Digital Asset Estate Planning: Summary and How to Plan

Jan 13, 2022
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Digital Asset Estate Planning: Summary and How to Plan

By: Daniel J. Gershman, Esq.

As digital assets, such as cryptocurrencies and non-fungible tokens (NFTs) (collectively “Digital Assets”), increase in circulation, so has the number of inquiries––specifically for those long-term holders––as to how these assets should be addressed and/or incorporated into their estate plans. All Digital Assets are regarded as “property” for tax purposes. Thus, in order to minimize the taxable obligations and to ensure your beneficiaries inherit the Digital Assets, the ownership and distribution of such should be addressed in a well-formulated estate plan.

Overview of Blockchain, Cryptocurrency and NFTs

A blockchain is effectively a list of transactions embodied in a computer code that is run on a series of computers and stored in “blocks” of data. Most blockchains are decentralized, meaning no single person, company, or central authority has complete control, rather it is operated in a peer-to-peer setting. Each block of data contains a history of the prior blocks and transactions. This allows the entire history of the blockchain, or the “ledger”, to be visible, secure, and resistant to tampering or double-spending.

Whereas the blockchain serves as the record of transactions, the cryptocurrencies serve as a medium for the exchange; a means of payment. Digital Assets are therefore digital representations of value made possible by use of the blockchain. In addition to transfers of cryptocurrency, some blockchains have evolved to enable “smart contracts”––a type of automatically executable computer program––to be executed on the blockchain when certain parameters have been met. This enables a set of instructions to effectively self-execute on a public blockchain, instead of on a private computer. In turn, this allows the creation of both fungible and non-fungible tokens (NFTs).

NFTs can digitally represent almost any real or intangible property, including artwork, music, videos, collectibles, trading cards, video game virtual items, contract rights, or even a debt or real estate. NFTs are considered “non-fungible” as each NFT is unique and cannot be replaced. By contrast, cryptocurrencies and other “fungible” tokens are similar to a US Dollar – whereby each is theoretically unique with its own serial number – but are generally interchangeable with another dollar bill or any variation of change equaling one hundred cents. In sum, an NFT is the digital version of a certificate of authenticity of the one original piece of work embodied in the blockchain.

Individual Ownership of Digital Assets

A. Cryptocurrency

Most cryptocurrencies utilize a two-key system. The public key, which is used to keep a log of the transactions on a decentralized online ledger known as the blockchain and the private key, is required for the owner to access the funds. In essence, the public key is similar to a bank account number, whereas the private key is the secret PIN or signature on a check that provides control over the account.

There are a number of ways to store one or more private keys, with each option being represented as a “wallet”. Wallets can be split into two primary categories: (i) cold storage and (ii) hot storage. “Cold storage” refers to wallets that store keys on a physical device such as a USB stick. Whereby the owner retains full control over when and where the wallet is accessed, and all of the assets are stored offline. On the other hand, “hot storage” ––which can be further split into two forms: software wallets and online wallets––store the keys on a virtual device connected to the internet. Software wallets are downloaded to a computer or mobile device, often in the form of an app, while online wallets act like websites, and are usually controlled by a major crypto exchange. Consequently, with either type, any person who knows the access authorizations to a wallet has access to the cryptocurrency that is contained within said wallet. 


Similar to cryptocurrencies, ownership of NFTs is also found on the blockchain. However, ownership is not granted by a set of private keys. By default, the owner of an NFT will generally not receive ownership of the underlying work of art embedded in the NFT, nor the right to reproduce or transform that work of art. The owner will only receive ownership of the NFT itself (with that ownership being recorded on the blockchain). With that being said, NFT ownership is written by software code (referred to as a “smart contract”) that governs actions such as verifying the ownership and managing the transferability of the NFTs. Such smart contracts can also be programmed beyond the basics of ownership and transferability to also include a variety of other applications and functionality, including linking the NFT to another digital asset or allocating a portion of the amounts paid for any subsequent sale of the NFT back to the original owner, thus giving the owner an ability to realize the benefits of the secondary marketplace. As with cryptocurrencies, an owner of NFTs should maintain a list of the NFTs he or she owns, including the details of the applicable smart contract. 

Estate Planning Techniques 

At the onset of planning an estate, it is crucial to identify any Digital Asset held and to incorporate specific language in the documents to permit a designated fiduciary to access, retain, and manage any Digital Asset in the estate. Additionally, these documents may further grant a fiduciary permission to access any laptop, cell phone, or other electronic devices, which may have information regarding any Digital Assets owned by the decedent at the time of his or her death. 

Although an executor can generally inquire and gain access to accounts held by financial institutions; this method of gaining access is unavailable for Digital Assets as there is no formal directory or central body that governs them. Moreover, even if there is a central body, the question of whether a decentralized network can be compelled into providing access information to a third party remains unanswered.

The decentralized nature of the blockchain, the lack of oversight, the privacy it provides for inter-vivos transactions, are a few of the many benefits of Digital Assets, however, the same becomes an enormous burden for those attempting to identify and access assets of a deceased owner. As such, in order to ensure Digital Assets are able to be found, accessed, and claimed, it is crucial to maintain an inventory of each Digital Asset held.

Providing Access

Once a Digital Asset is identified, properly drafted estate planning documents will need to provide fiduciaries the power to access such after death. This is imperative due to the fact that––even if the decedent provided a fiduciary with his or her access authorizations while still alive––any use of the passcodes after death without the proper estate authorization could cause the fiduciary to unintentionally violate applicable federal or state privacy laws, terms of service agreements, or fraud and data protection laws. Thus, when it comes to the estate planning aspect for these digital assets, the number one priority is providing access to the Digital Asset. 

