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: 

1. On a centralized exchange ( i.e. , Coinbase or Gemini) 
2. In a digital “hot” wallet ( i.e. , Mycelium or Metamask) 
3. 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

What next?

1. 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.
2. 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.
3. Learn more by reading our blog or watching our videos .