Cryptocurrency has become a mainstream investment class. Not just tech enthusiasts, but everyday investors and families increasingly look to Bitcoin, Ethereum and other digital assets to diversify their wealth. Cryptocurrency estate planning is a must for holders of digital assets. Unlike traditional assets—such as real estate, bank accounts, or securities—cryptocurrency presents unique challenges when it comes to estate planning. Because it exists in a decentralized, encrypted system without a central authority, planning for its transfer at death requires special care.
For estate planning clients, failing to properly document cryptocurrency holdings can mean that valuable assets are lost forever. For attorneys, understanding how cryptocurrency fits within wills, trusts, and probate is critical to helping clients protect and pass on this form of wealth.
As with all content on this website, this article is educational in nature, and is not to be relied upon as legal advice.
What Makes Cryptocurrency Different?
At its core, cryptocurrency is a digital asset secured by cryptography and recorded on a blockchain. Possession of the private key (a string of alphanumeric characters that grants access to the digital wallet) establishes ownership, not a paper certificate or an account statement.
Unlike other digital property, cryptocurrency is not linked to a central bank or financial institution. This means:
- No central authority can recover lost access. If the private key is lost, the cryptocurrency is effectively gone.
- Anonymity and privacy make it difficult for executors or heirs to identify the existence of assets without disclosure by the owner.
- Volatility and complexity add urgency to securing a clear plan for management and transfer.
These characteristics make advance planning essential.
Estate Administration Challenges with Cryptocurrency
1. Accessing the Assets
For a traditional bank account, an executor provides a death certificate and letters of office to gain access. For cryptocurrency, the executor must have the decedent’s private key or account login credentials. Without this information, the digital wallet is impenetrable.
Some exchanges, such as Coinbase, have procedures for granting heirs access to accounts after death, but this still requires court documents and proof of death. Importantly, if cryptocurrency is held in a personal wallet (not on an exchange), there is no intermediary—only the private key matters.
2. Valuation
Despite its name, the U.S. Internal Revenue Code treats cryptocurrency as property, not currency or cash. During the owner’s lifetime “spending” their cryptocurrency may trigger capital gains taxes, and at death, the gross value of the estate includes the fair market value of the cryptocurrency. Given the price volatility of Bitcoin and other coins, this can create both estate tax and reporting complications.
3. Probate Considerations
In Illinois, as elsewhere, cryptocurrency is part of the probate estate unless transferred outside probate. If the owner dies intestate and no one knows about the holdings, the asset may never be claimed. Conversely, including cryptocurrency in a trust or making lifetime transfers can provide more security and privacy.
Best Practices for Cryptocurrency Estate Planning
1. Maintain an Updated Inventory
You should keep a secure, up-to-date list of cryptocurrency holdings, wallets, and exchange accounts. This should include:
- The type of currency held (Bitcoin, Ethereum, etc.)
- Where it is stored (exchange account, hardware wallet, etc.)
- Instructions on how to access it (private keys, seed phrases, or login credentials).
This list should be updated regularly and stored in a safe but accessible place, such as with other estate planning documents, in a secure safe deposit box, or using encrypted password management software.
2. Provide Access Without Compromising Security
The challenge in cryptocurrency estate planning is to balance current security with future access. Options include:
- Sealed instructions stored with an attorney or fiduciary.
- A trusted digital executor named in the estate plan.
- Secure third-party services that allow transfer upon death.
3. Use a Revocable Trust
A revocable living trust can help avoid probate and provide continuous management of digital assets. Trustees should be specifically authorized to access digital accounts under the Illinois Fiduciary Access to Digital Assets Act (RUFADAA), which governs how fiduciaries can access online accounts and digital property.
4. Update Powers of Attorney
A durable power of attorney for property should grant the agent express authority to manage digital assets, including cryptocurrency. This ensures continuity if the owner becomes incapacitated.
5. Consider Tax and Record-keeping Issues
Owners and fiduciaries must maintain accurate records of cryptocurrency purchases and sales, as the IRS requires reporting of gains and losses. Planning ahead can reduce headaches for executors and beneficiaries.
Legal Landscape and Fiduciary Access
Illinois adopted RUFADAA in 2015. The law allows fiduciaries—executors, trustees, and agents under a power of attorney—to access digital assets if expressly authorized by the estate planning documents. Without such authorization, even a duly appointed executor may be unable to gain access.
This makes it critical to include clear digital asset provisions in wills, trusts, and powers of attorney. Simply leaving cryptocurrency to a beneficiary without providing the means of access is not enough.
Conclusion
Cryptocurrency estate planning presents both opportunities and risks. Properly planned, it can be passed on like any other asset. Poorly planned, it can vanish into the digital void.
For clients who hold cryptocurrency, estate planning must address three key elements:
- Documenting the existence and value of holdings.
- Ensuring fiduciaries have legal authority and practical means of access.
- Using trusts, powers of attorney, and secure instructions to safeguard assets while preserving security.
As cryptocurrency continues to grow in popularity, attorneys and their clients must be ready to integrate digital assets into comprehensive estate planning strategies.
Lost keys mean lost cryptocurrency. Make sure your digital assets are safe for the next generation. Schedule a consultation with Palley Law to discuss your estate plan.