Estate Planning for Bitcoin in 2023 | A Simple Guide to Fund a Trust with Bitcoin

If you are a holder of Bitcoin, this article will help you to understand how to fund a trust with Bitcoin as well as the benefits of estate planning for Bitcoin.
Fund a Trust with Bitcoin

As an owner of Bitcoin, you have probably gone to great lengths to keep your private key safe and secure and not accessible to anyone else.

You may not think much about it, until one day something happens and you (or your next of kin) need to access those funds.

So this begs the question…What happens to Bitcoin when you die or become incapacitated? Is it smart to fund a Trust with Bitcoin?

This article will primarily focus on the legal aspects of how to fund a Trust with Bitcoin and what happens to bitcoin upon death.

In doing so, we will need to first briefly touch on some of the technical parts of Bitcoin related to estate planning.

4 Benefits of Putting Bitcoin in a Revocable Trust in California

  1. When You Fund a Trust With Bitcoin, it Avoids Probate: If you have a valid Trust in place and it is properly funded with your Bitcoin, your bitcoin will likely avoid California Probate.
  2. When You Fund a Trust With Bitcoin, Your Successor Trustees and Beneficiaries Will Be Aware You Own Bitcoin Upon Your Death. Including Bitcoin in your Trust will make it less likely that your Bitcoin or cryptocurrency will go undiscovered upon your death.
  3. When You Fund a Trust With Bitcoin, you get Privacy: Unlike a Will, Revocable Trusts are generally not made public in California and your Bitcoin and other cryptocurrency assets will likely remain private.
  4. When You Fund a Trust With Bitcoin, You Direct How Your Beneficiaries Will Inherit Your Bitcoin. Through the Trust, you can dictate who will inherit your Bitcoin and any conditions you would like to place on the inheritance. In addition, you can control how it should be managed until it is distributed to your beneficiaries.

Now that we have gone over some benefits of why it is important to fund a revocable living trust with Bitcoin, let’s go over some of the technical basics of owning Bitcoin and cryptocurrency.

Understanding the Basics of Cryptocurrency is Fundamental to Including Bitcoin in a Trust

Here is an oversimplified outline of some concepts we will discuss in this article.

How Is Bitcoin Held or Stored?

Bitcoin and cryptocurrencies are stored on a blockchain which keeps a public ledger of an individual’s ownership.

To access your Bitcoin through the blockchain you will need a “private key”.

Your private key is then stored in a “crypto wallet”, which allows you to access the blockchain and buy, sell, or trade, your cryptocurrency.

A cryptocurrency wallet contains a set of public addresses and private keys.

Anyone can access the wallet’s public address and make a deposit of cryptocurrency, however, to remove the funds from the wallet you will need the corresponding private key.

To summarize, your wallet holds your private key, and without a private key, you have no ability to buy, sell, or access your cryptocurrency.

2 Different Types of Cryptocurrency Wallets to Be Aware of When Estate Planning for Bitcoin

  1.  “Custodial Crypto Wallet is a type of crypto wallet where a 3rd party controls your private key and is responsible for safeguarding your crypto assets. These are also sometimes called “Hosted Wallets”.
  2.  “Non-custodial crypto wallet is a place that has your private key where you have complete access to the private key. These are often called Self Custody Wallets. There are two types of non-custodial wallets discussed below.

What is a “Custodial” Crypto Wallet?… Also known as the “Hosted Wallet”

The vast majority of those who invest in Bitcoin do so through a web-based crypto wallet tied to an exchange where you can buy and sell your cryptocurrency.

A Custodial Wallet is a crypto wallet controlled by a third-party crypto exchange (e.g. Coinbase).

It lets its users conveniently store and trade crypto, HOWEVER, rarely gives its users access to the private key associated with their crypto.

 Custodial Wallets are almost always web-based and can be accessed by setting up a username and password upon creation of the account.

One of the key benefits of using a custodial wallet is that if you lose your password, you can always reset it.

Key Benefit of a Custodial or Hosted Wallet

2 Types of Non-Custodial Crypto Wallets (Also Known As Self Custody Wallets)

Hardware Wallet ( or Cold Storage Wallet):

The first non-custodial crypto/self-custody wallet is often called a “hardware wallet” or a “Cold Storage Wallet”.

Note: While we understand there are many different terms used in the industry based on nuanced differences, in an effort to simplify the concepts, we will be referring to both as a hardware wallet.

A hardware wallet is simply a physical device that holds your private key.

In most instances hardware wallets are non-custodial wallets, meaning you are the only person with access to your private key.

