Is Cryptocurrency Included in Estate During Probate? (w/Examples) + FAQs

Yes, your cryptocurrency is included in your estate when you die and must go through the court process called probate. The core problem stems from IRS Notice 2014-21, which legally defines cryptocurrency as property, not currency. This ruling creates a direct conflict between old property laws and new digital technology, leading to a catastrophic consequence: your family can permanently lose your entire crypto fortune.

The traditional legal system was built to handle physical property and accounts at institutions like banks, where a court order can force a transfer. Cryptocurrency was designed to ignore those authorities entirely; only a private key can unlock it. This fundamental clash means that without a special plan, your crypto is like a locked treasure chest, and you died with the only key.

This isn’t a small problem. An estimated 20% of all Bitcoin, worth hundreds of billions of dollars, is already considered lost forever, much of it because owners died without leaving a way for their families to access it. The system isn’t built to handle these new assets, and families are paying the price.

Here is what you will learn to prevent that from happening to you:

🔑 You will understand why the private key is the single most important—and dangerous—part of your crypto inheritance and how to handle it correctly.
📜 You will learn the critical differences between a Will and a Trust for crypto and why choosing the wrong one makes your assets a public target.
👨‍👩‍👧‍👦 You will discover who the key people are in this process and how to choose the right person to protect your assets for your family.
❌ You will see the most common, wealth-destroying mistakes people make and get a clear, step-by-step guide to avoid them.
🛡️ You will get actionable strategies, including do’s and don’ts, to build a bulletproof plan that secures your digital legacy for your loved ones.

The Fundamental Conflict: Why Old Laws Fail New Money

To protect your family, you first need to understand the key parts of this puzzle and why they don’t fit together. The system involves the asset itself (cryptocurrency), the legal process for handling it after death (probate), and the people involved (the owner, the executor, and the heirs). Their relationship is broken from the start.

What Is an “Estate” and “Probate”?

Your estate is simply everything you own when you die. This includes your house, your car, your bank accounts, and yes, all of your cryptocurrency. The total value of all these things, minus your debts, is what will be passed on to your family.

Probate is the court-supervised process for managing your estate. A judge validates your will, appoints someone to be in charge (an “executor”), pays your final bills, and oversees the transfer of your assets to your heirs. This process was designed for a world of paper deeds and centralized bank accounts.

The IRS Ruling That Changed Everything

The entire problem begins with a simple but powerful decision by the U.S. government. The Internal Revenue Service (IRS) declared in 2014 that cryptocurrency is property. For tax and legal purposes, your Bitcoin is treated more like a stock, a painting, or a piece of land than like the dollars in your wallet.

This decision was a double-edged sword. It made crypto a legitimate, ownable asset that could be legally inherited. But it also forced this decentralized, anonymous technology into a centralized, public legal system that is completely incompatible with it.

The Technical Trap: “Not Your Keys, Not Your Coins”

Cryptocurrency ownership isn’t proven by a name on an account. It is proven by possessing a secret piece of code called a private key. This key, often represented by a 12 or 24-word “seed phrase,” is the only thing that allows you to access and spend your crypto.

This creates the ultimate form of ownership, summarized by the crypto mantra: “Not your keys, not your coins“. If you control the key, you control the crypto. If you lose the key, the crypto is gone forever. There is no bank to call, no “forgot password” link, and no court that can order the blockchain to give you access.

Probate vs. Non-Probate: The Two Paths Your Assets Can Take

When you die, every asset you own will follow one of two paths to your heirs. One path is public, slow, and dangerous for crypto. The other is private, fast, and secure. Choosing the right path is the most important decision you will make for your digital wealth.

The Default Path to Disaster: Probate Assets

A probate asset is anything owned only in your name with no automatic transfer plan. This includes a bank account with just your name on it or a car titled only to you. These assets are stuck until a probate court judge gives your executor the legal authority to move them.

By default, cryptocurrency held in a personal wallet that you control (known as “self-custody”) is a probate asset. You are the sole owner, and there is no built-in “transfer-on-death” feature. This forces your crypto down the worst possible path.

Why Probate Is a Death Trap for Cryptocurrency

The probate process is uniquely dangerous for crypto for three main reasons:

It’s a Public Spectacle. When your will is filed with the probate court, it becomes a public document. Anyone can walk into the courthouse or go online and read it. If you foolishly include your private keys or seed phrase in your will, you have just published the combination to your digital safe for every thief in the world to see.
It’s Incredibly Slow. Probate can take months or even years to complete. During this time, your crypto is frozen. If the market crashes, your executor is legally powerless to sell, and your family can only watch as their inheritance evaporates.
The System Is Clueless. Most judges, court staff, and even lawyers have no idea what a private key is or how a blockchain works. This lack of knowledge can lead to mistakes, mismanagement, and the accidental but permanent loss of your assets.

