Estate Planning for Crypto
Learning Objectives
Implement the step-up in basis for inherited crypto assets
Create secure inheritance plans for private keys and wallet access
Navigate estate tax valuation for cryptocurrency
Structure gifts of crypto during lifetime for tax efficiency
Establish documentation that protects heirs from IRS challenges
The Most Powerful Tax Benefit:
STEP-UP IN BASIS EXAMPLE:
Original purchase:
10,000 XRP bought at $0.10 = $1,000 basis
At death:
10,000 XRP worth $5.00 = $50,000 value
Unrealized gain: $49,000
If sold before death:
Tax on $49,000 gain at 23.8% = $11,662
If inherited (step-up):
Heir's basis: $50,000 (stepped up to FMV at death)
If heir sells at $50,000: $0 gain
Tax: $0
TAX SAVED: $11,662
The $49,000 gain is NEVER taxed.
This is one of the most valuable tax benefits in the entire code—and it applies fully to cryptocurrency.
Important Disclaimer:
Estate planning involves complex legal, tax, and family considerations. This lesson provides educational overview only. Work with qualified estate planning attorneys and tax advisors for your specific situation.
STEP-UP IN BASIS RULES:
IRC Section 1014:
Property acquired from a decedent receives basis
equal to fair market value at date of death
(or alternate valuation date if elected)
- Heir's basis = FMV at death
- All prior unrealized gains eliminated
- Holding period = automatically long-term
- Can sell immediately at LTCG rates
- Gifted property (carryover basis)
- Property sold before death
- Income in respect of a decedent (IRD)
CRYPTO VALUATION FOR ESTATE:
- FMV as of date and time of death
- Use consistent pricing source
- Document methodology
- Estate can elect if it reduces estate tax
- Must be used for ALL estate assets
- Consider if crypto volatile around death
- Price on specific date/time
- Source (CoinGecko, exchange, etc.)
- Screenshot or printout
- Keep with estate records
Example:
Death: January 15, 2025 at 2:30 PM
XRP price at that time: $3.00
10,000 XRP step-up basis: $30,000
COMMUNITY PROPERTY STATES:
States: AZ, CA, ID, LA, NM, NV, TX, WA, WI
Special rule:
When one spouse dies, BOTH halves of community
property receive step-up in basis
Example:
Married couple in California
Community property: 20,000 XRP
Basis: $2,000 (bought years ago)
FMV at first spouse's death: $100,000
- Deceased spouse's half: $50,000 step-up
- Surviving spouse's half: $1,000 basis (no step-up)
- Total basis: $51,000
- Both halves step up
- Total basis: $100,000
- Additional $49,000 basis benefit
If you live in CP state:
Ensure crypto is community property
Document it as such
Massive potential benefit
CRYPTO ACCESS CHALLENGE:
- Brokerage accounts: Heirs contact broker
- Bank accounts: Death certificate unlocks
- Real estate: Title transfer via probate
- Private keys control everything
- No "customer service" to call
- Lost keys = lost crypto forever
- No recovery mechanism
- Assets are lost
- But may still owe estate tax on them
- Worst possible outcome
CRYPTO INHERITANCE SOLUTIONS:
- Location of wallets
- Private keys or seed phrases
- Instructions for access
- Risk: Physical security
- Give sealed envelope to estate attorney
- Or professional fiduciary
- Accessible upon death
- Risk: Trust in third party
- Hardware wallet in safe deposit box
- PIN and seed phrase separate location
- Detailed instructions for heirs
- Risk: Multiple security points
- Require 2 of 3 keys to access
- You hold 1, attorney holds 1, family holds 1
- Prevents single point of failure
- More complex to implement
- Emerging solutions (Casa, etc.)
- Dead man's switch mechanisms
- Third-party custody with inheritance
- Evaluate carefully before trusting
EXCHANGE ACCOUNTS FOR INHERITANCE:
- Standard account transfer process
- Death certificate + legal docs
- Exchange has customer service
- Heirs don't need technical knowledge
- Exchange could fail/freeze
- Subject to exchange policies
- May take time to process
- Privacy concerns
1. Death certificate provided
2. Legal documentation (executor appointment)
3. Exchange transfers to estate/heirs
4. Similar to brokerage transfer
- More control but more responsibility
- Technical knowledge required
- Documentation essential
- Consider heir capabilities
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FEDERAL ESTATE TAX (2025):
Exemption: ~$13.99 million (indexed for inflation)
Rate: 40% on amounts over exemption
Portability: Unused exemption transfers to spouse
- Under exemption = no federal estate tax
- Exemption is per person
- Married couple: ~$28 million combined
- Amounts over exemption taxed at 40%
- Crypto included in taxable estate
- Valuation critical
Example:
$15 million estate including $2M in XRP
Exemption: $13.99M
Taxable: $1.01M
Estate tax: $1.01M × 40% = $404,000
STATE ESTATE/INHERITANCE TAXES:
- Connecticut: $13.99M (matches federal)
- Hawaii: $5.49M
- Illinois: $4M
- Maine: $6.8M
- Maryland: $5M (plus inheritance tax)
- Massachusetts: $2M
- Minnesota: $3M
- New York: $6.94M (cliff!)