A hardware wallet can be a “hot wallet” meaning it is, or can be, connected to the internet, or a “cold storage wallet” meaning it is not connected to the internet.

Some examples of hardware wallets are:

  1. A piece of paper where you write down your private key (remember if this is lost, destroyed, or stolen there is no way to recover your crypto assets)
  2. An Electronic device that can store your private key, which then connects to another device via USB, Bluetooth, or an app. Some examples of these devices are Trezor and Ledger

Software Wallet ( or Hot Wallet):

The second non-custodial crypto wallet is often referred to as a “Self Custody-Software Wallet”. This is generally software that stores your private key through a desktop app, mobile app, or browser extension.

A software wallet is a “hot wallet” meaning it is connected to the internet.

This requires that the holder be familiar with technology and use software with advanced security.

Some examples of current popular software wallets are Munn, Wasabi Wallet, and Wallet of Satoshi among others.

So What Happens if I lose my Non-Custodial Crypto Wallet?

If you lose your private key, you lose your crypto assets. It really is that simple.

One solution to this problem is by creating a “recovery seed phrase” if that is an option given by the hardware wallet you are using.

A recovery seed phrase allows you to re-gain access to your crypto wallet if your hardware wallet is lost or stolen.

A recovery seed phrase is a 12 or 24-word sequence randomly generated from a particular set of simple words, that is generated when you create a wallet address.

Seed phrases are helpful because they are made up of simple words instead of a long list of numbers.

Thus, it is easier to remember and write down than your private key which is a randomized long list of numbers.

Because your recovery seed phrase is an alternative way (from your private key) to access your cryptocurrency, it is imperative you keep it stored safely.

*Remember, anyone who has access to your seed phrase, just like anyone with access to your private key, can access your Bitcoin.

The Importance of the “Private Key” in Estate Planning for Bitcoin

First off, what is a private key, and why is it so important in estate planning for cryptocurrencies?

Private keys are a form of passwords. They’re a string numbers that allow you access to your cryptocurrency funds on the blockchain ledger. They allow the holder of the private key full access to control and transfer your Bitcoin or other cryptocurrency assets.

Without the private key, your Bitcoin cannot be accessed.

For there to be a successful transfer of Bitcoin upon death, it is imperative that your personal representative have access to the private key.

While providing access to the private key is a logical step for every crypto owner, people don’t like to think about their own mortality and put off creating an estate plan.

Thus, your estate planning attorney should gather information related to all of your Bitcoin (and other crypto and digital-related assets).

Once the asset information is gathered, when estate planning for Bitcoin you should:

  1. Store the private key in a way that keeps it safe while the owner is alive and well; and
  1. Provide a method to transfer access to the successor trustee upon the disability or death of the owner.

This can be done by using technology like multi-signature wallets and smart contracts, OR by storing the private key information offline in a safe place (such as a safe-deposit box, offline encrypted flash drive, hard wallet, or third-party custodian) which we address later in this article.

For people with very large cryptocurrency holdings, it may be prudent to identify a trustworthy tech-savvy trustee or corporate custodian (if available) to help in this task.

Some examples of corporate custodians include River Financial and Unchained Capital.

NOTE: remember, this technology is rapidly evolving, as are the techniques of hackers, so work with a crypto security professional to make sure your key is secure and accessible when needed.

What Happens to my Bitcoin When I Die?

What Happens to My Bitcoin When I Die?

If you are one of the 85 million Americans who hold Bitcoin (as of November 2022), you may wonder how to leave your Bitcoin to your loved ones.

There are a few things you can do to make sure your loved ones can access your Bitcoin or other cryptocurrencies after you’re gone.

While overly simplified (and excluding the many other possibilities), there are three common paths for transferring Bitcoin after death.

The 3 Common Paths for Transferring Bitcoin After Death:

  1. No Plan in Place for Your Bitcoin Upon Death: 

You do not put a plan in place and some or all of your estate may need to go through the probate process. Your state’s laws of intestacy will determine who will inherit your Bitcoin and other cryptocurrencies.

Then, once the probate court determines the beneficiaries, your executor will need to find your private key, which is normally hidden for security purposes.

If the executor cannot find the private key, it may be impossible for your executor to transfer the crypto to your beneficiaries and it may be lost forever…

The downside here is that the probate process is public, expensive, stressful, and takes a lot of time.

  1. You Include Your Bitcoin in a Valid Last Will and Testament: 

You have a valid Will in place that identifies who will inherit your Bitcoin.

In California, this will likely require that some form of probate be opened and your Will to be publicly filed with the probate court.

As is the case with the first option, you face the same challenges when facing the probate process.