In order for a fiduciary to gain access, both the power of attorney as well as the testamentary instrument should include provisions to allow access to each specific Digital Asset held by the decedent at the time of his or her death. To ensure confidentially, usernames and passwords should not be directly listed in a will or other estate planning documents, as each becomes public record once admitted to probate. Thus, in addition to updating the general estate planning documents, a separate document which contains more private information should be drafted and kept alongside the will.  

This document should provide detailed information regarding each digital asset, its current location––whether it is stored on an exchange, in a wallet, or as a smart contract on the blockchain––its value at the time of acquisition, and any other pertinent details to locate and access the asset. Keeping such information in a separate document and limiting references in the will to generalities will prevent public disclosure while maintaining––under a power of attorney––access by the fiduciary agent or executor. 


Once the assets have been gathered, the liquidation and/or distribution of those assets should be provided for under the terms of the owner’s estate planning documents. This is another aspect of the estate plan that should be carefully considered as the potential value and appreciation of these assets, due to their volatility, may trigger sophisticated income and estate tax ramifications. In order to freeze the value of or remove taxable liability from the estate, Digital Assets should be planned for with regard to basis planning as well as for charitable and other considerations. 

A. Direct Transfer

Since Digital Assets are treated as property, each can be distributed via direct transfer by a will or assigned/transferred to a Trust. If the plan includes a distribution of digital assets to beneficiaries, it is imperative to understand the nuances of each type of Digital Assets. 

B. Gifting of Digital Assets

Some owners of digital assets may be interested in making gifts, or even donating their holdings to friends, family, or charitable organizations in order to reduce income taxes accruing on their holdings. Accordingly, when an owner of a Digital Asset is considering gifting such an asset, he or she should retain a detailed record of the gift including, at a minimum, information on the Digital Asset to be gifted, and an appraisal of its fair market value on the date of the transfer. This information is needed as the donee will receive the donor’s cost basis in the asset. If the gift is being made to a charitable organization, additional consideration of the requirements of the internal revenue code and treasury regulations should be taken to ensure that the gift qualifies as an income tax charitable deduction

C. Digital Asset Trusts

A trust may be a more desirable place for account information than a will because it would not become part of the public record and is easier to amend than a will. The owner of Digital Assets can transfer such into a trust and provide a trustee with the access authorizations to manage the assets on behalf of the trust. As with any gift of a Digital Asset, a detailed record of any transfer should be kept for tax purposes, but for trust purposes, this record will also serve as proof to verify that the donor has relinquished all control over the gifted asset to the trust. 

i. The Grantor Trust

A grantor trust is a flexible tool for estate planning with digital assets. One of the primary benefits of this entity is that it allows for an owner and the trust to enter into a transaction whereby the owner can sell an asset to the trust in exchange for a promissory note. The trust would then make payments (or a balloon payment) under the terms of the promissory note, for a fixed principal amount and interest rate. This transaction is commonly referred to as an “Estate Freeze” as the note, at a fixed amount, becomes the asset of the estate, and any appreciation in the value of the Digital Asset sold to the trust is for the sole benefit of the trust (and its beneficiaries). Thus, a portion of the owner’s taxable estate is eliminated. Moreover, due to the fact that the income of a grantor trust is taxed to the grantor, the sale to the trust is not subject to any capital gain. 

ii. Grantor Retained Annuity Trust (GRAT)

Another strategy is to utilize a GRAT. Although accomplishing much of the same goal as the sale to a grantor trust, the preparation and functionality of this trust vary considerably from that of a Grantor Trust. Unlike the Grantor Trust, here the owner of a Digital Asset will make a gift of such asset in return for an annuity payment from the trust. The value of the gift minus the value of the annuity stream becomes the “value” of the gift. Because the IRS has deemed Digital Assets to be property for tax purposes, the value of such assets for these purposes would be the price at which the property would change hands between a willing buyer and a willing seller on the date of the transfer. In order to determine the value needed to satisfy the annuity, one would take a weighted average of the mean between the highest and lowest prices of the asset from multiple exchanges. Moreover, if the trustee also opens up a simple bank account for the GRAT at the time of funding, the trustee can use the power of substitution to exchange the cash in the bank account for a Digital Asset held in the GRAT that has appreciated significantly, thus locking in the increased value of the cryptocurrency. 


The new asset class that estate planning attorneys are likely to see in their clients’ portfolios is digital. Since digital assets and the laws that regulate them are changing rapidly, owners are encouraged to contact an attorney to ensure that these assets are adequately addressed in a properly executed estate plan. This not only includes language in the documents that permit a fiduciary to access the Digital Asset, but also to advise owners of Digital Assets of the risks that accompany the ownership and distribution of such assets. The Private Client Practice Group at Falcon Rappaport & Berkman LLP will formulate an estate plan that not only addresses the underlying Digital Assets but will also accommodate the changes in the laws. 

DISCLAIMER: This summary is not legal advice and does not create any attorney-client relationship. This summary does not provide a definitive legal opinion for any factual situation. Before the firm can provide legal advice or opinion to any person or entity, the specific facts at issue must be reviewed by the firm. Before an attorney-client relationship is formed, the firm must have a signed engagement letter with a client setting forth the Firm’s scope and terms of representation. The information contained herein is based upon the law at the time of publication.

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