor or trustee

You have several options for passing along your cryptocurrency assets in a way that doesn’t cause headaches for your beneficiaries. For instance, naming your trust as the beneficiary of your crypto assets can help ensure they are passed on to the intended recipient without going through probate.

Another option is to appoint a digital executor or trustee to manage your digital assets, including cryptocurrency, after your passing. Their job is to ensure that your assets are accessible and distributed according to your wishes.

An estate planning attorney can help you determine the right trustee for your cryptocurrency assets. They’ll guide you through appointing a digital executor or trustee, ensuring you pick someone who understands the complexities of managing digital assets and can fulfill their responsibilities.

The attorney will also help you draft clear instructions for your trustee so there’s no confusion about how your cryptocurrency should be handled and passed on to your beneficiaries.

Consider how your cryptocurrency is stored

Managing cryptocurrency assets presents some unique challenges. Unlike traditional investments, which often involve physical documents or tangible items, cryptocurrencies are entirely digital and stored in wallets protected by private keys.

If you lose those keys, accessing your funds can be next to impossible.

Many people spread their cryptocurrency across different exchanges, wallets, and platforms. While this diversification (often) helps with security, it can also complicate things for your heirs when they need to access those assets.

But here’s the thing—too much security can backfire if your heirs can’t access your assets. To avoid this, here are a few simple steps you can take:

• Document private keys: Write down all your private keys and store them securely. Make sure your executor, trustee or attorney knows where to find them.
• Have a central place for information: Try to consolidate details about where your cryptocurrency is stored. This will make things a lot easier for your heirs.
• Look into custodian services: If juggling multiple wallets and keys sounds overwhelming, a custodian service specializing in cryptocurrency estate planning could be a great solution.
• Add clear instructions to your will: Work with your attorney to include clear, straightforward instructions in your will about how you want your cryptocurrency handled.

By taking these steps, you’ll protect your assets and make life much easier for your heirs when the time comes. It’s all about finding that sweet spot between security and accessibility.

Don’t forget about taxes

The IRS treats cryptocurrency as personal property, similar to artwork, and in the tax world, personal property is handled differently from other asset categories. Overlooking these distinctions can lead to higher taxes for your heirs, income or estate tax penalties, or a depreciation in market value—outcomes that likely don’t align with your intentions.

To prevent these issues, it’s important to maintain detailed records of all your cryptocurrency transactions, including the cost basis for each asset. Having this information organized simplifies tax reporting and helps your trustees and beneficiaries manage your estate more effectively.

An estate planning attorney can guide you through this process and ensure that your records are thorough and up to date.

For example, they can work with your tax or financial advisor to plan tax strategies for the step-up in basis, which typically adjusts to the fair market value at the time of your death. This adjustment can significantly reduce the capital gains tax your heirs may owe if they sell the assets later, preserving more of your legacy.

Consult a Texas estate planning attorney

Cryptocurrency represents a new frontier in investing. If you have added crypto to your asset portfolio or plan to do so, you need to work with your estate planning attorney to consider your digital assets in your estate planning.

With the right approach, you can ensure that your crypto assets are preserved, accessible, and passed on to your loved ones according to your wishes.

The asset protection attorneys at The Law Offices of Shann M. Chaudhry, ESQ., are here to help you safeguard and preserve the legacy you’ve worked hard to build so you can plan to pass on all your assets to your heirs, including your crypto. Contact us to explore your options and schedule a consultation to ensure your digital assets are well-protected now and in the future.