The Escape Route: Non-Probate Assets

Non-probate assets are designed to skip the court process entirely. These assets have a built-in transfer plan. Examples include a joint bank account that automatically passes to the surviving owner, a life insurance policy that pays a named beneficiary, or assets held in a trust.

The best way to protect your crypto is to legally transform it from a probate asset into a non-probate asset. You do this by creating a legal tool called a revocable living trust and transferring ownership of your crypto to it. When you die, the person you named as your “successor trustee” can immediately and privately take control, without asking a court for permission.

The People Involved: A Triangle of Hope and Fear

Three key people are at the center of every crypto inheritance story: the owner, the executor, and the beneficiary. A successful plan requires understanding the unique goals, fears, and responsibilities of each.

The Owner: The Architect of Success or Failure

As the crypto owner, your primary goal is to ensure your wealth passes safely to your loved ones. However, you likely face deep-seated fears: the fear that your assets will be lost forever, the fear of burdening your family with a complex technical puzzle during their time of grief, and the fear that your plan to give them access will accidentally create a security hole for thieves.

With traditional assets, you can rely on banks and courts to handle the process. With crypto, you are the system. You must build the entire bridge from your digital vault to your family, which includes the legal structure, the technical access instructions, and the educational guidance.

The Executor or Trustee: The Fiduciary in the Hot Seat

The person you appoint to manage your estate—the executor of your will or the successor trustee of your trust—is called a fiduciary. They have a legal duty to protect your assets. When crypto is involved, this job becomes a minefield of technical and legal risks.

The Technology Hurdle: Your fiduciary must be tech-savvy enough to understand wallets, keys, and blockchain transactions. Appointing someone who is afraid of technology is a recipe for disaster, as they could easily make a mistake that permanently loses the assets.
The Legal “Catch-22”: Fiduciaries are legally required to act as a “prudent investor,” which often means avoiding speculative, volatile assets. Holding onto your crypto during a market downturn could expose them to a lawsuit from heirs. At the same time, logging into your accounts might violate an exchange’s terms of service or even federal laws like the Computer Fraud and Abuse Act (CFAA), creating a legal trap where doing their job is technically illegal.
The Power Reversal: In the traditional world, a court order gives an executor power over a bank account. In the crypto world, a court order is meaningless to the blockchain. The only thing that grants power is the private key. Your plan to transfer the key is what truly empowers your fiduciary; the legal documents just give them the right to act once they have that technical power.

The Beneficiary: The Heir to a Potential Nightmare

For your beneficiaries, inheriting crypto can feel like being given a map to a treasure they can’t find. They have the legal right to an asset of immense value but may have no practical way to access it. This adds a layer of intense stress and frustration to an already painful time.

This problem is often worse due to a generational tech gap. Many crypto investors are younger and more comfortable with technology than their parents or other heirs. A beneficiary who has never used crypto can be completely overwhelmed and is at high risk of falling for scams or making a fatal error.

Real-World Scenarios: Where Plans Succeed and Fail

The difference between a successful crypto inheritance and a catastrophic failure comes down to planning. The following scenarios show how different choices lead to dramatically different outcomes for three common types of crypto owners.

Scenario 1: The Young Investor with a Hardware Wallet

Alex is a 28-year-old who has built a significant Bitcoin portfolio stored on a Ledger hardware wallet. He believes in self-custody and keeps his 24-word seed phrase written on a piece of paper in his desk drawer. He tells his parents he “has some Bitcoin” but never explains what a seed phrase is or where to find it.

Alex dies in a sudden accident. His parents, as his legal heirs, know he owned Bitcoin but have no idea how to access it. They hire a lawyer, who gets a court order appointing them as administrators of his estate. But this legal document is useless.

The lawyer finds the paper with 24 random words but, not understanding its significance, sets it aside. The parents try to guess Alex’s passwords on his computer, but nothing works. The Bitcoin, worth millions, remains locked on the blockchain, legally theirs but practically lost forever.

Alex’s Approach	The Tragic Outcome
Asset Storage	Bitcoin held in a self-custodied hardware wallet.
Access Plan	Wrote down the seed phrase but provided no instructions.
Legal Plan	No will or trust. Relied on default inheritance laws.

