As cryptocurrency investing goes mainstream, there's a growing need for careful estate planning to ensure assets don't get lost, stolen, or eaten up by taxes before they pass to beneficiaries.

Believe it or not, some 27% of upper-income Americans -- those with annual revenue of roughly more than $200,000 for a four-person household and $90,000 for singles -- have invested in Bitcoin, Ethereum, and other digital currencies. That's up from 17% in 2021, per the folks at the Pew Research Center.

And as the population of crypto investors rises, so too does the number of sad stories of wealth transfers gone awry.

"The worst that can happen is the cryptocurrency cannot be accessed. It becomes ghost crypto and sits there, dead on the blockchain," says Karin Prangley, a senior wealth planner at Brown Brothers Harriman. "You can't call the blockchain to sort things out. There's no help desk, no 1-800 number."

For example: Prangley's firm recently had a client who couldn't include his cryptocurrency in his estate plan. That's because he lost his cryptographic private key -- a string numbers and letters that essentially serve as a digital password. Another client's evidence of crypto-ownership was on a deceased parent's phone. The trouble with that? There was no way to locate or access it.

"There can be a lot of value lost to future generations," Prangley says.

Estate planning challenges depend on whether an investor holds cryptocurrencies through an exchange like Coinbase, Crypto.com, Kraken, and Robinhood, or directly without an intermediary. With an exchange, investors technically don't have direct ownership of cryptocurrency. Rather, they have a claim on the assets, and the exchange acts as a custodian and holds the crypto keys. A primary benefit of an exchange is that it removes an investor's risk of losing a key.

But because exchanges charge fees for trades, deposits, withdrawals and other activities, and are at risk of security breaches, many investors hold cryptocurrencies directly on a blockchain, a decentralized digital ledger. They maintain their keys in cold storage, meaning off-line and out of reach of hackers.

But whatever your approach, if you have meaningful assets, it isn't a good idea to delay estate planning. Some advice:

Inventory your holdings

Add to your will a list of your crypto investments. If you use an exchange, create a catalog of companies -- and where any access instructions are securely stored. If you own cryptocurrencies directly, detail which types.

But do not include account numbers or passwords in your inventory, warns Punya Coelho, tax director at Vialto Partners. "If the will goes to probate, it becomes public."

Secure passwords/keys

Mishandling these can have devastating results. Chainalysis estimates that 3.7 million Bitcoins -- that's $240 billion at the current value -- are permanently inaccessible due to lost keys.

"We've seen a number of instances where beneficiaries hire a cleaning service, and those things (actually) get put into a baggie or a box and nobody thinks to go through them," says Scott Rahn founding partner at the law firm RMO.

Theft is another problem. Since 2016, some $7.5 billion in cryptocurrency has been stolen due to theft of private keys, according to DeFiLlama.

Consider a home safe or safe deposit box, or even a "belt and suspenders" approach, like storing passwords in more than one location, Rahn says.

Select a fiduciary

"People don't spend enough time selecting a fiduciary. It must be someone you can trust to have access to your keys and has no conflicts of interest," says Andrew Hook, of counsel at Hook Law. "Often the best choice is a professional fiduciary."

Financial advisors, attorneys, and trust officers can serve as professional fiduciaries, and there are a growing number that will manage cryptocurrency.

Update your estate plan

If you use an exchange, you typically can't name a beneficiary on your account as you would with a typical brokerage. So be sure your estate plan documents clearly indicate your beneficiaries.

If you directly own crypto and your password is physically stored, say on a key fob, cryptocurrency can blur the line between tangible assets like your autographed Caitlin Clark rookie card and assets without physical substance like a patent or domain name. That's because the non-physical crypto assets only have value to your heirs if they have the tangible key fob to access them, says James Cundiff, a partner at McDermott Will & Schulte.

For instance, if you indicate in your will that non-physical assets go to your spouse -- and all tangible assets to your ex-spouse -- your ex-spouse could walk away with your key fob and access to the cryptocurrency, he says.

In other words: Be sure your will clearly reflects your intentions.

Also leave explicit instructions if you have preferences for how to allocate your portfolio. "A fiduciary generally has an obligation to hold a moderate portfolio. If you have a large percentage in Bitcoin and you want to hold it for your grandson, be clear about that or the fiduciary may have to sell the assets," Cundiff says.

Take care with taxes

Traditional estate planning strategies used to minimize taxes can be applied to cryptocurrency -- such as transferring ownership to a trust or a limited liability company. But extra care must be taken to document the transfer of ownership. The Internal Revenue Service may deem the trust or LLC to be invalid and the assets would remain in the estate, potentially subject to estate taxes and a lengthy probate, Cundiff says.

"There's no title that transfers to a new owner, so you must keep proper documentation and ensure the new owners possess and hold the keys, and that they are the only ones who hold them," Cundiff says.

"These assets," he adds, "are super unique."

Whether that turns out to be a benefit to your heirs -- or a bust -- could depend on the soundness of your planning.

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