Estate Planning With Cryptocurrency

July 10, 2022

One of the benefits of NFTs and popular cryptocurrencies such as Bitcoin, Ethereum, Solana, and Cardano is that you are able to own, possess, and transact these assets without needing custodial services from a financial institution. However, this inherent benefit can also be a risk in estate planning situations.

There are primarily three ways in which crypto assets are stored:

On a centralized exchange ( i.e. , Coinbase or Gemini)
In a digital “hot” wallet ( i.e. , Mycelium or Metamask)
On a cold storage device ( i.e. , Ledger or Trezor)

Each of these storage options have their own benefits and risks related to security, reliability, and accessibility.

For example, a centralized exchange will allow a Personal Representative (Executor), Trustee, or Power of Attorney to recover assets in much the same way that estates gain access to brokerage accounts: namely, by providing a death certificate, letters testamentary, or other documentation to the centralized exchange. This benefit, however, is offset by the risk that the centralized exchange will not exist at the time of your passing, that the exchange will lose your assets (crypto assets are not FDIC insured), or that they will freeze or seize your assets in accordance with some potential future regulation.

On the other hand, cold storage devices are only accessible to individuals possessing the wallet’s “seed phrase” or the login information for the device that stores the private keys. This form of ownership is akin to holding cash in your wallet and provides the owner with full autonomy over their crypto assets, however they are also the sole point of failure in maintaining access to those funds. Every owner of crypto assets should take precautions to make sure that their seed phrase and login information are both secure and retrievable, but, absent a comprehensive plan, if they misplace or forget that information, it will be impossible for their estate to gain access to their crypto assets.

In light of these risks, it is important to consider how your estate and heirs will access your crypto assets if you die or become incapacitated. Generally, a will alone will not suffice. While there is currently no perfect solution, the following steps and considerations will help ensure that your crypto assets pass to your desired heirs.

Step 1: Instruct

Provide explicit instructions in your estate planning documents, including access to the necessary seed phrases and passwords to allow for a Personal Representative, Trustee, or Power of Attorney to actually access and distribute your crypto assets to the desired beneficiaries.

It is also preferable that the individual you appoint as your Personal Representative, Trustee, or Power of Attorney has a familiarity with crypto assets and how they work. This will help reduce the risk of funds being sent to an incorrect address and being lost forever. Crypto assets require far more instruction and information to access than most traditional asset classes. Even if your crypto assets are not yet part of a formal estate planning strategy, detailed instructions are essential to making sure that your crypto assets are found by your desired beneficiaries and successfully held or transferred.

Step 2: Focus on the big picture

Consider crypto assets as part of any larger estate planning effort.

While it is possible that crypto assets would go unnoticed by any probate or trust administration process, it is best practice to account for any crypto assets in order to prevent infighting amongst heirs and to make sure that applicable tax laws are followed. It is likely that the IRS’s crypto asset tracking capabilities will increase exponentially over the next few years, and it would not be surprising if they are able to identify the identity of most wallets in existence in the not-so-distant future (learn more here and here ). As a result, including crypto assets as part of a trust or other estate planning strategy may help protect the assets from potential tax and creditor issues. In most instances, this larger estate planning effort would likely include a trust to keep the crypto assets out of probate courts.

Step 3: Secure

Devise a secure method of holding and transferring your crypto assets upon your death or incapacity.

If your crypto assets are stored in a cold or hot wallet, any owner wishing to transfer these assets to an heir will necessarily need to provide the Personal Representative or Executor of their estate with access to the wallet. What is the best way then to both keep your seed phrase/login information secure during your lifetime, but also easily accessible upon your death or incapacity?

One solution involves a safety deposit box, in which one would place their cold storage device or seed phrase, to allow a Personal Representative or Trustee to access upon their death. Another solution includes simply providing the key (potentially encrypted) in the trust documents held privately by the owner until their death. Both of these solutions, however, potentially compromise the crypto assets themselves by exposing the seed phrase to other parties and will require the Personal Representative or Trustee to have some familiarity with cryptocurrencies to successfully hold or transfer the assets. As of yet, there is no perfect solution to this trust/security dilemma.