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Scenario 2: The Family with Crypto on an Exchange

Maria and David are a couple in their 40s who have been buying Ethereum on Coinbase. They use a shared login and feel secure because the exchange is a large, well-known company. They have a standard will that leaves all their assets to their two children, but it doesn’t specifically mention digital assets.

Maria and David die in a car crash. Their adult children are named as executors in the will. They know their parents used Coinbase but don’t have the password. They contact Coinbase support, starting a long and frustrating process.

Coinbase, to comply with regulations, requires a mountain of paperwork: death certificates, letters of administration from the probate court, and identity verification for both children. The probate process takes nine months. During that time, the crypto market is volatile. By the time the children finally gain access to the account, the value of the Ethereum has dropped by 40%.

Maria & David’s Approach	The Frustrating Outcome
Asset Storage	Ethereum held in a custodial exchange account (Coinbase).
Access Plan	Relied on the exchange’s process for deceased users.
Legal Plan	A standard will that forces the estate through probate.

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Scenario 3: The High-Net-Worth Individual with a Trust

Susan is a 65-year-old retiree with a diverse portfolio, including a large amount of cryptocurrency. Working with an estate planning attorney who specializes in digital assets, she creates a comprehensive plan.

She establishes a revocable living trust and legally transfers her crypto exchange accounts and her self-custodied assets into the trust’s name. She appoints her financially savvy daughter, Emily, and a professional trust company as co-trustees.

Susan creates a detailed but non-public “Letter of Instruction” that is kept with her attorney. This letter lists all her digital assets and provides step-by-step instructions for accessing them. For her hardware wallet, it gives the location of the device and two separate, sealed envelopes containing halves of the seed phrase, stored in different bank safe deposit boxes.

When Susan passes away, Emily and the trust company are able to take control of the trust assets immediately, completely bypassing probate. They follow the Letter of Instruction to securely access both the exchange accounts and the hardware wallet. They are able to manage the assets according to the trust’s terms, selling some to pay for estate expenses and distributing the rest to the beneficiaries privately and efficiently.

Susan’s Approach	The Secure Outcome
Asset Storage	A mix of custodial exchange accounts and self-custody wallets.
Access Plan	A private Letter of Instruction with detailed, multi-layered security.
Legal Plan	A revocable living trust that holds all assets.

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The Four Horsemen of Crypto Inheritance: A Guide to the Core Risks

Four primary dangers threaten every crypto estate. These risks are interconnected, and a failure in one area often leads to a cascade of problems in the others. A successful plan must defend against all four at once.

1. The Access Dead End: The Lost Key

This is the original and most devastating risk. As explained before, the private key (or seed phrase) is the only way to access self-custodied crypto. If your plan fails to transfer this key to your heirs in a usable format, the wealth is gone forever.

Unlike a bank account, where a death certificate and a court order can eventually grant access, there is no backdoor to the blockchain. The digital vault is sealed permanently. This makes the creation of a reliable access plan the absolute cornerstone of crypto inheritance.

2. The Security Tightrope: Balancing Access and Protection

The very act of creating an access plan for your heirs introduces the second major risk: security. You must make your secret keys available to the right people at the right time, without ever exposing them to the wrong people. Storing your seed phrase in a public will or an unencrypted file on your computer is a catastrophic mistake.

A secure plan uses layers of protection. This could mean storing a physically durable copy of a seed phrase (e.g., engraved on a metal plate) in a bank safe deposit box, or splitting the phrase into multiple parts stored in different locations. The goal is to create a system where no single accident or attack can compromise the assets.

3. The Volatility Nightmare: A Ticking Clock

Cryptocurrency markets are famous for their extreme price swings. This volatility creates a nightmare for a fiduciary, who has a legal duty to preserve the value of estate assets. The long delays of the probate process can be financially ruinous.

An executor could gain access to a crypto wallet a year after the owner’s death only to find its value has been cut by 75%. They are then trapped: selling could lock in a massive loss, but holding on could lead to further decline. Either choice could open them up to a lawsuit from angry beneficiaries.

4. The Legal Fog: Navigating Uncharted Territory

The laws governing digital assets are new and confusing. In the U.S., most states have adopted a version of the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). This law creates a hierarchy for who can access your online accounts after you die.

RUFADAA’s three-tiered system gives priority first to any instructions you set using an online tool provided by the platform (like Google’s “Inactive Account Manager”). If that doesn’t exist, the directions in your will or trust take precedence. If neither exists, the platform’s terms of service agreement applies.

