Background
As the world saw Wall Street collapse under the unstable financial system in 2008, a new radical digital currency was quietly forged – Cryptocurrency. Cryptocurrency is a form of currency that exists digitally and is not regulated by an official authority. What is Cryptocurrency? FIDELITY. The use and exchange of cryptocurrency have expanded significantly, with the total cryptocurrency market capitalization surpassing two trillion dollars in 2024.
Given cryptocurrencies’ increasing popularity it is critical that all cryptocurrency users, regardless of age, think, and more importantly, prepare an effective succession plan that will protect such assets from unwanted hands and prying eyes. Without a proper succession plan, cryptocurrency assets are vulnerable to permanent misplacement.
In 2008, Gerald Cotton, the CEO of a cryptocurrency company, died suddenly at 30 years old, leaving millions of dollars in cryptocurrency that was inaccessible to anyone but himself. The laptop computer which was used to store Mr. Cotton’s cryptocurrency, was entirely encrypted and Mr. Cotton, prior to his untimely passing, had not shared with anyone his passwords or recovery keys. Company Loses $190 Million In Cryptocurrency As CEO Dies With Sole Password, ABC News, by Guy Davies. Indeed, when stories like Mr. Cotton’s circulate, they raise an important question: how can cryptocurrency holders prevent this from happening to them?
In the most basic sense cryptocurrency is a type of currency that uses digital files as money. What is Cryptocurrency and How Does it Work?: Part 1, CENTRAL BANK. As a decentralized currency, it operates without a central authority like a bank or government instead relying on blockchain technology. Decentralized Market, INVESTOPEDIA, Carla Tardi. Blockchain is a “a shared, immutable digital ledger, enabling the recording of transactions and the tracking of assets within a business network and providing a single source of truth.” What Is Blockchain?, IBM, Stephanie Susnjara and Ian Smalley. At the heart of blockchain’s appeal is the secure architecture, designed to drastically reduce fraud and mistakes.
Once cryptocurrency is purchased it remains stored in an individual’s exchange account. However, it is highly recommended that purchased cryptocurrency be moved out of the exchange account. Instead, it is advised to store cryptocurrency in a “wallet” which offers an additional layer of protection. Cryptocurrency wallets can be maintained in a cold storage or an online wallet. A cold storage allows an individual to download software onto a solid-state drive (“SSD”) which causes a file containing the wallet to be stored on an individual’s computer. Cryptocurrency 101 For Estate Planners, Eido M. Walny and Abigail McGowan. Once this step is completed the cryptocurrency user can then transfer the wallet file onto a flash drive. Thereafter, anytime the cryptocurrency user seeks to make a cryptocurrency transaction they only need to connect their flash drive to their computer.
An online wallet, on the other hand is typically considered more convenient, but is left vulnerable to cyberattacks as the wallet is stored online. To make a transaction using an online wallet the cryptocurrency user would open their wallet by entering a password, selecting an option to send the cryptocurrency, entering the address of the wallet that will receive the cryptocurrency, and finally, enter the individual’s private key to authorize the transfer. Hot Vs Cold Crypto Wallet: What’s The Difference? COINBASE.
Despite the appeal of digital assets’ decentralized nature, the use of cryptocurrency creates certain risks. Unlike banks, there is no central authority or institution to contact in the event of misplaced account numbers or login credentials. Nor will beneficiaries or fiduciaries successfully seek assistance in gaining access to digital assets if cryptocurrency wallets cannot be located. Accordingly, if records for cryptocurrency are not maintained, secure wallets are not utilized, and passwords are not accessible, digital assets may be lost forever. Accordingly, an estate plan must account for cryptocurrency holdings to prevent avoidable administrative burdens.
While the risks are significant, there are still many steps you can take to create a seamless succession plan that safeguards digital assets and eases the transition for fiduciaries and beneficiaries.
Estate Planning
Addressing digital assets like cryptocurrency in estate planning documents is essential to put fiduciaries on notice and prevent key information from becoming misplaced. Unlike a non-digital form of currency, cryptocurrency may be accounted for in select ways (e.g., digital wallet with ‘key’ composed of numbers). What To Know About Cryptocurrency and Scams, FEDERAL TRADE COMMISSION; Understanding Cryptocurrency in Estate Planning. AMERCIAN COLLEGE OF TRUST AND ESTATE COUNSEL (ACTEC). As the digital age grows, trusts and estates lawyers will face growing complexity in addressing digital assets in client estate plans.
