You’ve worked hard to generate and preserve your wealth. If some of your wealth is held in cryptocurrencies (crypto) or digital assets and you value privacy and tax efficiency, you might consider taking steps to update your estate planning documents.
Don’t have an estate plan? The state you reside in has one for you. If you fail to work through an estate plan during your lifetime, state law will decide on your behalf how your estate is passed on to beneficiaries, even if it’s not what you would’ve intended. Time may also be running out to take advantage of a historically large estate tax exemption scheduled to be cut approximately in half at the end of 2025.
Estate planning with cryptocurrencies, such as bitcoin, can raise certain challenges, such as how you choose to custody the assets, tax efficiency, and tax planning with a volatile asset, along with asset protection.
Custody
Self-custody is a large part of the ethos behind why bitcoin and other cryptocurrencies exist. Most view self-custody as a way to reduce counter-party risk. However, with self-custody comes the increased risk of loss of private keys and cybersecurity risk. Self-custody doesn’t allow you to designate a beneficiary, and simply leaving behind a private key may also create a scenario in which your spouse or children don’t know how to recover the assets without further instructions. Imagine a scenario in which you don’t know much—if anything—about cryptocurrencies and stumbled upon a piece of paper with 12 random words on it. Would you know what to do with that information?
Fortunately, there are regulated qualified custodians in the U.S. that can custody crypto and digital assets in a bankruptcy remote manner. While this doesn’t completely eliminate counter-party risk, qualified custodians must adhere to certain regulations so that your assets are segregated and not subject to the same bankruptcy process as the custodian’s assets. While creating or updating an estate plan, you may identify a trust structure that fits your needs for privacy, tax efficiency, and asset protection. Custodians can help ensure that assets are properly titled and that the trustee can manage the assets according to the terms of the trust. When gifting assets to a trust, separation of the assets from the grantor must occur for it to be considered a completed gift. For crypto assets, this means that the crypto cannot be held in self-custody where the grantor still has sovereign ownership over the assets. The trustee should have ultimate authority and ownership over the assets as it ultimately holds the asset for the beneficiary(ies) and has a fiduciary duty to that person(s).
Tax Efficiency & Planning
In 2017, Congress passed the Tax Cuts and Jobs Act (TCJA). A major provision of the TCJA was the increase of the lifetime gift and estate exemption amount from $5 million to $10 million per taxpayer plus an index for inflation. As a result, in 2025 an individual can give up to $13,990,000 either during life or at death with no transfer tax consequences. A married couple could give up to $27,980,000. This can be a major tax planning opportunity, especially since the estate tax rate can reach up to 40%. This major change allows individuals to take advantage of the increased exemption to preserve wealth for future generations.
Due to congressional budgetary rules, the TCJA includes a “sunset provision” with an expiration date of December 31, 2025, and on January 1, 2026, the available gift and estate tax exemption will revert back to $5 million indexed for inflation. This amount is anticipated to be approximately $7 million.
Given this “sunset,” taxpayers have an extremely unique planning opportunity to use a portion of their exemption in that it would be the first time ever that the gift and estate tax exemption has decreased.
Why Crypto & Tax Planning?
Given the spike in value cryptocurrencies (such as bitcoin) have seen in roughly the past 15 years, many taxpayers are finding themselves in a situation where they have accumulated a substantial amount of wealth in a short period of time. This may mean crypto owners might face a taxable federal estate based on the substantial appreciation in their crypto holdings.
In general, taxpayers may be looking to use the all-time-high gift and estate exemptions. In a scenario where a taxpayer’s net worth is made up largely of cryptocurrency or digital assets, it may be the obvious candidate to do some planning with. This creates a ripe opportunity for gifting some cryptocurrency to a trust, particularly with using a “freeze” technique.
