As 2024 draws to a close, cryptocurrency stands at a turning point. Bitcoin has crossed the $100,000 mark and digital assets have solidified their place in investment portfolios of all sizes. Yet, amid these milestones, a critical, yet overlooked issue remains: the estate planning challenges unique to cryptocurrency and other digital assets.
A Looming Crisis: Estate Planning in a Digital Era
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, crypto holdings can be lost forever, become embroiled in legal disputes, or heavily taxed.
This vulnerability is not hypothetical. Chainalysis reports that nearly 20% of all bitcoin is lost or stranded, much of it likely due to the misplacement of private keys or owners dying without a plan for the now-valuable assets transferring to their heirs. As billions of dollars in digital wealth continues to accumulate, the risks tied to inadequate planning grow exponentially.
With the Tax Cuts and Jobs Act (TCJA) of 2017 set to sunset in 2025, legal frameworks surrounding wealth transfer may undergo significant changes. For cryptocurrency holders, this moment represents both a wake-up call and an opportunity to reassess their plans to protect and pass on digital assets to future generations.
2025 Tax Law Changes: A Catalyst for Action
The TCJA temporarily doubled the federal estate, gift, and generation-skipping transfer (GST) tax exemptions, allowing individuals to transfer up to $13.99 million, tax-free, in 2025. Without new legislation, however, these exemptions will revert to approximately $7 million per individual on January 1, 2026, adjusted for inflation. This reduction will subject a greater share of estates to federal taxes, making planning for cryptocurrency even more urgent.
Several legal strategies should be considered:
- Draft Digital Asset-Specific Estate Plans: Create comprehensive plans that include instructions for accessing private keys and wallets.
- Capitalize on Gift Exclusions: Now is the time to transfer digital assets out of taxable estates.
- Embrace Multi-Signature Wallets: Use them for enhanced security and ease of access for heirs.
- Move Digital Assets to LLCs: This can protect assets from creditors and facilitate smoother transitions.
- Stay Ahead of Regulatory Changes: Keep informed of the evolving IRS rules to ensure compliance.
Looking forward, 2025 offers a chance for cryptocurrency holders to act decisively before tax laws change and vulnerabilities deepen. As the saying goes, failing to plan is planning to fail.