  1. You Fund a Trust with Bitcoin: 

When you set up a revocable living Trust and properly fund it with your Bitcoin and other assets, the probate process will likely be avoidable.

While there needs to be careful planning and considerations with how to fund a Trust with Bitcoin, when done properly, it is likely the best and most efficient way to leave your loved ones with an inheritance of Bitcoin.

This post focuses on how to fund a Trust with Bitcoin so that the transfer of your Bitcoin can avoid probate.

Please note, all references in this post to a Trust are referencing a revocable living trust. Irrevocable trusts are outside the scope of this article.

Estate Planning for Bitcoin: How to Fund a Trust with Bitcoin

As Bitcoin gains in popularity, some people may wonder if, and how, to fund a Trust with Bitcoin.

A revocable Trust can only distribute assets that have been transferred to the Trust – a process often called Trust “funding”. Often, Trust funding is straightforward.

This, however, is not always the case when you want to fund a Trust with Bitcoin and other cryptocurrencies.

To “fund” your revocable Trust with Bitcoin and other cryptocurrencies, the analysis starts with how you hold it.

Below are three common ways people hold their cryptocurrency and steps to fund such cryptocurrency.

How To Fund a Trust with Bitcoin when Held in a “Non-Custodial Wallet”:

If you hold your Bitcoin in a non-custodial wallet (and store your private key in a hardware or software wallet) here are 3 steps to funding your revocable Trust with your Bitcoin:

  1. Set up a valid California revocable living trust.
  2. Reference your cryptocurrency on Schedule A to your revocable Trust and, in a written instrument, assign your cryptocurrency to your revocable Trust.
  3. If you implicitly trust the person you have named as successor trustee of your Trust, provide him/her your private key or seed phrase or let him/her know where you store it (e.g., in a drawer in the kitchen, the safe in the closet, buried in the backyard, etc.). *

*Note, however, if you don’t Trust your successor trustee 100%, be sure to think twice before giving him/her the “keys to the kingdom”.

If you prefer not to give your private key to your successor trustee, you could store your private key in a safe-deposit box titled in the name of your Trust, or through a third-party custodian as discussed further in the next section.

How To Fund a Trust with Bitcoin when Held in a Custodial Wallet” or “Hosted Wallet”:

If you hold your Bitcoin through a third-party custodial wallet or a hosted walled (and they have sole access to your private key) here are 3 steps to fund your revocable Trust with your Bitcoin:

  1. Set up a valid California revocable living trust.
  2. Reference your cryptocurrency on Schedule A to your revocable trust and, in a written instrument, assign your cryptocurrency to your revocable Trust.
  3. If the third-party custodian recognizes revocable trusts as account owners and would recognize your successor trustee upon your death or incapacity, transfer your account to your Trust.
  4. If the third-party custodian does not recognize trusts as account owners, if you Trust the person you have named as your successor trustee, provide him/her the username and password to access your account or let him/her know where you store it.

Please remember to think twice before giving him/her the “keys to the kingdom”.

If you prefer not to give your private key to your successor trustee, you could store your private key in a safe-deposit box titled in the name of your Trust, or through a third-party custodian as discussed further in the next section.

How To Fund a Trust with Bitcoin when Held in by an LLC**

  1. Set up a valid California revocable living trust.
  2. Set up a Limited Liability Company.
  3. Open up a crypto wallet in the name of your LLC and purchase or transfer Bitcoin to that crypto wallet.
  4. Reference your LLC on Schedule A to your revocable Trust and, in a written instrument, assign your membership interest in your LLC to your revocable Trust.
  5. If your LLC is managed by a 3rd party manager, that manager will need to follow the rules of the LLC operating agreement, along with the terms of the Trust, for the benefit of your beneficiaries as monitored by your successor trustee. If you are the managing member, or manager, of your LLC, and you implicitly Trust the person you have named as successor trustee of your Trust, provide him/her your private key or let him/her know where you store it.*

* Note, however, if you don’t Trust your successor trustee 100%, be sure to think twice before giving him/her the “keys to the kingdom”.

If you prefer not to give your private key to your successor trustee, you could store your private key in a safe-deposit box titled in the name of your Trust, or through a third-party custodian as discussed further in the next section.

IMPORTANT NOTE: No matter how you own your cryptocurrency, be sure not to unintentionally include your cryptocurrency or cryptocurrency wallet in a general bequest of your tangible personal property.

Unless you specifically exclude it, you may unintentionally gift a wallet, holding your private key, to the beneficiaries of your tangible property, thereby potentially defeating what may be one of your most important estate planning goals – namely making sure someone specific inherits your cryptocurrency.