Step 4: Stay up to date

Stay up to date on relevant legal and technological developments to ensure that the transfer of your crypto assets follows best practices.

As mentioned above, there is no perfect solution to the problem of storing your crypto assets during your lifetime and transferring them easily upon your death or incapacity. There are several projects in the work that attempt to solve for this problem, but none are yet reliable enough to trust for estate planning. These projects are based on smart contracts that will self-execute transfers of assets upon the occurrence of specific events, however, these types of products bring their own set of issues, including the oracle problem of determining how a smart contract ascertains that an outcome in the real world (i.e. death or incapacity) has actually occurred.

Conclusion

Crypto assets are increasingly representing a substantial portion of individual estates around the world. While one may believe that they can transfer these assets to heirs and beneficiaries without drawing the attention of the IRS or other agencies, they will likely end up leaving their heirs with back tax bills (for potential estate tax or capital gains tax liabilities) and inquiries from increasingly crypto knowledgeable government agencies. Once known, these assets may also become available to creditors of the estate or its heirs.
By integrating crypto assets into a comprehensive estate plan, efforts can be made to limit these risks and provide for a safe and orderly transfer. Clear and explicit transfer plans can be memorialized and assigned to a competent Personal Representative or Trustee, explicitly chosen to make sure that crypto assets do not slip through the cracks and are not lost due to an erroneous transfer to a bad wallet address.

What next?

If you think it might be time to think through your estate plan, you can:

Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
Learn more by reading our blog or watching our videos .

< Older Post Newer Post >

Differences Between a Trust and a Will in Colorado

April 14, 2025

Differences Between a Trust and a Will in Colorado

Who Can I Name as an Heir in Colorado?

March 13, 2025

Who Can I Name as an Heir in Colorado?

Consequences of Dying Without a Will in Colorado

February 12, 2025

Consequences of Dying Without a Will in Colorado

What Types of Assets Can Be Included in a Colorado Trust?

January 30, 2025

What Types of Assets Can Be Included in a Colorado Trust?

What is a Guardianship and When Do I Need One?

December 2, 2024

What is a Guardianship and When Do I Need One?

What Are the Required Documents to Create a Will in Colorado?

October 28, 2024

What Are the Required Documents to Create a Will in Colorado?