While helpful, RUFADAA doesn’t solve everything. It doesn’t help with self-custodied assets where there is no platform to contact. It also doesn’t resolve the legal conflict where a fiduciary logging into an account with the deceased’s password may be violating the platform’s rules and federal law.

A Blueprint for Success: Your Step-by-Step Crypto Estate Plan

Building a plan that works requires a methodical approach that combines legal documents, technical security, and clear communication. Follow these five steps to create a resilient plan.

Step 1: Create Your Digital Asset Inventory

You cannot protect what you don’t track. The first step is to create a complete and detailed inventory of all your digital assets. This document should be kept private and secure, never as part of your public will.

Your inventory must include:

A list of every cryptocurrency you own (Bitcoin, Ethereum, etc.).
The location of each asset (e.g., Coinbase, Ledger hardware wallet, MetaMask software wallet).
Usernames and contact information for any exchanges.
Crucially, it must state the location of your access credentials (keys and passwords), but not the credentials themselves. For example: “The seed phrase for my Trezor wallet is in safe deposit box #123 at First National Bank”.

Step 2: Choose a Trust Over a Will

As we’ve seen, a will forces your assets through the public, slow, and insecure probate process. A revocable living trust is the superior tool for any significant crypto holdings. It is a private legal structure that you control during your lifetime.

By transferring your crypto into the trust, you ensure that upon your death, your chosen successor trustee can manage the assets immediately and privately, according to your confidential instructions. This avoids probate, protects your family’s privacy, and allows for swift management of volatile assets.

Step 3: Appoint a “Digital Fiduciary”

The person you choose to manage your digital assets must be both completely trustworthy and technologically competent. This “digital fiduciary” should be comfortable with concepts like two-factor authentication and hardware wallets, or at least be willing and able to learn.

Have an honest conversation with your chosen person to make sure they understand and accept the responsibility. It is also wise to name at least one backup in case your first choice is unable to serve.

Step 4: Design a Secure Inheritance Protocol

This is the technical core of your plan. It details exactly how your fiduciary will get the information they need to access your crypto. The number one rule is to never put private keys or seed phrases in your will.

Better methods include:

Physical Storage: Engraving your seed phrase on a metal plate and storing it in a secure location like a home safe or bank vault. Using multiple locations provides redundancy.
Multi-Signature Wallets: This advanced method requires multiple keys to approve a transaction. A “2-of-3” setup is common for inheritance: you hold one key, your fiduciary holds a second, and your lawyer holds a third. Any two are needed to move the funds, preventing any single person from acting alone and providing a backup if one key is lost.
Letter of Instruction: This is a private, non-legal document that you reference in your trust. It provides your fiduciary with a step-by-step guide to finding and using your access credentials.

Step 5: Understand Your Custody Choice

Where you store your crypto has major implications for your estate plan. There is a fundamental trade-off between control and convenience.

Self-Custody (e.g., Hardware Wallet): This gives you absolute control over your assets. You are your own bank. The downside is that the entire burden of creating a successful inheritance plan falls on you. If your plan fails, the assets are gone.
Third-Party Custody (e.g., Exchange): Leaving your crypto on an exchange like Coinbase is more convenient. It also provides a central company that your heirs can legally contact. The downside is that you are trusting the exchange not to get hacked or go bankrupt, and your heirs will face a long and bureaucratic process to gain access.

Do’s and Don’ts of Crypto Inheritance Planning

Following a few simple rules can be the difference between a secure legacy and a lost fortune.

Do’s:

✅ Do Create a Detailed Inventory: Maintain a complete and updated list of all your digital assets and where they are located. Your family can’t protect what they don’t know exists.
✅ Do Use a Revocable Living Trust: This is the single best legal tool to keep your crypto private, out of probate court, and accessible to your trustee.
✅ Do Appoint a Tech-Savvy Fiduciary: Choose an executor or trustee who is comfortable with technology and can follow complex instructions without getting overwhelmed.
✅ Do Create a Separate “Letter of Instruction”: Use this private document to provide your fiduciary with a roadmap to your assets and access credentials.
✅ Do Review Your Plan Regularly: At least once a year, review your inventory, access instructions, and legal documents to ensure they are up to date with your current holdings and any changes in the law.

