How cryptocurrency custody affects estate succession

By Richard C. Wilson

Start by separating three questions: who controls the private keys, what recovery arrangements exist, and who has authority to act. Identify each holding as self custody or third party custody. Record where the relevant instructions can be found without putting transaction secrets into widely shared records.

Scope: Federal tax rules, Minnesota legal examples, SEC staff custody education and Bitcoin technical explanations address different parts of succession planning. Ask an estate attorney or CPA to review the applicable law, account terms, authority documents and tax treatment before acting.

Direct holdings depend on private key access

SEC staff education describes a private key as a passcode that authorizes cryptocurrency transactions. Holders manage keys in self custody, while custodians control key access in third party custody. A seed phrase can restore a wallet after loss of the wallet or key, or damage or corruption of its hardware or software. Loss or theft of keys or phrases may prevent access, depending on the recovery arrangements available. These educational statements have no legal force or effect, change no applicable law and create no new obligations.

For each wallet, list the custody arrangement and whether recovery instructions exist. Keep the location of those instructions distinct from the secret itself, and use the digital estate inventory guide to organize the records.

Hot and cold wallets

SEC staff education distinguishes hot wallets connected to the internet from cold wallets, which are typically physical devices disconnected from it. Hot wallets offer convenient transaction access but expose assets to cyberthreats. Cold wallets generally provide greater protection from those threats, but their devices can be lost, damaged or stolen, potentially causing permanent loss. Both types are available for self custody and third party custody. The bulletin has no legal force or effect, changes no applicable law and creates no new obligations.

Record the wallet type alongside the custody type and recovery arrangements. Review those entries together rather than treating the word “cold” as a complete description of a succession plan.

Bitcoin multisignature arrangements

In the Bitcoin Developer Guide's described multisignature script, m specifies the minimum number of signatures matching the n supplied public keys. Signatures must follow the corresponding public key order. P2SH redemption also requires the correct redeem script. These are Bitcoin technical requirements, not a universal cryptocurrency feature or a rule establishing legal ownership.

Use the technical resource below to discuss the signing threshold, corresponding public keys, signature order and required script with someone familiar with the arrangement. Keep that technical review alongside the separate review of authority.

Exchange accounts may have a fiduciary process

In Minnesota, for example, a personal representative has a statutory disclosure route for a deceased user's communication catalog and other digital assets excluding communication contents, unless the user prohibited disclosure or a court directs otherwise. The appointment letter or court order route requires a physical or electronic written request, a certified death certificate, and a certified copy of the appointment letter or court order. If requested by the custodian, the representative must also supply an account identifier, evidence linking the account to the user, an affidavit that disclosure is reasonably necessary for estate administration, or a court finding of account identity or reasonable necessity for administration. Other states differ.

In Minnesota, for example, a custodian disclosing assets under Chapter 521A may choose full account access, access sufficient for assigned tasks, or copies of qualifying assets. Copies cover assets the user could have accessed when the request arrived if alive, fully capable and able to access the account. The custodian may charge reasonable administrative costs and need not disclose assets deleted by the user. When a user directs or a fiduciary requests disclosure of some assets, the custodian need not disclose them if segregation would impose an undue burden. The custodian or fiduciary may then seek a court order for a subset limited by date, all assets to the fiduciary or designated recipient, no assets, or all assets to the court for review in chambers. Other states differ.

Use the fiduciary access guide for the separate review of communication contents and estate documentation. Ask the particular exchange about its current process, and take questions about small estate procedures to the probate guide.

Questions for a custodian

SEC staff education warns that a custodian's hacking, closure or bankruptcy may prevent access. Ask whether insurance exists and what its terms cover. Ask about subcontracted storage, use of deposited assets as collateral, commingling and required consent. Review annual fees based on asset value, transaction fees, transfer fees, and account setup and closure fees. These questions do not assure that insurance exists or assets will be recovered. The bulletin has no legal force or effect, changes no applicable law and creates no new obligations.

Put the provider's answers beside the account records. Ask for clarification where the response leaves storage, consent, insurance limitations or costs unclear.

Custody and expertise shape the transition

In Minnesota, for example, a trustee may delegate duties and powers that a prudent trustee with comparable skills could properly delegate under the circumstances. The agent may be associated with the trustee. The trustee must exercise reasonable care, skill and caution in selecting the agent, setting scope and terms consistent with the trust's purposes and terms, and periodically reviewing performance and compliance. The agent owes the trustee reasonable care in complying with the delegation, and that duty is enforceable by the trustee. Other states differ.

Delegating a function does not itself establish a separate digital fiduciary office. Use the Minnesota delegation resource below to discuss selection, instructions and oversight, and take the proposed technical assignment and trust instrument to counsel together.