Probate in Colorado: A Guide for Families and Executors

October 1, 2024

Dealing with the death of a loved one is never easy, and navigating the legal process that follows can add stress during an already difficult time. In Colorado, probate is the legal process by which a deceased person’s estate is administered, their debts are paid, and their assets are distributed to beneficiaries. Whether you’re an executor, beneficiary, or family member, understanding how probate works in Colorado can help you anticipate the steps involved and your potential responsibilities. This blog post will provide an overview of the probate process in Colorado, outline when probate is necessary, and offer guidance on how to navigate the system effectively. What is Probate? Probate is the legal process that occurs after someone dies to ensure their assets are distributed according to their will or, if there is no will, according to state law. The probate process includes validating the will, inventorying the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. While probate is often associated with lengthy court proceedings, not all estates require formal probate. Colorado offers several options depending on the size and complexity of the estate, which can help simplify the process in many cases. When is Probate Necessary in Colorado? Probate is not always required in Colorado. Whether an estate must go through probate depends on the types and value of the deceased’s assets. Generally, probate is necessary if: The deceased owned real estate solely in their name. The deceased’s assets, such as bank accounts or investments, were not held in joint tenancy or designated to transfer on death. The deceased had personal property valued at over $74,000 (as of 2023). If an estate falls below this threshold and does not include real estate, the beneficiaries can often use a Small Estate Affidavit to claim the assets without going through probate. Types of Probate in Colorado Colorado has three main types of probate procedures: small estate procedures, informal probate, and formal probate. The type of probate required depends on the estate’s value and whether there are disputes among heirs or creditors. Small Estate Procedure (Collection by Affidavit) The small estate procedure can be used if the value of the deceased’s assets is less than $74,000 and does not include real estate. This process involves filling out a Small Estate Affidavit, which allows the heirs to collect and distribute the assets without opening a probate case in court. It is the simplest and fastest way to handle a small estate. Informal Probate Informal probate is used when there is a valid will and no disputes among heirs or creditors. The process is overseen by a court-appointed Personal Representative (executor), but there is minimal court supervision. Most of the process, such as distributing assets and paying debts, is handled by the Personal Representative, with only basic filings required with the court. Informal probate is less time-consuming and costly than formal probate. Formal Probate Formal probate is required when there are disputes regarding the will’s validity, disagreements among heirs, or if the estate is complex and needs court intervention. The process is supervised by the court, and all major decisions, such as approving the distribution of assets, must be approved by a judge. Formal probate can take much longer and involve more legal fees than informal probate. Steps in the Colorado Probate Process While the specific steps in probate can vary depending on the type of probate and the complexity of the estate, the general process in Colorado typically includes the following: Filing the Probate Petition The process begins with filing a Petition for Probate with the appropriate Colorado probate court. The petition is usually filed by the executor named in the will or an interested party if no will exists. Appointment of the Personal Representative The court will appoint a Personal Representative (executor) to manage the estate. If there is a valid will, the person named as executor is typically appointed. If no will exists, the court will appoint someone, usually a family member, to serve as the Personal Representative. Notice to Heirs and Creditors The Personal Representative must notify all potential heirs and creditors of the probate proceeding. This step is essential for providing an opportunity for interested parties to come forward and make claims against the estate. Inventory and Appraisal of Assets The Personal Representative must create an inventory of all the deceased’s assets and have them appraised if necessary. This inventory will include real estate, personal property, financial accounts, investments, and any other assets owned by the deceased. Paying Debts and Taxes Before distributing assets, the Personal Representative must pay off the deceased’s debts and any taxes owed. If the estate does not have enough assets to cover all debts, Colorado law dictates the order in which creditors are paid. Distribution of Assets Once all debts and taxes have been paid, the Personal Representative can distribute the remaining assets to the beneficiaries according to the will or, if no will exists, according to Colorado’s intestacy laws. Closing the Estate After all assets have been distributed and all required filings have been made with the court, the Personal Representative can file a Petition for Final Settlement to close the estate. Once approved, the Personal Representative’s responsibilities are complete. Challenges and Disputes in Colorado Probate Unfortunately, probate can sometimes become contentious, especially in cases involving high-value estates or when family members disagree on how assets should be distributed. Some common challenges in Colorado probate include: Will Contests Heirs or beneficiaries may challenge the validity of a will, claiming it was signed under duress, there was undue influence, or the deceased lacked the capacity to create the will. Will contests can significantly delay the probate process and require formal probate to resolve. Executor Misconduct If an executor is not fulfilling their duties or is mishandling estate assets, beneficiaries can file a complaint with the court and request the executor’s removal. Disputes Among Beneficiaries Disputes can arise over specific bequests, how assets are divided, or even the valuation of estate property. Mediation or formal court intervention may be necessary to resolve these disputes. How a Colorado Probate Attorney Can Help Navigating the probate process can be overwhelming, particularly when dealing with the emotional aftermath of losing a loved one. An experienced probate attorney can help in several ways: Guiding You Through the Process An attorney can explain the probate process, help you understand your rights and responsibilities, and ensure all legal requirements are met. Managing Court Filings and Deadlines Probate involves numerous legal documents and deadlines. An attorney can handle these tasks, ensuring that everything is filed correctly and on time. Resolving Disputes If disputes arise, an attorney can provide representation in negotiations, mediation, or court hearings to protect your interests and work toward a fair resolution. Minimizing Costs and Delays With the guidance of a skilled attorney, you can often minimize the time and expense associated with probate, helping ensure the process goes as smoothly as possible. How The McKenzie Law Firm, LLC Can Help At The McKenzie Law Firm, LLC, we understand the complexities of the probate process and are committed to helping families navigate it with compassion and expertise. Whether you’re an executor needing assistance with your duties or a family member looking to understand your rights, our experienced probate attorneys can provide the support you need. If you have questions about probate in Colorado or need legal assistance, contact us today to schedule a consultation. We are here to guide you through the process and ensure your loved one’s wishes are honored.