For example: Susan and Bob hire ‘Law Firm A’ to draft estate planning documents. Upon executing their estate planning documents, Susan and Bob store copies in a safe located inside their personal residence. If either Susan or Bob own cryptocurrency, they should store the wallet or key crypto information near their existing estate planning documents. If not, Susan and Bob run the risk of losing the key’s information upon death or disability. In this case, the fiduciaries will lack the critical knowledge required of administering an estate.
A digital wallet will prove difficult for a fiduciary to identify and distribute according to the Testator or Grantor’s intent if the fiduciary is not properly put on notice of the physical location of the cold wallet or the passwords and encryptions codes for the online wallet.
When selecting a fiduciary to manage assets, it is essential to consider their ability to understand and navigate the complexities of cryptocurrency. Title 3B of New Jersey Statutes Annotated imposes certain obligations on fiduciaries. New Jersey Rev. Stat. §3B:20-11.2, 11.4, 11.7 directs fiduciaries, who invest and manage trust assets, to comply with the prudent investor rule, which requires the fiduciary to: (1) invest and manage assets; (2) diversify the investments; and (3) review the assets to make informed decisions relating to the retention or disposition of certain investments.
In addition to selecting a competent fiduciary, estate planning attorneys can include safeguards to lessen the chance of misplacement. In addition to core estate planning documents, a letter of intent or instruction that addresses a cryptocurrency’s key information will ease the administrative burden. CRYPTOCURRENCY 101 FOR ESTATE PLANNERS, NAEPC JOURNAL OF ESTATE & TAX PLANNING. A letter of instruction is a non-public document. The letter is drafted by the Testator or Grantor, addressed to fiduciaries or beneficiaries, and provides final wishes and instructions. Why writing a letter of instruction can be beneficial FIDELITY. In administering an estate, this letter can easily identify information related to a digital wallet or key information used to access the cryptocurrency assets.
Another layer of protection springs from third-party custody of the key information. One ACTEC Fellow recommends using a corporate entity to transfer the inscription keys. Generally, it is not advisable to include any identifying or key information since the executor will probate the will. During this process, a will becomes public record. The Fundamentals of Estate Planning with Crypto Assets WEALTH COUNSEL. Thus, it is generally recommended to keep sensitive information excluded from the planning documents. However, incorporating documents, like a letter of intent will be secure and non-public. Despite this safeguard, there are few complications to be aware of. Goldman Sachs analysts caution that industry efforts must focus on decreasing the volatility of digital assets, including cryptocurrency. COINDESK Goldman Sachs Sees Gold Outperforming Bitcoin in the Longer Term (Canny, Will Dec. 2022). Given that fiduciaries are encouraged to avoid volatile assets, corporate fiduciaries may be less inclined to act in the capacity as a fiduciary.
Trusts and estates attorneys should also be aware of the tax implications of cryptocurrency. Beginning in 2024, taxpayers are required to report all digital assets, including cryptocurrency. The requirement applies to taxpayers filing returns, including a 1040 Individual Income Tax Return and 1041 U.S. Income Tax Return for Estates and Trusts. INTERNAL REVENUE SERVICE FS-2024-12 IRS Taxpayers need to report crypto, other digital asset transactions on their tax return.
The Internal Revenue Service recognizes digital assets as property--not currency. Digital Assets, IRS. Thus, upon a sale of cryptocurrency, capital gain or loss must be reported. For instance, if the cryptocurrency is held for one year or less before sale, short-term capital gain or loss will be recognized. If the cryptocurrency is held for more than one-year, long-term capital gain or loss will be recognized. However, if a charitably inclined client donates to a charitable organization, no income, gain or loss is recognized. Consistent with this, the Internal Revenue Service requires users to maintain records that substantiate the information incorporated in their tax returns. Records can include, without limitation, “receipts, sales, exchanges, or other dispositions of virtual currency and the fair market value of the virtual currency.” Frequently Asked Questions On Virtual Currency Transactions, IRS.
KEY TAKEAWAYS
Estate planning for digital assets involves multiple, and sometimes, complex layers. A cryptocurrency user must equip themselves with the proper tools that allow for a seamless succession of digital assets. To do this: (1) store cryptocurrency in either a cold or online wallet; (2) maintain records of all transactions, passwords, and encryptions in a secure location; (3) retain counsel to draft and prepare all necessary estate planning documentation related to digital assets; (4) prepare letters of intent for beneficiaries and fiduciaries that specify the location of digital assets and detail the procedures required for access; (5) select a trustworthy and knowledgeable fiduciary who can effectively manage investments.
Reprinted with permission from the July 28, 2025 edition of The Legal Intelligencer © 2025 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or reprints@alm.com.