In general, a freeze technique is any wealth transfer technique where the value of the assets for gift and estate tax purposes is considered to be “frozen” at the fair market value (FMV) as of the date of the transfer, and any growth subsequent to the transfer technique may be passed to heirs free of gift and estate tax. This can be particularly opportune when assets are gifted to a trust that can be held for multiple generations, which can help perpetuate generational wealth.
How Could Taxpayers Use Their Exemption on Crypto?
Intentionally Defective Grantor Trust (IDGT) & Spousal Lifetime Access Trust (SLAT)
In the current environment, one of the most used tools to implement a freeze technique is an IDGT.
After the trust has been established, the grantor will transfer assets to the trust to be administered and managed by a named trustee. The IDGT is an effective tool in estate planning due to its unique structure and its two defining features.
- The trust is an irrevocable trust and is drafted such that any gift to the trust will use up the taxpayer’s lifetime exemption and will not be includable in the taxable estate upon the death of the grantor, thereby avoiding up to 40% tax on the transfer of assets at death.
- These trusts are called “grantor trusts” for income tax purposes, which means that the grantor pays income taxes on any income or gains generated by the trust’s assets during the grantor’s lifetime. Over time, this has proven to be one of the more powerful features of the strategy as the income tax paid by the grantor creates additional “tax-free” gifting opportunities for the grantor.
Further, IDGTs can be drafted to provide to the grantor’s spouse as a permissible beneficiary. This is sometimes referred to as a SLAT. The spousal beneficiary provisions may be a preferred option for many as they ultimately allow for protection of appreciation from estate tax while also providing flexibility and indirect access in that the spouse is a permissible beneficiary.
In addition, to increase the ease of administration of the trust and of transfers to the trust, individuals who hold digital assets may wish to put all/a portion of their digital assets in a limited liability company (LLC) and simply transfer the LLC to the trust. This may provide the taxpayer with valuation discounts, and they should consider speaking with their attorney and valuation specialist on such available discounts. Individuals should be cautious, however, with the LLC approach. If they are deemed to retain too much control over the LLC, it may be deemed that the control would be sufficient enough to pull the entirety of the LLC back into their taxable estate, rendering the strategy ineffective.1
This type of structure can yield significant tax and non-tax results for individuals looking to engage in planning. Consider a basic example scenario where a holder of digital assets wishes to leverage one of these trust vehicles to protect their cryptocurrency holdings for future generations from potential creditors and estate tax. They ultimately decide to fund an LLC with $10 million in digital assets and gift 100% of their interest to a trust that benefits descendants. If in a future year, the value of the digital assets has increased to $20 million, that individual would have shielded $10 million in value from estate tax or potentially saved $4 million. See chart below.
| Digital Asset Value in 2025 | Future Date Value | Appreciation Captured out of the Estate | Value Retained in Taxable Estate | 40% Estate Tax |
|---|---|---|---|---|
| $10,000,000.00 | $20,000,000.00 | $- | $20,000,000.00 | $8,000,000.00 |
| $10,000,000.00 | $20,000,000.00 | $10,000,000.00 | $10,000,000.00 | $4,000,000.00 |
| Potential Savings | $4,000,000.00 |
Despite the estate tax savings power these vehicles have, for many practitioners and taxpayers, using the lifetime exemption on digital assets poses at least two notable risks given the volatility of cryptocurrency.
- If a taxpayer uses a significant portion of their exemption and the asset sees a significant decline, the exemption may have been “wasted.” As noted above, a core tenet of the freeze technique is that the goal is for the asset transfer to experience appreciation, as every dollar of growth will receive protection from estate tax.
- Gifting cryptocurrency to a trust could mean that beneficiaries would not benefit from a step up in basis. For many who have experienced appreciation by owning crypto, the basis may be very low. Currently, assets that are gifted receive carryover basis. As a result, if someone gifts a large portion of their cryptocurrency, e.g, to a trust, that recipient generally takes the same basis as the giftor/transferor. This creates a scenario where no step up in basis is available upon the death of the original cryptocurrency holder. Assuming the taxpayer’s estate was over the lifetime exclusion, when it comes time to pay the estate tax, and the only liquid asset is cryptocurrency held in a trust, the estate may have to liquidate the cryptocurrency to pay the tax, which creates a circular reference. Liquidating cryptocurrency to pay the tax also generates a taxable gain as a result of a sale because the basis in the cryptocurrency is still that of the original owner’s.
