Cryptocurrency in Estate Planning: 2025 Update

Transcript

Hi, I’m Karin Prangley. I’m an ACTEC Fellow from Chicago and I’m here with Jim Cundiff, also another ACTEC Fellow from Chicago.

Introduction: Cryptocurrency and Estate Planning 2025 Update

In 2022, ACTEC Fellow Suzy Walsh and I shared a video, Understanding Cryptocurrency and Estate Planning. And in the crypto world, three years is like 300 years. So much has happened and Jim and I would like to update you on these developments. Welcome, Jim.

Jim Cundiff: Thank you, Karin. I’m a big proponent of the crypto community, so I love our presentation for today.

The Rise of Cryptocurrency Ownership in the U.S.

I’ve read, according to a Harris poll, that 21% of adults now own cryptocurrency in the U.S.; that’s 55 million people. So, do investors in the crypto markets need to do something special in their estate planning documents?

Karin Prangley: Yes, just like we emphasized in 2022, you have to have a great succession plan for your cryptocurrency. Remember, “not my keys, not my coin.”

Why Succession Planning for Crypto Matters

If you don’t have a way for your beneficiaries and fiduciaries to get access to your private keys or your crypto accounts, if you choose online custody, there is no troubleshooting. There is no help desk call. If you do not have a plan for succession of those assets, it’s likely they will be unrecoverable and of no value, unfortunately, to your beneficiaries.

As far as updates since 2022, I would say– Jim, as I know you’re going to discuss a little more later– the custody of cryptocurrency is getting better and better. And we have so many more options than we used to. Succession maybe is more well-developed, but still it is not automatic like it might be for a traditional bank account.

New Developments: Custody Options and Cybersecurity

The other development is cybercrime has been on the rise for a very long time, certainly since 2022, and people are having more security and encryption surrounding their cryptocurrency and other tokens. We have new things like multi-sig, where you need a series of sub-passwords to get at the private keys, in some ways that makes succession without a plan even more difficult. Of course, it’s difficult to break very strong encryption.

The Importance of a Digital Succession Plan

So, again, more important than ever to have a succession plan. And the world is becoming more and more digital and there is even less of a paper trail than there used to be so it belies the need for your fiduciaries and your beneficiaries to really know that you have crypto and how they can access it because they won’t encounter it in your desk drawer. They’re not going to know you have it. And, again, if they don’t know your fiduciaries and those that take care of your estate and your property, if something happens to you, if they don’t know you have crypto, they’re really unlikely to find it in this day and age if they can’t get into your computer; which again, with secure encryption, they probably can’t.

All this doom and gloom, Jim, tell us how we can solve some of these access issues. Tell us about some generally effective ways to make a succession plan. And tell us how valuable cryptocurrency can be preserved for the causes or people that you care about.

How to Create a Crypto Succession Plan

Jim Cundiff:  That’s great, Karin. To start off, I want to make sure we know what we’re talking about when we talk about the cryptocurrency. When we’re talking about crypto in these instances, we’re talking about direct blockchain holdings as opposed to a Coinbase account or an exchange account in which someone else holds the crypto and you have an interest or an account with that provider.

That’s not to say working with Coinbase or others is easy, but there is someone to call and there is a process to arrange for the transmission of the underlying asset. That would be a RUFADA asset, meaning Revised Uniform Fiduciary Access to Digital Assets – an asset that you can call someone and a fiduciary can take custody of that Coinbase account and arrange for its transmission. It’s not easy and planning for it is a good and important aspect, but it’s not a direct blockchain asset.

Understanding Blockchain Assets vs. Exchange Accounts

A direct blockchain asset really involves two items, a public key and a private key. These are not passwords for the faint of heart. We’re talking about 64 give or take characters, of each of those. It’s not something that you can easily remember or that you write down with great ease. These are very long security pass codes. If you lose the private key, you cannot arrange for the transmission of that, further transmission of that cryptocurrency and it’s lost forever. There’s no help desk. There’s no reset my password. It is just gone forever.

Security Risks and Cold Storage Solutions

With that, I’d like to pass along two comments on succession planning. The first one is these days, people are very worried about their security, both security of the individual during their lifetime, that’s maintaining those private and the private keys, as well as the security for the transmission of that asset in the future. Those are important components. Security during life, when you’re serving as the bank, it’s possible that someone will start cutting off your fingers until you reveal that private key and allow the transmission of the asset. And then transmission at your death; if you share the passcode or your private keys with the wrong person, the asset can be transferred in the dark of night without your knowing it and without your ability to retrieve the asset. Security throughout the system is a very delicate item.

We usually go through the pros and cons of this. It usually involves, in many cases, cold storage of those assets. These are written down, typed on a tin plate, stored on a ledger or other electronic format that’s not connected to the internet. That’s usually the basics for it. Some use multi-sig or other processes that are available. And we run through the pros and cons of these.

In many cases, people in this community are very concerned, don’t like having others hold their assets. Just like Karin said: not my key, not my coin. And we develop a solution consistent with their goals. I have clients that keep keys and safe deposit boxes in five places across the nation to ensure that a catastrophe in one bank does not remove access to their codes.

The other item I wanted to mention was estate planning documents. And that’s where you need to have special provisions in your estate plan to dispose of your crypto. And that’s because unlike other assets, crypto can bridge the gap between an intangible asset and a tangible asset. If you have the private key, you can arrange for the transmission of that asset.