- Oregon: $1M
- Rhode Island: $1.77M
- Vermont: $5M
- Washington: $2.193M
- DC: $4.71M
- Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania
Example - Massachusetts:
$3M estate including $500K crypto
MA exemption: $2M
Taxable: $1M
MA estate tax: ~$65,000+
Federal: $0 (under federal exemption)
State: $65,000
ESTATE TAX VALUATION:
- 24/7 markets (what time on death date?)
- Price variation across exchanges
- Some tokens lack clear market price
- Volatile values
- Document time of death precisely
- Use consistent exchange/source
- Average of major exchanges defensible
- Consider alternate valuation date
- Elect to value 6 months after death
- Must reduce gross estate AND estate tax
- Useful if market drops after death
- Irrevocable election
Example:
Death: March 1, value $5M
6 months later: Value $3M
Alternate valuation saves estate tax
But heir's basis = $3M (lower step-up)
ANNUAL GIFT EXCLUSION (2025):
Amount: $19,000 per recipient per year
No limit on number of recipients
No gift tax return required (under exclusion)
Married couple: $38,000 per recipient (split gifts)
- Gift XRP worth up to $19,000
- No gift tax
- No reporting (unless over exclusion)
- Recipient gets carryover basis
Example:
Gift 5,000 XRP worth $19,000 to each of 3 children
Total gifted: $57,000
Gift tax: $0
Gift tax return: Not required
GIFT TAX RULES:
- File Form 709 (gift tax return)
- Uses lifetime exemption ($13.99M)
- No tax paid until exemption exhausted
- Donor: No recognition of gain at gift
- Done: Receives carryover basis
- Holding period tacks (continues)
Example:
Gift 50,000 XRP
Your basis: $5,000
FMV at gift: $150,000
Amount over exclusion: $131,000 ($150K - $19K)
Uses $131K of lifetime exemption
No immediate tax (unless exemption exhausted)
Recipient's basis: $5,000 (carryover)
GIFT NOW VS. LEAVE AT DEATH:
Scenario:
10,000 XRP, basis $1,000, FMV $50,000
You want to transfer to child
- Child's basis: $1,000 (carryover)
- Child sells at $50,000: $49,000 gain
- Tax (at child's rate): ~$10,000-12,000
- Child's basis: $50,000 (stepped up)
- Child sells at $50,000: $0 gain
- Tax: $0
Analysis:
Bequest saves ~$10,000+ in income tax
But: Keeps asset in your estate
If estate under exemption: Bequest wins
If estate over exemption: Complex analysis
General rule:
Low-basis appreciated assets = better to bequest
High-basis or loss assets = better to gift
REVOCABLE LIVING TRUST:
- Trust you create and control during life
- Assets transfer to trust but you maintain control
- Becomes irrevocable at death
- Avoids probate (private, faster)
- Successor trustee named (access plan)
- Can include detailed crypto instructions
- State law may protect better
- No income tax change during life (disregarded)
- At death: Normal step-up applies
- Trust continues for beneficiaries if desired
- Trust document with crypto provisions
- Transfer crypto to trust (retitle)
- Name successor trustee
- Provide access instructions
IRREVOCABLE TRUST FOR CRYPTO:
- Remove assets from estate
- Gift/estate tax planning
- Asset protection
- Control from grave
- Intentionally Defective Grantor Trust (IDGT)
- Irrevocable Life Insurance Trust (ILIT)
- Charitable Remainder Trust
- Dynasty Trust
- Gift tax on transfer to trust
- Assets out of estate (if structured right)
- May lose step-up (complex rules)
- Trust income taxed to trust or beneficiaries
Example - IDGT:
Transfer $1M XRP to IDGT
Gift tax: Uses exemption
Estate tax: Out of estate at current value
Future appreciation: Not in estate
Step-up: Lost (gift, not bequest)
Income tax: Paid by grantor (further reduces estate)
TRUST CRYPTO CUSTODY:
Challenge:
Trust needs to "own" crypto
How does trust hold private keys?
