Blockchain-Based Assets and your Estate Plan

What is Blockchain?

A blockchain is much like a “public notebook” (or, more appropriately, a ledger) where every time someone writes something down, it is recorded forever. This “notebook” is immutable—meaning that no one can change what has already been written in it. Each time someone adds to the “notebook,” they have to make sure that everyone else can see it and agree that it’s true (i.e., a mechanism for consensus).

Blockchains are used to keep track of transactions. Every time a group of new transactions is added to the chain, it is called a block. These blocks are connected to form a chain, hence the name “blockchain.” Each block contains information about a group of transactions and a code that links it to the previous block (which itself contains information about a group of transactions).

How Does a Blockchain Work?

A transaction on a blockchain could be a purchase, like of digital artwork (a non-fungible token or “NFT”), sending a digital asset to someone, gaming, or investing in derivative financial products. Instead of a bank keeping a record of these transactions, blockchains use various mechanisms to reach a consensus regarding the validity of transactions. These consensus mechanisms typically require the validators of transactions to have “skin in the game.”

For example, in the case of “mining,” data validators are rewarded by solving complex cryptographic puzzles (i.e., a proof-of-work consensus). These cryptographic puzzles require substantial amounts of computing power, which, in turn, requires that the data validators incur significant costs to obtain these rewards—thereby incentivizing their honesty. Notable examples of proof-of-work blockchains are Bitcoin and Ethereum 1.0.

On the other hand, in the case of “staking,” data validators place their digital assets as a “stake,” to assure the network that they are validating the data honestly (i.e., a proof-of-stake consensus). By validating transactions, data validators earn a transaction fee. In order to “attack” a proof-of-stake consensus mechanism, a malicious actor would have to control 51% of the supply of the staked asset—which is generally extremely expensive and difficult. A notable example of a proof-of-stake blockchain is Ethereum 2.0.

Because of these safeguards, blockchains are thought to be very infrastructurally secure. But there are risks associated with blockchain technology—primarily attributable to human error in coding (“smart contract risk”) or to malicious actors engaging in phishing scams, social engineering, and other nefarious schemes.

Public and Private Keys

When you own something on the blockchain, you have a “wallet” that has a public key and a private key. These keys are like secret passwords that let you control your digital assets.

• Public Key: This is like your email address. You can share it with others so they can send you digital assets. 
• Private Key: This is like the password to your email account. You need it to access and control your assets. If someone else gets your private key, they can take your digital assets.

In estate planning, it’s important to make sure that your private key is kept safe. If no one knows your private key after you pass away, your digital assets may be lost forever.

Storing Blockchain Assets

A custodian is a person or company that is trusted to take care of things for you. When it comes to blockchain-based assets, some people choose to have a centralized institution—like an exchange—hold those assets. Though a centralized institution may provide assurances regarding the safety of digital assets, digital assets kept in a custodial manner is not without risk—as the centralized institution may be exploited and the funds on the exchange lost.

There are other non-custodial means of storing one’s digital assets:

• “Cold” wallets: “Cold” wallets involve keeping a private key in a physical form (like a piece of paper or a USB drive) and storing it in a secure place. “Cold” wallets are those that are not connected to the internet.
• “Hot” wallets: “Hot” wallets are services or programs where one can store a private key digitally, with added layers of security, like encryption and multi-factor authentication. “Hot” wallets may be online non-custodial wallets, but they may also include custodial exchanges as well.

Blockchain Assets in Estate Planning

Estate planning is about making sure that your belongings, including real estate, investments, and other property (including digital assets), are passed on to the people you choose after you pass away. In today’s digital world, you might have assets stored on the blockchain. But because these assets are digital, it’s not as simple as writing them down in a last will and testament.

For example, wills are public documents that must be filed with the court under Wis. Stat. § 856.05—even if a probate is not required. Including a private key in a will may inadvertently make that private key a public record.

Similarly, given that digital assets are not “titled” in the traditional sense (beyond merely having an alphanumeric address associated with a given wallet) and not necessarily held by a centralized authority, there is a question concerning the logistics of how one can pass digital assets upon one’s death in a safe, secure manner.

Moreover, many holders of digital assets have a high concentration of their net worths in cryptocurrencies or NFTs. Many digital asset holders are opposed to the diversification of their blockchain-based assets with non-blockchain (or “centralized finance”) assets. For clients and fiduciaries (e.g., trustees and personal representatives) alike, an additional question exists regarding the default requirement under the Prudent Investor Act (Wis. Stat. § 881.01(4)(a), in particular) to diversify investments.

Careful drafting and thought to digital assets—and their role in one’s estate plan—are necessary to ensure that one’s intentions are honored upon death.

Blockchain-Based Assets and Estate Taxes

If you leave behind cryptocurrencies or other blockchain-based assets, they are treated like any other asset for federal estate tax purposes. This means that your estate may be subject to federal estate taxes, which apply to estates worth over a certain amount.

In very broad terms, as of 2025, if one’s “gross estate” is valued at more than $13.99 million, it could be subject to an estate tax upon death. Absent specialized planning, the value of one’s blockchain-based assets would be included in one’s gross estate. The value of one’s gross estate exceeding $13.99 million (which, absent congressional action, is set to decrease to approximately $7 million at the beginning of 2026) is taxed at 40%.

There are certain irrevocable trusts which allow for assets (including digital assets) to be removed from one’s gross estate. But removing assets from one’s gross estate also generally requires:

• The person making the transfer to ensure that he or she does not retain an interest that brings the digital assets back into his/her estate (e.g., under IRC § 2036); and
• Nominating a fiduciary (such as a corporate trustee) to manage those assets in a custodial manner.

The second requirement above poses an interesting dilemma for many holders of blockchain assets—on one hand, they would like to mitigate (or eliminate) their estate tax exposure and, on the other hand, to do so, they must place their trust in a custodian to hold their assets and relinquish their right to “(1) the possession or enjoyment of, or the right to the income from, [the digital assets, and] (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the [digital assets] or the income therefrom.” Doing so may contradict the philosophical underpinnings of why that person has invested in blockchain technology to begin with.

Finally, as with other assets, if one gives away blockchain-based assets during one’s lifetime, those gifts may be subject to payments of gift taxes (or, more likely, reporting the gift to the IRS without an accompanying tax liability) if their value exceeds a certain amount ($19,000 per recipient in 2025).

Conclusion

Blockchain technology is changing the way we think about digital ownership and estate planning. By understanding how blockchains work and how digital assets are stored and transferred, one can make informed decisions about how to protect these assets for future generations.

Estate planning today isn’t just about physical assets; it’s also about protecting your digital legacy. Whether through a custodian or by keeping your private keys secure, taking the right steps now will ensure your digital assets are safely passed on when the time comes.

If you would like to know more about how your digital assets intersect with your estate plan, you may contact Michael Bezoian at (608) 283-5618 or his assistant, JoJean Murphy, at (608) 252-9320.