**The pros and cons of owing cryptocurrency through an LLC is beyond the scope of this article.

How to Give Your Successor Trustee Access to Your Bitcoin Upon Your Death or Disability? The Bitcoin Access Plan”

Bitcoin Access Plan

We briefly discussed how to give your successor trustee access to your Bitcoin to distribute it to your beneficiaries in the paragraphs above.

While i) making specific reference to your Bitcoin in your revocable living Trust, ii) adding it to your Schedule A, and iii) creating an assignment, alerts your successor trustee to the fact that you own Bitcoin, there still is the issue of how to safely, and efficiently, give your successor trustee access to your Bitcoin to manage and transfer to your beneficiaries during trust administration.

Creating a “Bitcoin Access Plan” document to include in your Estate Plan

It may be wise to create a separate document called a “Bitcoin Access Plan” to include in your estate planning portfolio.

This Bitcoin Access Plan should clearly explain how your successor trustee can access your Bitcoin after you die.

As of the time of writing this article (and with technology rapidly advancing) in addition to what was discussed above, here are two potential Access Plans to Bitcoin that allow the transfer of access to your bitcoin to your successor trustee.

Bitcoin Access Plan Option 1: Hire a Licensed and Insured Third-Party Custodian

While this is a new area with evolving regulations, hiring a professional third-party custodian to entrust your private key and access to your Bitcoin along with a copy of your Trust outlining how it should be managed and distributed upon your death, maybe the safest bet.

In your Bitcoin Access Plan, you would identify the third-party custodian and information on how your successor trustee should contact them and the required next steps to take.

While we do not recommend or endorse any third-party custodian, some examples of companies may be able to assist are River Financial, Unchained Capital, and even established brokers such as Fidelity Investments are starting explore and put together programs for acting as a custodian.

Bitcoin Access Plan Option 2: Using a Safe-Deposit Box

An alternative access plan is to open a safe-deposit box in the name of your Trust. Once opened, you can put your seed phrase, and or private key, in the safe-deposit box with detailed instructions for your successor trustee on how to access and distribute your Bitcoin upon your death.

This will ensure that your private key cannot be lost or fall into the wrong hands.

Estate Planning for Bitcoin

Specific Provisions to Consider Including in a Revocable Trust That Holds Bitcoin or in a Bitcoin Trust

1. Consider Addressing and Putting Limitations on the Prudent Investor Rule as It Relates to Bitcoin Held by Your Trust.

California Probate Code Section 16046 states:

(a) Except as provided in subdivision (b), a trustee who invests and manages Trust assets owes a duty to the beneficiaries of the Trust to comply with the Prudent Investor Rule.
 (b) The settlor may expand or restrict the Prudent Investor Rule by express provisions in the Trust instrument. A trustee is not liable to a beneficiary for the trustee’s good faith reliance on these express provisions.

California Probate Code Section 16046

The “Prudent Investor rule” roughly states that a trustee must invest and manage Trust assets as a prudent investor would after taking into consideration the terms of the Trust, the context of the Trust portfolio as a whole, and part of an overall investment strategy with risk and return objectives reasonably suited to the Trust.

The rule is intended to preserve the assets under the trustee’s control based on a set of facts and circumstances that are specifically listed in Probate Code 16047(c) (1-7).

By its nature, Bitcoin is still highly speculative and volatile. A Trustee who follows the Prudent Investor Rule may be advised to immediately liquidate all Bitcoin holdings (even if Bitcoin was at a high or low value at that moment) to avoid any potential future losses.

If they held onto the Bitcoin, knowing its volatile nature, and the price were to decrease, they may potentially expose themselves to liability from the beneficiaries under the basis of the Prudent Investor Rule. This is all dependent on the court’s interpretation of how it is worded within the Trust.

As Settlor, Selling Bitcoin immediately by the successor trustee to avoid any future losses very well may be your intent.

Alternatively, your intent may be to give your successor Trustee the discretion to hold on to the cryptocurrency until they feel (in their subjective judgment) is the right time to sell, or to transfer it directly to your beneficiaries.

The bottom line is that you should consider these implications, and have your Trust drafted in a way that gives your successor Trustee the ability to carry out your wishes without having to take on unnecessary personal liability.

2. Consider Including a Specific Provision in your Trust for Access to Computers, Devices, and Passwords.

If you hold Bitcoin through a hosted account or hot wallet, it is wise to include specific language in your Trust that lets your trustee access all your computers, electronic devises, and logins. This may be helpful in overcoming any privacy laws and terms and conditions of third-party platforms that your successor trustee may need to gain access to.