Solutions:
Growing number offer crypto custody
Trust owns, trustee manages
Professional management
Fees and limited control
Named person holds for trust
Detailed written procedures
Fiduciary duty applies
Less institutional protection
Multiple key holders
Trust document specifies requirements
Complex but flexible
Third-party holds for trust
Institutional solution
Evaluate security and insurance
CRYPTO ESTATE DOCUMENTATION:
- All wallets and addresses
- All exchange accounts
- Approximate values
- Location of access credentials
- How to access each wallet
- Hardware wallet PINs
- Seed phrase locations
- Exchange login procedures
- Purchase records (basis)
- Historical prices
- Date of death prices
- Methodology documentation
- Will provisions for crypto
- Trust provisions
- Beneficiary designations
- Power of attorney for crypto
HEIR BASIS DOCUMENTATION:
- Proof of date of death value
- Documentation of stepped-up basis
- Any alternate valuation election
- Original cost basis (for comparison/audit)
- Create portfolio snapshot at death
- Screenshot multiple price sources
- Document valuation methodology
- Keep original purchase records too
- Heir claims $100K basis (stepped up)
- IRS may request proof
- Death certificate + valuation evidence
- Keep for 6+ years after heir sells
CRYPTO LETTER OF INSTRUCTION:
Non-binding but essential document:
- List of all crypto holdings
- Where private keys/seeds are stored
- Step-by-step access instructions
- Contact info for any custodians
- What to do with each asset
- Who to contact for help
When you add/remove assets
When you change storage
Annually at minimum
Safe location
Known to executor/trustee
Secured but accessible
✅ Step-up in basis applies to crypto: FMV at death becomes heir's basis
✅ Estate tax exemption is high: ~$14M per person covers most estates
✅ Gifts use carryover basis: No step-up for gifted property
⚠️ Trust custody solutions: Still evolving for crypto
⚠️ Complex trust step-up rules: Depends on trust type
⚠️ State treatment variations: Differing rules across states
📌 Lost access = lost assets: Keys die with owner if not planned
📌 Estate tax on inaccessible assets: May owe tax on crypto no one can access
📌 Undocumented basis: Heirs may not be able to prove step-up
The step-up in basis is one of the most valuable tax benefits available—potentially saving thousands to hundreds of thousands in capital gains taxes. But crypto's unique access requirements mean estate planning is more critical than ever. The investor who documents everything, creates clear access paths, and works with qualified advisors protects both themselves and their heirs.
Assignment: Create a comprehensive crypto estate plan.
Requirements:
All crypto holdings
Location (exchange, wallet type)
Approximate value and basis
How will heirs access each holding?
Where are credentials stored?
Who knows the plan?
Current unrealized gains
Potential tax savings from step-up
Gift vs. bequest analysis for each asset
Complete letter for your executor
Step-by-step access procedures
Contact information
What legal documents need updating?
Do you need trust structure?
Professional advisors needed?
Time investment: 4-5 hours
1. Step-up in basis at death means:
A) Heir pays extra tax
B) Heir's basis = FMV at death, eliminating prior gains
C) Original basis carries over
D) No basis is assigned
Answer: B
2. If you gift appreciated crypto during your lifetime:
A) Recipient gets stepped-up basis
B) Recipient gets carryover basis (your original basis)
C) Recipient's basis is zero
D) You pay tax on the gain at gift
Answer: B
3. The biggest risk for crypto estate planning is:
A) Estate tax rates
B) Lost access due to no key inheritance plan
C) State variations
D) Step-up rules
Answer: B
4. In community property states, when one spouse dies:
A) Only deceased spouse's property steps up
B) Both halves of community property step up
C) No step-up applies
D) Special crypto rules apply
Answer: B
5. For low-basis appreciated crypto, it's generally better to:
A) Gift during lifetime
B) Sell and gift cash
C) Leave as bequest (to get step-up)
D) Donate to charity
Answer: C
End of Lesson 16
Total words: ~4,500
Estimated completion time: 55 minutes reading + 4-5 hours for deliverable
Key Takeaways
Step-up in basis eliminates unrealized gains:
Heir's basis = FMV at death. All prior appreciation never taxed.
Access planning is essential:
Private keys must be accessible to heirs or assets are lost forever.
Low-basis crypto is better bequeathed than gifted:
Gift = carryover basis (no step-up), bequest = stepped-up basis.
Community property states offer double step-up:
Both halves step up when first spouse dies.
Documentation protects heirs:
Without proof of stepped-up basis, heirs may face IRS challenges. ---