By Nikki Sohal, CPA
December 10, 2025
The rise of digital assets like cryptocurrencies and Non-Fungible Tokens (NFTs) is profoundly altering how clients manage their finances. As trusted advisors, you’re already addressing the tax implications of these innovative assets. However, an equally vital, yet often overlooked, question arises: what happens to these digital assets if access is lost or if unforeseen circumstances prevent their smooth transfer?
The financial news is full of stories about substantial digital asset fortunes that have become inaccessible due to poor planning, leaving millions of dollars essentially stranded in the digital realm. This presents both a unique challenge and a significant opportunity for tax professionals. By helping clients establish a thorough digital asset legacy, you provide more than just tax compliance; you offer invaluable peace of mind. Empower your clients to control their digital investments, ensuring secure transfer to beneficiaries and strengthening long-term financial security.
Estate Planning Challenges for Digital Assets
Tax practitioners understand that comprehensive estate planning goes beyond traditional assets such as real estate, retirement accounts, and investment portfolios. In an increasingly digital world, the growing variety of digital assets, particularly cryptocurrencies, necessitates their inclusion.
However, the primary difficulty lies in the intangible nature of digital assets. Unlike physical property or conventional securities, which often come with formal certificates or documented ownership, digital assets exist primarily as entries on a blockchain, identified by unique digital wallet addresses. A digital wallet, whether a physical device, software application, or service, acts as the secure storage for an individual’s private key—an alphanumeric code that grants ownership and transaction authority. Complementing this is the public key, similar to an account number, which is openly visible across the network.
The inherent absence of centralized documentation can create significant obstacles for fiduciaries. Considering the crucial role of a designated fiduciary, entrusted with managing an individual’s affairs upon incapacitation or death, the digital asset owner must meticulously ensure three key conditions are met:
- Awareness:The fiduciary must be explicitly informed of the existence of all digital assets.
- Accessibility:The fiduciary must be able to securely access these digital assets.
- Direction:The fiduciary must possess clear instructions on how to manage and distribute the digital assets to the owner’s beneficiaries.
The first hurdle a fiduciary often encounters is simply identifying all digital assets. The situation is further complicated by the distinction between digital asset wallet types:
- Hot Wallets:These wallets are connected to the internet and offer convenient user access but are inherently less secure. They are typically preferred for daily transactions.
- Cold Wallets:These wallets are physical devices that operate offline, providing enhanced security and generally preferred for long-term holdings.
The critical implication for estate planning documents is the absolute necessity to precisely list all digital asset holdings and their storage locations. Without these essential details, a fiduciary faces an insurmountable task.
Beyond identification, ensuring fiduciary access is paramount. The digital asset owner’s private keys are the keys to their digital wealth. If these vital access credentials are not securely shared and clearly documented, the digital assets risk being irretrievably lost. These are not hypothetical scenarios. Consider the well-known case of a cryptocurrency investor who accidentally lost an estimated $800 million in Bitcoin after discarding a hard drive, or the thousands of individuals unable to retrieve funds following the sudden death of a cryptocurrency exchange founder, who was the sole person with access to the exchange’s wallets. These examples underscore the urgent need for meticulous documentation and proactive planning.
Further complicating matters, many prominent cryptocurrency exchanges, such as Coinbase and Binance, do not offer direct beneficiary designation features for accounts. Consequently, transferring ownership requires the execution of a valid will, trust, or other legally binding documents, with fiduciaries likely needing to navigate specific exchange protocols, typically outlined on their respective websites.
For fiduciaries seeking guidance, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) provides a standardized framework. This act prioritizes user intent regarding digital asset access:
- Online Tool Directives:Instructions provided via an online tool take precedence over those in a will, trust, power of attorney, or other records.
- Will/Trust Directives:In the absence of online tool directives, instructions in a will, trust, power of attorney, or other records govern access.
- Terms of Service:If no explicit directives are given, the provider’s Terms of Service Agreement dictates access.
It is wise to advise clients to collaborate with their estate planners to prepare a statement authorizing companies to disclose online account information to their fiduciary. While such a statement, ideally incorporated into a will, can empower fiduciaries to request account data, potential challenges remain if a company’s terms of service agreement restricts third-party access.
The final obstacle involves the seamless transfer of digital assets to the intended beneficiaries. To avoid the often-difficult probate process, the strategic use of trusts is highly recommended. A well-drafted trust document should explicitly outline the management of digital assets, identify beneficiaries, and stipulate the distribution terms. Ideally, a trustee with demonstrated experience in digital asset management should be appointed. However, tax practitioners should inform their clients that not all exchanges currently permit trusts to open accounts, introducing another layer of complexity that requires careful navigation.
Creating a Digital Asset Legacy
For your clients holding digital assets, the question isn’t if they need a digital asset legacy plan, but when. The unfortunate reality of inaccessible wealth due to lost keys or forgotten passwords highlights a critical oversight in many estate plans: the digital blind spot. Without a clear, secure roadmap for digital holdings, even substantial fortunes can disappear.
A robust digital asset legacy plan serves as this essential roadmap. It’s more than just a list; it’s a meticulously organized inventory of all a client’s digital assets, their specific locations, and precise instructions for accessing them. Crucially, this document details where private keys and recovery phrases are securely stored, without ever listing these highly sensitive credentials directly. Compromising the legacy document itself is a risk no one should take.
Therefore, emphasize to your clients that their private keys and recovery phrases must reside in ultra-secure, segregated environments—consider hardware wallets, encrypted offline storage, or physically secured safes for paper backups. Similarly, the legacy document itself demands uncompromising security. Advise your clients on using encrypted password managers, secure cloud storage with multi-factor authentication, or robust physical safes for printed versions.
By proactively guiding your clients through the creation of such a legacy, you not only safeguard their digital wealth but also affirm your role as a comprehensive and forward-thinking financial advisor in an evolving digital economy.
Conclusion
Tax practitioners are crucial in guiding clients through digital asset legacy planning. Secure transfer of these assets isn’t automatic; without proactive planning, digital assets risk being lost or inaccessible due to issues like lost private keys or incapacitation. Advising clients on a comprehensive digital asset legacy plan protects their financial future and ensures their wishes are met. This not only prevents potential disaster but also solidifies your role as a strategic financial partner in the digital age.
Editor’s Note: The full article presented above is available in the Practitioner’s Tax Action Bulletin, as Tax Action Memo (TAM-2335), first published in Issue 17 Dated September 9, 2025, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bi-monthly Practitioner’s Tax Action Bulletin, which is available in print, and online or to add Thomson Reuters Planner CS to your advisory toolkit.
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