The Same, but Different: Strategic Estate and Wealth Planning for Crypto

Since it was first released in January 2009, bitcoin — the digital currency associated with the Bitcoin network — has evolved from an unknown digital asset with no users and no marketable value to one with a global market capitalization exceeding USD 1 trillion. The per-unit price of bitcoin continues to fluctuate dramatically, but since January 2024 has dipped below USD 40,000 only once. At the time of writing, bitcoin is trending in the low-to mid-USD 60,000 range, representing over 43% growth in the asset’s value year to date.¹ Of course, by the time this article is published, the price of bitcoin might well have varied by 20% or more in either direction. Or both.

The economic success of bitcoin and the broader crypto market have contributed to a new generation of highly affluent individuals and families. As Henley & Partners’ Crypto Wealth Report 2024 reveals, at 30 June 2024, at least 172,300 individuals worldwide held over USD 1 million in crypto, representing remarkable growth of 95% since 1 July 2023. At least 325 crypto cento-millionaires had crypto holdings of over USD 100 million (one-year growth of 79%), and 28 had over USD 1 billion in crypto holdings alone (growth of 27%). Over the same period, the market prices of bitcoin and Ether, the two largest crypto assets by market capitalization, have increased by 114% and 64%, respectively.²

Estate and wealth planning for novel, complex assets

Significant wealth requires careful planning to ensure it is preserved across generations. Well-trodden strategies such as dynastic multi-generational trusts, family partnerships or LLCs, and foundations offer privacy, asset protection, tax efficiency, and scaffolding to support family wealth governance. The need for sophisticated planning for crypto is at least as profound as it is for conventional assets — perhaps more so. But crypto wealth presents additional challenges that must be addressed for appropriate estate and wealth planning.

Special complexities

As a novel asset class, crypto can be difficult to comprehend. Like gold, it is a bearer form of asset with no title to determine ownership. But unlike gold, it does not exist in tangible form. It is controlled by complex cryptographic key controls through computer applications or peripheral devices, requiring a level of technical savvy that traditional assets do not require.

Ardent investors in crypto sometimes cloister in online communities of likeminded individuals, forming a tribal bond of enthusiasts who eschew traditional legal and wealth solutions or support from outside professionals. Concepts like decentralization and self-sovereignty are gaining momentum, but these approaches may be overstated and rather naïve. Maxims such as “be your own bank” and “not your keys, not your coins” have a lyrical ring, but when meaningful value — and perhaps an outsized portion of one’s wealth — is on the line, proven strategies and experienced fiduciaries are necessary to structure and safeguard this new form of exclusively digital wealth.

Widening the aperture: Wealth transfer beyond the mechanical

As individuals with crypto wealth contemplate long-term planning, their priorities often center on ensuring that their assets effectively transfer to their intended beneficiaries. While this is indeed the essence of estate planning, many affluent individuals appreciate that how they structure the transfer is also essential.

Like other forms of valuable property, crypto is taxable in many jurisdictions, potentially contributing to a taxable estate for tax purposes. Even in jurisdictions where tax is not a concern, many affluent benefactors are concerned that their beneficiaries are immature, lack financial sophistication, or may be exposed to liability risk arising from divorce or other legal controversy.

The same estate structures and strategies employed for individuals with traditional forms of wealth can be effectively deployed for crypto wealth. Various trusts, foundations, entities, and elaborate combinations of strategies — coupled with careful administration and diligent selection and management of fiduciaries — allow crypto’s ultra-wealthy to engage in the same generational wealth planning that the rest of the world’s ultra-wealthy have long enjoyed.

But it can be a bit more complicated.

Technical considerations

Traditional estate planning has not yet caught up to the realities of holding crypto assets. As a bearer asset, structuring the control of cryptographic key signatures is essential to substantiate ownership by a foundation, trust, or other structure. The fiduciary charged with managing the assets must have requisite control to properly secure or trade them and should do so in a framework that requires multiple individuals within its oversight to move them. Such multi-signature or “multi-sig” key frameworks are increasingly popular for ensuring that no single party controls the crypto, especially when the value of the crypto is consequential. Various global qualified custodians now facilitate title-held multi-signature crypto asset vault services for affluent individuals, trusts, and other institutional clients.

In many jurisdictions, fiduciaries (for example, trustees) are held to a “prudent investor” standard, which requires portfolio rebalancing to mitigate volatility and concentration risk. This standard may be modified or waived altogether in many other jurisdictions, which must be considered when wealth planning structures hold large concentrations of crypto.

Further, the selection of fiduciaries is essential when a structure holds crypto. Most professional fiduciaries have limited experience with crypto. Layered structures such as delegated or directed trusts that divide the fiduciary’s responsibilities among specialists may be appropriate. Managing crypto in a bifurcated limited liability company may allow more flexible crypto activities. LLC interests may then be transferred to trusts or other entities for further tax, asset protection, or estate planning purposes.

Crypto is becoming a mainstream asset, with many affluent families in need of guidance and structured planning. Estate planning and wealth structuring for crypto will become increasingly relevant. The greatest service gap appears to be among traditional advisers who may only now be taking the asset seriously. Fortunately, many of the traditional strategies for securing generational wealth need only be refined at the margins to provide great value to the new generation of wealth.

Notes

¹ Pricing, trends, market capitalization levels, and other data compiled via messari.io

² According to Messari’s research, the price of bitcoin on 30 June 2023 was approximately USD 30,584. On 1 August 2024, the price was approximately USD 65,291, an increase of 113.5% in 13 months. The price of Ether on 30 June 2023 was approximately USD 1,933 and on 1 August 2024 was approximately USD 3,178, an increase of 64.4% during that period.