It should be noted that this provision is also a good idea to include in your durable power of attorney for the same reasons.

Should I Include My Crypto Private Key In my Last Will and Testament?

In California, the answer is ABSOLUTELY NOT.

While other states may have different laws, under California law, if a resident of the state passes away with a Will, the custodian of such Will must file it with the probate court, thereby making it a public record.

If you reference your private key in your Will, you risk it being accessed by anyone who views the public records.

Remember, anyone with access to your private key can access and transfer your cryptocurrency, and there is no way to undo that transfer.

Can Custodial Crypto Wallets Have a Beneficiary Designation or Transfer on Death (TOD) Designations Like Bank Accounts?

To answer this question depends on the custodial crypto wallet and platform along with its terms.

To date, many of the custodial crypto wallet platforms (also known as hosted wallets) that we have seen do not have a beneficiary designation process.

With that being said, this will likely be changing in the coming years.

In any event, it is imperative you have any beneficiary designations reviewed by your estate planning attorney to make sure that they will result in the desired outcome.

Charitable Donations of Bitcoin and Their Tax Implications.

What could be more rewarding than donating to a good cause? With charitable giving, many people think of giving cash or writing a check.

However, did you know that you may also donate Bitcoin and cryptocurrency to charity with tax efficiency?

Many of the same general estate tax principles that govern property transactions apply to virtual currency transactions.

For example, instead of selling your Bitcoin, then donating the proceeds of the sale to charity, you may donate the Bitcoin directly to a charity.

By donating it directly, you may avoid paying capital gains taxes on the donation, which may be more tax efficient than selling the Bitcoin and donating the proceeds to charity.

While not all charities are set up to accept Bitcoin or other cryptocurrencies as donations, some have adopted third-party platforms to help in the transfer.

NOTE: Before making any charitable donations of Bitcoin or other cryptocurrencies, work with a qualified CPA or Tax Attorney to access all tax implications of the transaction. In addition, when using any third-party platforms to help with the transfer to the charity, do a thorough investigation of the platform’s legitimacy and all fees they charge.

Does the IRS Treat Bitcoin as Currency or Property?

Many people mistakenly people believe that Bitcoin and cryptocurrency are treated the same way under the law as the US Dollar.

Despite their name, cryptocurrency is not really “currency” under the law. Rather, cryptocurrency is classified as “property” for Tax Purposes.  IRS Notice 2014-21 states that:

“virtual currency is “property,” it is not “money” and is not considered “stock or securities” for IRC § 351(e) or IRC §721(b) purposes.”

Why is this important?

Because buying and selling cryptocurrency, in some respects, is akin to buying stock. Like stock, cryptocurrency has “basis” and may incur “capital gain” on sale, thereby causing capital gains tax.

Is Bitcoin a Commodity?

Bitcoin is governed by The U.S. Commodity Futures Trading Commission (CFTC) which has determined that Bitcoin is a commodity and falls under the Commodity Exchange ACT.

The CFTC has jurisdiction whenever a virtual currency is used in a derivatives contract, or if there is fraud or manipulation involving a currency traded in interstate commerce.

In Conclusion, the Importance of Proper Estate Planning for Bitcoin and Understanding How to Fund a Trust With Bitcoin is Vital for All Owners of Bitcoin

If you hold Bitcoin or another cryptocurrency, it is imperative you tell your estate planning lawyer.

For them to do their job, they will need this information to provide you with the best advice and help you plan for what will happen to your cryptocurrencies and Bitcoin after you die.

It is also equally important to educate your successor trustees and beneficiaries about cryptocurrency and how it works.

Without a proper Bitcoin Access Plan in place to securely store and provide access to your private key, you risk your private key falling into the wrong hands, or as devastating, the risk of your cryptocurrency being lost due to the inability to transfer it.

Contact Opelon LLP today for more information about how we can help you set up a comprehensive estate plan that covers all of your assets. 760-278-1116 | Info@Opelon.com

Matt Odgers

Matt Odgers

Attorney Matthew W. Odgers is a partner and co-founder of Opelon LLP, a firm based in San Diego, California that focuses its energy on Estate Planning, Trust Administration, and Probate

Table of Contents

Related Posts

Lets Chat!

Get In touch


How can we help you?

(760) 278-1116

Call for a Free Consultation

Address 1901 Camino Vida Roble, STE 112, Carlsbad, CA 92008

Email Info@opelon.com

Will Your Assets be Subject to Probate?

Take our free quick quiz to find out!

Takes 2 Minutes
Skip to content