Grantor Retained Annuity Trust (GRAT)
A solution to the carryover basis problem may be to consider a GRAT. One benefit to using a GRAT is that it is generally created in a way in which no lifetime exemption is used upon its creation, reducing the risk of using the lifetime exemption on an asset that may lose value. A GRAT is a wealth transfer technique where a trust is created by an individual (a grantor) and that individual retains an interest in the trust for a prescribed term of no less than two years in the form of an annuity. A majority of GRATs are structured in a way where the present value of annuity payments back to the grantor are equal to the amount gifted to the trust. This is what is referred to as a “zeroed-out GRAT.” The benefit of structuring a GRAT in this manner is that the balance left in the trust at the end of the annuity term can pass to heirs free of federal estate and gift tax.
Further, taxpayers may consider a “rolling GRAT” strategy, where annuity payments received by the taxpayer are used to create a new GRAT. By implementing this strategy, the grantor can leverage annuity payments received to make future transfers to a new trust, providing greater potential benefit to the strategy. This can be done with successive two-year GRATs, effectively giving you multiple “bites at the apple” to implement successful wealth planning techniques. This strategy further reduces the noted risk of using the lifetime exemption on a volatile asset in that if in a given year the volatility in the GRAT causes it to be unsuccessful, there would not be lost exemption, and the taxpayer could attempt the strategy again with the rolling GRAT model.
Example
Consider that a holder of digital assets may have 100 coins with a cost basis of $1,000 per coin and a FMV of $10,000 per coin.2
| Digital Asset | ||||
|---|---|---|---|---|
| Coins | Cost Basis Per Coin | Basis | Coin Price | FMV |
| 100 | $1,000.00 | $100,000.00 | $10,000.00 | $1,000,000.00 |
To balance basis planning with estate tax and thoughtful exemption planning, the individual sets up a five-year GRAT that results in $0 gift for gift tax purposes. The annuity back to the grantor is $233,534 per year.
| Client GRAT | |
|---|---|
| Years | 5 |
| 7520 Rate | 5.40% |
| FMV | $1,000,000.00 |
| Annuity Payment | $233,534.64 |
As the only asset in the GRAT is the digital asset, the annuity payments are made in kind on an annual basis.3 If we considered a period of volatility of +20% annually and -20% annually, it can be well illustrated as to why the GRAT may be a good estate planning technique in a period of volatility when compared to an IDGT. To the extent a GRAT is implemented and saw a 20% annual decline in value, the GRAT illustration would look like the following:
| Client GRAT | |||||
|---|---|---|---|---|---|
| Payment Schedule | Payment | PIK Coins | Value Per Coin | Coins Left in Trust | Trust Value |
| Year 1 | $233,534.64 | 29.1918297 | $8,000.00 | 70.808 | $566,465.36 |
| Year 2 | $233,534.64 | 36.48978712 | $6,400.00 | 34.318 | $219,637.65 |
| Year 3 | $175,710.12 | 34.31838318 | $5,120.00 | 0.000 | $- |
| Year 4 | $- | 0 | $4,096.00 | 0.000 | $- |
| Year 5 | $- | 0 | $3,276.80 | 0.000 | $- |
In the above, the GRAT “breaks” in year three, meaning the value of the trust goes to $0. Since all 100 coins have been paid back to the grantor in the form of the annuity payment, the grantor is in a similar position as if they did not execute the strategy, which limits risk. Conversely, should the coin experience a period of 20% annual growth during the five-year GRAT period, the GRAT illustration could look like the following:
| Client GRAT | |||||
|---|---|---|---|---|---|
| Payment Schedule | Payment | PIK Coins | Value Per Coin | Coins Left in Trust | Trust Value |
| Year 1 | $233,534.64 | 19.4612198 | $12,000.00 | 80.539 | $966,465.36 |
| Year 2 | $233,534.64 | 16.21768316 | $14,400.00 | 64.321 | $926,223.80 |
| Year 3 | $233,534.64 | 13.51473597 | $17,280.00 | 50.806 | $877,933.92 |
| Year 4 | $233,534.64 | 11.26227998 | $20,736.00 | 39.544 | $819,986.07 |
| Year 5 | $233,534.64 | 9.385233313 | $24,883.20 | 30.159 | $750,448.64 |
In the above, the GRAT is successful in that more than $750,000 of value is preserved outside of the estate and protected from gift and estate tax.4 As noted above, if this strategy is implemented on a rolling basis, the benefits could be significant.
