Biggest mistakes crypto investors make with estate planning

A staggering 1 in 7 individuals may be leaving unclaimed wealth behind, according to the National Association of Unclaimed Property Administrators. While the current downturn in bitcoin and ether prices has captured headlines, the issue of estate planning in the cryptocurrency realm poses a long-term challenge that could worsen as more people invest in digital assets. Many investors neglect to include their cryptocurrency in their estate plans or fail to communicate access details to their heirs. Recent surveys by Gallup and Pew Research indicate that between 14% and 17% of U.S. adults have owned some form of cryptocurrency, making the risk of losing access to these funds increasingly pressing. "While traditional assets like property or mutual funds are straightforward in a will, the rise in cryptocurrency means that a significant portion of inherited wealth could be at risk of being lost," explains Azriel Baer, a partner at Farrell Fritz, a law firm specializing in estate planning. The burgeoning popularity of cryptocurrency ETFs, particularly following the SEC's approval of the first bitcoin spot ETFs in 2024, like the iShares Bitcoin Trust (IBIT) and Fidelity's Ethereum Fund ETF (FETH), may offer a partial solution. These investment vehicles allow investors to gain exposure to cryptocurrencies without direct ownership, thereby mitigating the risks of losing actual digital assets. However, many crypto owners still make critical estate planning errors that could be easily avoided. A recent survey from Caring.com found that only 24% of Americans have a will that outlines their estate management preferences after death. Alarmingly, many individuals with existing wills have not updated them for years, with about one-quarter admitting they haven't made any changes since the document was first created. This poses a particular risk in the context of cryptocurrency, as outdated wills may lack the necessary provisions to empower executors to access digital assets. "It's common for people to neglect updating their estate documents for decades, which can leave them vulnerable," warns Patrick D. Owens, a shareholder at Buchalter. Without clear directives regarding digital assets, heirs may face the cumbersome task of going to court to obtain the authority for estate executors to access cryptocurrencies. While courts usually grant this access, the process can be time-consuming and expensive. A standard will may suffice for many, but attorneys often recommend incorporating a revocable living trust into an estate plan. Although drafting a will is typically less costly, revocable living trusts provide enhanced privacy and can streamline the probate process after death. Baer advises clients to transfer their cryptocurrencies into a revocable living trust, allowing trustees immediate access upon the owner's passing. This is crucial since estate settlements can take six to eight months or longer, during which heirs may miss opportunities to sell depreciating crypto assets. A revocable trust, when paired with a pour-over will, ensures that any assets not included in the trust at the time of death are transferred accordingly. While heirs don’t need to know the full extent of your cryptocurrency wealth, it’s essential they understand how to access these assets after your death. Baer recounts a case where heirs lost millions in crypto simply because they were unaware of the deceased's private keys, which are essential for accessing digital funds. He emphasizes that these sensitive details should not be included in a will, as such documents become public during the probate process. Moreover, the individual designated to manage your estate may not be qualified to handle the complexities of cryptocurrency. Not everyone is familiar with the nuances of digital currencies, and designating someone without the necessary knowledge could lead to significant financial losses. Baer advises against choosing someone who might struggle to navigate the volatile landscape of crypto transactions. In some cases, institutional trustees may also hesitate to manage cryptocurrency. Owens shares an example where a client passed away with substantial crypto holdings, but the institutional trustee declined to oversee them, necessitating the appointment of a special trustee. Finding a capable replacement can be both time-consuming and expensive. As cryptocurrency values skyrocket, many individuals face potential estate taxes that could impact their families. Jonathan Forster, a shareholder at Weinstock Manion, highlights the importance of understanding the tax implications of crypto ownership. With the federal estate tax exemption set at $13.99 million per individual for 2025, planning is essential to avoid unexpected tax liabilities. Forster has advised clients with crypto portfolios exceeding $50 million on effective gifting strategies to reduce their estate size. Some have opted to create limited liability corporations (LLCs) to transfer crypto assets and subsequently gift interests in the LLC to trusts for their children. Additionally, tracking the cost basis of cryptocurrencies is vital, especially for those considering gifting digital assets while alive. Accurate records are necessary for recipients to appropriately calculate taxes upon selling the assets in the future. "Keeping track of your basis can be challenging, but it's crucial," Baer concludes.