Don’ts:

❌ Don’t Put Private Keys or Seed Phrases in Your Will: Your will becomes a public document. This is the most dangerous mistake you can make and is like publishing your bank account password in the newspaper.
❌ Don’t Assume Your Family Knows What to Do: Do not rely on verbal instructions or assume your heirs understand crypto. Without clear, written steps, they will be lost.
❌ Don’t Rely on a Will Alone: A will guarantees your assets will go through the slow and public probate process, which is ill-suited for volatile and sensitive crypto assets.
❌ Don’t Store Everything in One Place: Use multiple secure locations for physical backups of your seed phrases to protect against fire, theft, or loss.
❌ Don’t “Set It and Forget It”: The crypto world changes fast. Exchanges close, wallets become outdated. An unmaintained plan is a failed plan.

Common Mistakes to Avoid

Many people make predictable and devastating mistakes when trying to plan for their crypto. Here are the most common errors and their direct consequences.

Mistake 1: The “Hidden in Plain Sight” Plan.
- What it is: Writing your seed phrase on a random piece of paper and hiding it somewhere clever, like inside a book.
- Why it fails: Your family, not knowing what they are looking for, will likely throw it away during cleanup. A string of 12 or 24 words is meaningless to someone who doesn’t understand what a seed phrase is.
Mistake 2: The “Digital Only” Plan.
- What it is: Storing your private keys in an unencrypted text file on your computer, in your email drafts, or in a cloud storage account.
- Why it fails: This makes your keys a prime target for hackers. It also relies on your family being able to access your computer and accounts, which may have their own password problems.
Mistake 3: Choosing the Wrong Executor.
- What it is: Appointing a loved one as executor out of tradition, even though they are terrified of technology and have never used a computer for more than email.
- Why it fails: A non-tech-savvy executor is at high risk of making a critical mistake, falling for a scam, or being too intimidated to even start the process. This leads to paralysis and potential loss.
Mistake 4: The “Gift vs. Inheritance” Tax Trap.
- What it is: Thinking it’s simpler to “gift” your crypto to your child right before you die instead of letting them inherit it.
- Why it fails: This can create a massive and unexpected tax bill. Inherited assets get a “stepped-up basis,” meaning the cost basis for tax purposes is reset to the market value on the date of death. Gifted assets carry over your original cost basis, potentially leaving your heir with a huge capital gains tax liability.

The Tax Man Cometh: Crypto, Inheritance, and the IRS

Your cryptocurrency is property, and the government will want its share when it’s transferred. Understanding two key tax concepts is essential to protect the value of your estate for your heirs.

Federal Estate Tax

For very wealthy individuals, the total value of your estate, including all your crypto, is subject to federal estate tax. However, the U.S. has a very high exemption amount ($13.61 million per person in 2024). This means that only the value of an estate above this massive threshold is taxed. Most estates will not owe any federal estate tax.

The “Stepped-Up Basis” and Capital Gains Tax

This is the most important tax rule for most heirs. When you inherit an asset, its cost basis for calculating capital gains tax is “stepped up” to its fair market value on the date of the owner’s death.

Here’s a simple example:

Your father bought 1 Bitcoin for $1,000. This is his cost basis.
He dies when that Bitcoin is worth $70,000.
You inherit it. Your new cost basis is stepped up to $70,000.
If you sell it immediately for $70,000, your taxable capital gain is $0. You owe no tax.

This is a huge tax benefit. However, as noted in the “Mistakes to Avoid” section, this benefit is lost if the asset is given as a gift before death. A gift uses a “carryover basis,” meaning you inherit the original $1,000 cost basis, which would result in a $69,000 taxable gain upon sale.

Frequently Asked Questions (FAQs)

Can I just put my seed phrase in a safe deposit box? Yes, this is a good physical security step. However, your executor needs the legal authority from a trust or will and clear instructions telling them which box at which bank holds the key.

What happens if I own crypto on an exchange like Coinbase? Yes, your executor can recover it. But they will need to provide a death certificate and court-approved probate documents, a process that can be very slow and expose the assets to market risk.

Do my heirs have to pay taxes on the crypto they inherit? No, not on the inheritance itself unless it’s a very large estate. They will only pay capital gains tax on any growth in value that happens after the date they inherited the asset.

Is a “digital executor” a legally recognized role? Yes, most states have laws like RUFADAA that give legal authority to fiduciaries to manage digital assets. You should formally name this person in your will or trust to grant them this power.

What if my family doesn’t know anything about crypto? Your plan must assume they know nothing. Provide simple, step-by-step instructions. You can also name a tech-savvy friend or a professional as a co-trustee to guide your family through the process.

Are NFTs and other digital tokens also part of my estate? Yes, NFTs, DAO governance tokens, and other digital assets are all property. They must be included in your inventory and estate plan, and they present their own unique challenges for valuation and management.