5 Essential Steps to Administer Trusts and Estates with Cryptocurrency Holdings

Cryptocurrency has brought new complexities to the administration of trusts and estates, requiring fiduciaries to adopt specialized strategies to manage these digital assets effectively. As more estates include substantial crypto holdings, trustees and estate administrators must navigate unique challenges, such as securing private keys, ensuring proper transfer, and complying with evolving regulations.

This article outlines five critical steps for administering trusts and estates that include cryptocurrency assets, aimed at helping fiduciaries protect and manage such holdings prudently and legally.

1. Secure and Transfer Control of Private Keys

Unlike traditional assets, cryptocurrencies are controlled by private keys—complex passwords stored digitally. One of the fundamental challenges in trust administration is ensuring that the trustee fully controls the private keys, which may be held in hardware devices or secured wallets.

Common methods include physically transferring the hardware device containing the private key to the trustee or transferring the cryptocurrency to the trustee’s own secure online wallet. For irrevocable trusts, it’s critical to confirm that the grantor has genuinely relinquished control of the private keys to avoid incomplete gifts or future disputes.

2. Implement Prudent Investment Practices Under Uniform Prudent Investor Rules

Trustees are obligated to manage trust assets prudently. Cryptocurrency, while volatile, is not exempt from these standards. Trustees should apply reasonable care, skill, and caution considering the trust’s distribution requirements and objectives.

Such a standard ensures that cryptocurrencies are neither treated as inherently safe nor inherently risky, but rather managed strategically alongside other assets to meet fiduciary goals.

3. Structure Trusts to Preserve Control and Flexibility

Estate planning for crypto-rich individuals often involves specialized trusts, such as Domestic Asset Protection Trusts (DAPT) or Spousal Lifetime Access Trusts (SLAT), particularly established in favorable jurisdictions like Nevada, Delaware, or South Dakota.

This structuring allows grantors to appoint administrative trustees while retaining investment control by serving as investment advisors or managers themselves, thereby maintaining control over trading and management of cryptocurrencies.

4. Address Valuation and Tax Considerations Including Step-Up in Basis

Cryptocurrency valuations can be highly volatile, complicating estate tax and reporting obligations. Proper valuation at the time of death is critical to establish the correct stepped-up cost basis, which can minimize capital gains taxes for beneficiaries when they sell these assets.

Accurate documentation and timely reporting to tax authorities help prevent disputes and ensure compliance.

5. Maintain Robust Security and Regulatory Compliance

Given the irreversible nature of cryptocurrency transactions, trustees must implement rigorous security measures to protect private keys from hacking or loss.

Moreover, trustees must stay informed of regulatory developments. In jurisdictions like the U.S. and the EU, crypto custodians and fiduciaries face increasing scrutiny under financial regulators, requiring adherence to fiduciary duties and client protections.

Conclusion

Administering trusts and estates with cryptocurrency requires a combination of technical knowledge, legal acumen, and prudent management. By securing private keys, adopting prudent investment strategies, leveraging specialized trust structures, addressing taxation properly, and maintaining security and compliance, fiduciaries can safeguard these increasingly common digital assets on behalf of beneficiaries.