Asset Protection
Another item to consider when determining how to effectively manage your estate is asset protection. A grantor is generally treated as the owner of any portion of a trust where the power to revest title is exercisable by the grantor.5 This means that assets in a revocable trust are generally considered to be assets of the grantor and accessible to creditors. Creditor protection status largely depends on state law and the specific terms of the trust, but grantors of a GRAT could be seen as having the right to receive annuity payments, and creditors may claim those payments.
However, upon the end of the GRAT term, if that GRAT pays out to another irrevocable trust, the assets inside the irrevocable trust may receive credit protection as they are no longer owned by the grantor or subject to the grantor’s creditors. In a similar context, SLATs may be better designed for potential creditor protection, without the added generation-skipping tax complexities, depending on the federal and state tax law. Even if advanced planning techniques like a GRAT or a SLAT are not pursued, it is crucially important that from an asset protection standpoint, a succession plan for your digital assets is well documented in your basic estate planning documents, so those assets can be effectively managed upon passing. This holds true not only for digital currency, but it also extends to other digital assets such as email, social media, and online account passwords as the online footprint for the average person continues to expand.
Conclusion
There is no time like the present to protect your wealth through estate planning. Owning crypto assets can create complexities in an estate, but there are strategies you can deploy to work around custody and volatility challenges while protecting your assets. Working with a professional advisor at Forvis Mazars can help you navigate these challenges.
If you have any questions or need assistance, please reach out to one of our professionals.
- 12036(a).
- 2Disclaimer: As noted above, over the past five years, bitcoin, as an example, has seen a significant amount of volatility in the marketplace. While opinion or direction of the investment viability of bitcoin or any digital asset is outside of the scope of this article, it is worth noting that the asset class has seen a rise in popularity. And given its rise in popularity, it is an asset that investors are choosing to hold in the current environment. Further, there recently have been swings in bitcoin’s value that have resulted in big bear and bull runs of the coin. Examples of this include a +700% bull run in 2020 and 2021, a -50% bear run in mid-2021, a -75% bear run in late 2021 into 2022, and a +130% run in 2024. Given this, it is not appropriate to try to predict the future appreciation potential of digital assets; however, in illustrating an example, it is relevant to show how a GRAT could be used as an estate planning solution in a period of volatility and uncertainty and addresses some of the risks noted above.
- 3Currently, digital assets are classified as property and not as securities for tax purposes. Thus, to substantiate any value for transfer tax purposes a qualified appraisal should be obtained. See IRS Chief Counsel Memo 202302012 which indicates a qualified appraisal requirement for charitable deduction purposes under IRC170(f)(11)(C).
- 4Disclaimer: The illustration above is not intended to suggest or speculate on the future value appreciation or depreciation of digital asset value. It is, however, intended to show that given the volatility, should investors choose to continue to hold digital assets, a GRAT could be an opportunistic estate planning technique as it offers the upside of capturing appreciation outside of the taxable estate, while avoiding the risk of using lifetime gift and estate tax exemption on an asset that may decline in value.
- 5Reg. 1.676(a)-1.