As 2024 comes to a close, cryptocurrencies are at an inflection point. Bitcoin has surpassed the $100,000 mark and digital assets have solidified their place in investment portfolios of all sizes. However, amid these milestones, a critical, yet overlooked, issue persists: the estate planning challenges unique to cryptocurrencies and other digital assets.
A looming crisis: estate planning in the digital age
Unlike traditional assets, cryptocurrencies and digital assets operate outside established estate planning frameworks. Their decentralized nature, reliance on private keys, and pseudonymity make them revolutionary. But without proper planning, cryptocurrency holdings can be lost forever, become embroiled in legal disputes, or suffer heavy taxes.
This vulnerability is not hypothetical. Chainalysis reports that nearly 20% of all bitcoins are lost or stranded, largely likely due to the loss of private keys or owners dying without a plan to transfer the now valuable assets to their heirs. As billions of dollars in digital wealth continue to accumulate, the risks linked to inadequate planning grow exponentially.
With the Tax Cuts and Jobs Act (TCJA) of 2017 set to expire in 2025, the legal frameworks surrounding wealth transfer may undergo significant changes (while Congress seems likely to act, it is not guaranteed). For cryptocurrency holders, this moment represents both a wake-up call and an opportunity to reevaluate their plans to protect and pass on digital assets to future generations.
2025 Tax Law Changes: A Catalyst for Action
The TCJA temporarily doubled federal estate, gift, and generation-skipping transfer (GST) tax exemptions, allowing individuals to transfer up to $13.99 million, tax-free, in 2025. However, without new legislation, these Exemptions will return to approximately $7 million per individual on January 1, 2026 (adjusted for inflation). This reduction will subject a greater proportion of wealth to federal taxes, making cryptocurrency planning even more urgent.
Additionally, new IRS reporting requirements for digital assets, which go into effect on January 1, 2025, will increase reporting requirements and scrutiny. Under the Inflation Reduction Act of 2022, Congress has allocated billions of dollars to the IRS, including bolstering the agency’s staff and increasing its focus on pursuing cryptocurrency enforcement.
Legal Strategies for Cryptocurrency Estate Planning
To address these challenges and take advantage of opportunities before the tax law changes, cryptocurrency holders should consider these strategies:
1. Draft estate plans specific to digital assets
Traditional wills and trusts often fall short when it comes to cryptocurrencies. Comprehensive estate plans should create an estate plan, including instructions for accessing private keys, wallets, and recovery phrases (without creating security vulnerabilities). A secure and regularly updated inventory of digital assets is essential to ensure that heirs can locate, access and manage holdings effectively.
2. Take advantage of gift exclusions and lifetime gifts
With the current high exemption levels, now is the time to transfer digital assets out of taxable estates. Gifting cryptocurrency to heirs or placing it in irrevocable trusts can ensure tax savings before exemptions are reduced in 2026. Charitable remainder trusts also allow for tax-advantaged transfers, benefiting both heirs and philanthropic causes.
Additionally, the annual gift tax exclusion will increase to $19,000 per recipient in 2025. Married couples can donate up to $38,000 per recipient tax-free. Regular use of these exclusions allows for incremental reductions in taxable estates over time.
3. Adopt multi-signature wallets and collaborative custody
Strategic use of multi-signature wallets and collaborative custody can improve both security and estate planning. By collaborating with multiple parties (such as an executor and trusted family members) to authorize transactions, these wallets prevent unauthorized access while ensuring that heirs can access funds when needed.
4. Move digital assets to LLC or establish asset protection trusts
Placing cryptocurrency in an LLC and transferring ownership to a trust can protect assets from creditors and legal claimants. This structure also avoids probate courts, ensuring a smoother transition to heirs while protecting the estate from lawsuits or claims by creditors.
5. Stay ahead of regulatory changes
IRS rules on cryptocurrency transactions are evolving rapidly and will require more meticulous record-keeping and compliance measures. Sophisticated tools and legal and accounting expertise will be crucial to navigate this environment and ensure tax-efficient wealth transfers.
Looking ahead to 2025
This year highlighted the transformative potential of cryptocurrencies as an investment class, but also exposed their vulnerabilities. Estate planning remains an afterthought for many cryptocurrency holders, even as the value of digital assets rises and changes to tax laws loom on the horizon. By 2025, the crypto community must confront these realities. Regulators, wealth planners, accountants, financial advisors and investors alike must prioritize creating and implementing solutions that address the unique challenges of increasing digital wealth.
A call to action
The close of 2024 is not only a time to celebrate the successes of cryptocurrencies, but also an opportunity to prepare for their future. By taking proactive steps now, whether by establishing estate plans, creating trusts, or implementing giving strategies, investors can protect their digital wealth and pass it on as a lasting legacy.
As the saying goes, failing to plan is planning to fail. For cryptocurrency holders, 2025 offers a rare window to act decisively before tax laws change and vulnerabilities deepen. Now is the time to protect your digital fortune.
This article is for informational purposes only and does not constitute legal, tax or financial advice. Consult qualified professionals for personalized guidance.