In Minnesota, for example, care, loyalty and confidentiality duties extend to digital asset management. Fiduciary or designated recipient authority remains subject to applicable terms of service except as Section 521A.04 provides, and to other applicable law including copyright. A fiduciary's authority is also limited by the scope of fiduciary duties. Neither a fiduciary nor a designated recipient may use that authority to impersonate the user. Other states differ.

Wallet ownership records and authority are distinct

In Minnesota, for example, Chapter 521A preserves the user's and custodian's contractual access and use rights. A fiduciary or designated recipient receives no expanded rights beyond the user's rights. User direction and federal law may modify or eliminate access. Terms of service may also do so when the user has not provided a direction under Section 521A.04. Other states differ.

In Minnesota, for example, trust creation methods include transferring property to another person as trustee during life, by will, or by another disposition taking effect at death. An owner may also declare that the owner holds identifiable property as trustee. Creation requires capacity to transfer property free of trust, except that a revocable trust uses the capacity required to make a will. The settlor must intend to create the trust, and the trustee must have duties to perform. The trust must have a definite beneficiary or qualify as a charitable trust, an animal care trust or a noncharitable purpose trust. A definite beneficiary must be ascertainable now or in the future, subject to applicable perpetuities rules. Other states differ.

These creation requirements do not establish that a generic cryptocurrency assignment completes a particular transfer or provides technical access. The trust funding guide covers the funding review.

Online directions and estate documents

In Minnesota, for example, a user may direct disclosure or nondisclosure through an online tool. A tool direction overrides a contrary will, trust, power of attorney or other record only if the tool allows modification or deletion at all times. When no qualifying tool direction was given or no tool was provided, a will, trust, power of attorney or other record may allow or prohibit disclosure, including communication contents. Either statutory direction overrides a contrary terms of service provision only when that provision does not require affirmative and distinct assent separate from assent to the terms of service. Other states differ.

Review existing online directions alongside the estate documents. Make a list of inconsistencies for counsel rather than relying on the document's title alone.

A business owner's concentrated holding creates management questions

A concentrated holding calls for a discussion of portfolio concentration, liquidity, retention, disposition and management costs. Use the Minnesota investment and management resource below for its full requirements, exceptions, trust instrument qualifications and application provisions.

Prepare questions about the trust's purposes, terms, distribution requirements, other circumstances, risk and return objectives, income needs and preservation or appreciation of capital. Ask counsel to review diversification and incoming asset decisions with the complete trust instrument.

Valuation and tax records

For a decedent who was a United States citizen or resident at death, Section 2033 includes property in the federal gross estate to the extent of the decedent's interest at death. Included property is generally valued at fair market value at death. Fair market value assumes knowledgeable willing buyers and sellers without compulsion. Use the market where the item is most commonly sold to the public, considering location where appropriate. A forced sale price does not determine fair market value.

For a valuation discussion, gather the holdings records and identify the valuation date, proposed price sources and proposed method. Take the entire alternate valuation election review, including eligibility and valuation effects, to the federal estate tax guide.

What basis does inherited cryptocurrency receive?

Convertible virtual currency acquired by bequest, devise, inheritance or the decedent's estate from the decedent generally receives fair market value basis at death under Section 1014, provided the recipient did not sell, exchange or otherwise dispose of it before the decedent's death and subject to the section's valuation alternatives and exceptions. Convertible virtual currency means virtual currency with an equivalent value in real currency or acting as its substitute, and federal tax rules treat it as property. Section 1014 does not apply to a right to receive income in respect of a decedent.

Use the inherited basis guide for special use valuation, conservation easement basis, the exception for appreciated property gifted to the decedent within one year, and estate tax basis consistency. Ask a tax adviser to review the applicable death and return filing limits with the basis source before applying an exception or reporting basis.

Incapacity can raise the same access problem

For incapacity planning, review custody and recovery arrangements as well as the authority documents. The trust control guide covers incapacity planning questions.

In Minnesota, for example, an agent with specific digital asset authority or general authority to act for the principal has a disclosure route for the communication catalog and other digital assets excluding communication contents. A court order, principal direction or the power of attorney may provide otherwise. The agent must supply a physical or electronic written request, an original or copy of the qualifying power of attorney, and certification under penalty of perjury that it is in effect. If requested by the custodian, the agent must also supply a custodian assigned account identifier or evidence linking the account to the principal. Other states differ.

The digital estate administration guide covers the separate requirements for access to communication contents. Bring the power of attorney and any account directions to that review.

Common questions

Resources to check out

• SEC: Crypto Asset Custody Basics: Staff education on wallets, recovery arrangements, custody risks, and questions for providers.
• Bitcoin Developer Guide: Multisignature Transactions: Technical background on Bitcoin signature thresholds and scripts.
• Minnesota: Investment and Management of Trust Assets: Source for the Minnesota investment and management examples.
• Minnesota: Delegation by Trustee: Source for the Minnesota delegation example.
• 26 U.S.C. §1014: Inherited Property Basis: Federal source for inherited property basis and its qualifications.