Planning for Your Digital Assets

As cryptocurrencies, stablecoins and non-fungible tokens (collectively, “digital assets”) have become increasingly popular investment vehicles, it has become clear that, absent thoughtful planning, these digital assets can be among the most difficult assets for your family to find, access and transfer in the event of your incapacity or after your death.

If you own any digital assets, your estate plan should not only address who inherits them, but it should also ensure that your successor fiduciaries know how and have the authority to (i) find them, (ii) access them and (iii) transfer them without compromising their security or unnecessary tax or legal complications.

Ownership of Digital Assets

The IRS classifies digital assets as property for tax purposes, not cash. This means the same baseline rules apply as with any other asset: digital assets should be owned by your trust where possible, payable to the trust at death when it is not and structured so the trustee has both clear legal authority and practical access when the time comes. If the value is large enough, digital assets held in your individual name at your death may necessitate probate proceedings, which are time-consuming, expensive and unnecessarily public.

If your digital asset is cryptocurrency held on an exchange or custodial platform, check first whether that exchange/platform allows for trust ownership; major exchanges/platforms such as Coinbase allow for accounts to be opened in/converted to the name of a revocable trust. This is the simplest option available as the exchange/platform continues to handle custody of the cryptocurrency, the trust becomes the legal owner and the successor trustee can step in with clear authority upon death or incapacity.

Some digital assets, however, are held in what are known as self-custodied wallets. Ownership of these wallets is defined by control of a set of private keys rather than formal title. Other wallets and platforms simply do not allow for ownership changes or beneficiary designations. In these circumstances, an estate plan should address both the legal authority of your successor trustee and the practical ability of the trustee to access the assets. For example, your trust should document the existence of the wallet in its asset schedule and include provisions that authorize your trustee to possess the wallet or keys. However, if the only way to access a digital asset is a private key, seed phrase, or passcode, that access must be available to the trustee at the right moment; if your trustee cannot access it, your beneficiaries cannot inherit it.

The Digital Asset Inventory

Your successor trustee may know that you owned “some Bitcoin” but have no idea:

Whether you have multiple wallets or accounts;
What assets are held in each wallet;
Which exchange or wallet holds it;
Whether you have a hardware wallet;
Where your seed phrase or private keys are stored;
What passwords or authentication methods are required; or
Whether two-factor authentication is required and how it can be completed

Unlike a lost bank account, a lost private key may mean that the asset is effectively inaccessible forever. Your estate plan should therefore include a digital-asset inventory and access plan. The inventory does not necessarily need to contain the actual private keys, seed phrases, or passwords. In fact, for security reasons, it generally should not. Instead, it should tell your successor trustee what digital assets exist and where the information needed to access them can be found.

For example, an inventory might identify:

Bitcoin: Hardware wallet located in [secure location]. Instructions for accessing the wallet are maintained separately in [secure location/password manager].

Coinbase Cryptocurrency Account: Held in the name of the [Name of your trust]. Access information and two-factor authentication instructions maintained separately in [secure location/password manager].

Ethereum Coins: Contained in self-custodied wallet. Hardware device located in [location, e.g., safe]. Seed phrase secured separately in [secure location/password manager].

Keep the Keys Secure—But Make Them Accessible When Needed

One of the most important challenges in digital asset planning is balancing security during your lifetime with access after incapacity or death. Simply giving your successor trustee your seed phrase or private keys may solve the access problem, but create a serious security problem; anyone who obtains a private key or seed phrase may be able to transfer the digital assets without your knowledge or authorization.

Instead, consider maintaining a two-part access plan:

An inventory and roadmap. Your successor trustee should have access to a document or other secure record identifying your digital assets, the relevant exchanges and wallets, the location of hardware devices and where the credentials and instructions are stored.

Secure credential storage. The actual passwords, seed phrases, private keys, recovery codes and similar sensitive information should be maintained separately in a secure location.

Depending on the nature and value of the assets, possible approaches include:

Using a reputable password manager with an appropriate emergency-access or legacy-access feature;
Storing a hardware wallet in a secure location and separately securing the seed phrase in a separate location;
Maintaining written recovery information in a secure physical location, such as a personal safe or other protected storage;

The Bottom Line

If you own digital assets such as cryptocurrency, stablecoins and non-fungible tokens, you should ensure that your trust is identified as the owner of the digital asset to the greatest formality possible, changing legal title when possible and at the minimum identifying them on the trust’s asset schedule.

Additionally, it is imperative that your successor trustee and other fiduciaries know how to locate your digital assets and gain access to your digital assets when you are incapacitated or after your death in order to reduce the risk that cryptocurrency will be lost forever.

Your trust should provide the trustee with the necessary legal authority to deal with your digital assets, but your trust generally should not become a repository for private keys, seed phrases, passwords, or other credentials; those should be maintained in your digital asset inventory. Instead, think of your trust as providing the necessary legal authority, while your digital-asset inventory and secure access system provide the practical roadmap for your successor trustee.

Your digital assets may exist entirely online, but your family’s ability to inherit it depends on the very real-world legal and practical planning you do today.

Author: Lars Kindem