Estate Planning Provisions for Cryptocurrency

If you leave all of your tangibles to your second spouse and in the back of your sock drawer, you have your tin plate with that passcode typed on it, your surviving spouse may take that as a disposition of the tangible assets to her and use those assets to provide for the further transmission and transfer of the cryptocurrency. And no one would be able to prevent it, stop it, or retrieve those assets. Or for that matter, even know where the crypto is gone.

Karin, tell me about some of the income tax rules that are now hitting or that are new to cryptocurrency.  

Cryptocurrency and Income Tax Updates

Karin Prangley: We’ve had a few really exciting updates since 2022. First, just repeating that the IRS told us long ago that cryptocurrency is property, not currency. So we’re dealing with capital gains taxes when we sell it.

Cryptocurrency and the Wash Sale Rule

And there continues to be, despite a few attempts by Congress to put in place a wash sale rule for cryptocurrency, we still don’t have one. Because the value of cryptocurrency is very volatile and it changes, you can take advantage of tax losses. You can sell your cryptocurrency and rebuy the next day to continue to hold your position and you can monetize that loss. I think that’s something pretty great that we still have in place.

There has also just been, since 2022, an increased trend of IRS reporting. The IRS has seen pretty alarming statistics that many cryptocurrency transactions are not reported for income tax purposes. And they’d really like this to change. And it’s difficult because everything is decentralized. And especially if we hold our cryptocurrency tokens in cold storage or their direct blockchain holdings, there’s no requirement to report. It’s all voluntary and the tracking is sometimes very difficult to do. So, it’s difficult for people to be compliant, but the IRS wants us to.

Increased IRS Reporting and Compliance Measures

We have a couple of new measures in place.

• We have some information that has to be disclosed on our personal income tax return, 1040s. We have to disclose if we have digital assets or digital asset transactions on our income tax returns.
• And financial institutions that have custody and deal with digital assets now have to report through a 1099-DA. So, there is some institutional reporting being put in place.

As far as Transfer Tax, the Estate and Gift Tax, cryptocurrency is still creating a tremendous amount of wealth for individuals and families. We should be thinking about putting cryptocurrency assets in trust while the value is low, so that when the value is high and it succeeds to our children or other beneficiaries, the 40% gift and estate tax doesn’t apply. Still a worthwhile endeavor.

Using Trusts and LLCs for Crypto Estate Planning

And I would say a trend in the gifting world is that because we have some more sophisticated custody options, you can use best practices in sophisticated gifting like LLCs with cryptocurrency. That’s something I’m more comfortable with today than 2022.

For those with significant holdings that are trying to reduce the 40% Gift and Estate Tax, ask your planner about using an LLC to simplify things. If that is even possible but simplify them a little more.

Charitable Giving with Cryptocurrency

Also, I’ve also seen developments in charitable giving with cryptocurrency. Several years ago it used to be that most charities and donor advice funds took only Bitcoin or Bitcoin, Ethereum and Litecoin. Now there are plenty of organizations that can help get your cryptocurrency tokens– whatever they are, whatever your digital assets are– to your favorite charities, if that’s what you want to do. There are organizations that will process a donation. And when the donation is made, they’ll be ready to give cash if needed.

Last question, what considerations are there for serving as a trustee or other fiduciary over a trust or a state or other entity that owns cryptocurrency? What advice would you give us if we’re serving as a fiduciary on cryptocurrency assets?

Fiduciary Responsibilities for Crypto Assets

Jim Cundiff:  Thanks, Karin, that’s great. Just to hit a few items in this area.

First of all, your estate planning documents will have many specialized provisions for crypto from the selection of the fiduciary to hold it, making sure that they have the expertise required to custody, transmit, and secure those assets to special provisions permitting concentrated positions in assets, even investments in an asset class often not thought of as a traditional asset class. So, many provisions in your estate plan will go into that.

From the succession perspective, we like using third party custodians as estate planners that provides for an ease and a smoothness to the transition. But it doesn’t come without a cost. And many people in this community are not big proponents of turning their crypto over to third party custodians.

Selecting Trustees and Custodians for Crypto Holdings

With that, though, I have to say that the U.S. is quickly adopting the crypto revolution and our money system is working towards a change, a long-needed change. And we’re building out the infrastructure to permit that—we’ve seen changes from the top down. The UCC that regulates banks is now permitting banks– UCC regulated banks– to hold and custody crypto. One of the largest holders of crypto is Anchorage Bank, which is a native currency only custodian.

Building Crypto Infrastructure and Custody Options

And then we’ve just recently seen a movement with state regulated trust companies being officially recognized as qualified custodians from the Securities Exchange Commission. So, the infrastructure is building out. There are custodians out there. The historical inability to locate qualified custodians is easing and the infrastructure is developing.

Closing Thoughts: Estate Planning in a Digital World

Karin Prangley:  I think in this regulatory environment and with the updates and custody, it’s time for people to get comfortable serving as trustees and other fiduciaries on cryptocurrency assets. I haven’t said that. I didn’t say that in 2022, but I think it’s the case today.

Thank you, Jim, for joining me today to discuss this evolving and exciting topic. For more information on other estate planning topics, please visit actec.org/estate-planning. Thank you very much.