Tax Strategies and Trust Structures for Crypto Investors
Protect your digital assets through proper estate planning, minimize tax implications, and structure trusts correctly for cryptocurrency inheritance.
TL;DR:
The Big Mistake: One couple transferred $10 million in crypto to a trust, paid $1 million in gift tax, and locked in $3 million in future capital gains taxes for their heirs. Had they structured it differently, total taxes would have been just ~$1 million.
Key Points:
Keep control = tax benefits: Staying in control of your crypto (keeping it in your "taxable estate") lets heirs get a "stepped-up basis" when you die, potentially eliminating millions in capital gains taxes
Three types of "estates" matter:
Probate estate (avoid costly court proceedings)
Creditor estate (protection from lawsuits)
Taxable estate (for estate taxes)
Grantor trusts save money: You pay the trust's taxes at your lower personal rate instead of the trust's high rate (37% on income over $15,000)
Wyoming LLCs offer advantages: No state income tax, strong asset protection, crypto-friendly laws
Don't rush "completed gifts": Giving up all control to avoid estate tax often creates bigger capital gains tax problems later
Current exemptions are high: $13.61 million per person ($27.22 million for couples) but dropping to ~$7 million in 2026
Bottom line: Structure your digital assets in trusts/LLCs early for protection and flexibility, but don't give up control too soon. The wrong move can cost millions in unnecessary taxes. Professional guidance is essential to balance competing goals of asset protection, tax efficiency, and maintaining control.
You’ve seen your digital assets climb in value…sometimes from pennies to thousands per token—and now you’re thinking about what comes next. How do you protect them, minimize taxes, and pass them to your heirs without leaving behind confusion or unnecessary costs? Estate planning with cryptocurrency can feel like uncharted territory, and it makes sense to get the right guidance before taking your next steps.
A recent conversation with estate planning experts highlights a truth many crypto holders overlook: mishandling trusts and transfers can cost millions in avoidable taxes. One case stands out. A client moved $10 million in tokens into a trust, paid $1 million in gift tax, only to learn their heirs would owe another $3 million in capital gains when selling. With a different structure, the entire tax burden could have been reduced to just $1 million.
The Estate Question Isn't What Most People Think
When crypto holders ask if putting assets in a trust takes them out of their estate, they’re often focused on the wrong definition. In reality, there are three distinct “estates” to consider, and each one carries its own importance for tax, legal, and inheritance purposes.
The first is the probate estate, the assets that go through court after someone passes. In states like California, New York, and New Jersey, probate can cost a percentage of the estate’s total value, functioning like an extra “death tax” just for a judge to approve transfers. By setting up a proper trust, you bypass this costly and public process altogether. Your digital assets can pass directly to beneficiaries without ever entering probate.
The second is the creditor estate…the pool of assets creditors can go after in lawsuits or bankruptcy. Timing is critical here. If you try to move assets into an asset protection trust while already being sued or in bankruptcy, courts won’t honor it. But when protection is set up in advance, states like Wyoming, South Dakota, and Nevada provide strong trust structures that can shield digital assets from future creditor claims.
The taxable estate represents the third category, and this is where things get complex. The more control you retain over assets in a trust, the more likely they'll remain in your taxable estate. This sounds bad, but here's the counterintuitive part - keeping assets in your taxable estate often saves money.
The Magic of Stepped-Up Basis
The third is the taxable estate, and here’s where the tax code offers what estate planners call a “magic wand.” When someone passes with assets inside their taxable estate, those assets transfer to heirs with a stepped-up basis. The cost basis resets to current market value, which can wipe out millions in potential capital gains taxes.
Consider this scenario: A crypto investor bought 200,000 tokens at 50 cents each, investing $100,000. Those tokens later reached $50 per token, creating a $10 million portfolio. If they transfer these tokens to a trust as a completed gift (giving up all control), the trust keeps the original 50-cent basis. When heirs eventually sell at $50, they'll owe capital gains tax on $49.50 per token - potentially $3 million or more in taxes.
Had the investor kept the tokens in their taxable estate, the heirs would receive them with a $50 basis after the investor's death. Selling immediately would trigger zero capital gains tax. The estate might owe estate tax, but with current exemptions at $13.61 million per person ($27.22 million for married couples), many portfolios escape estate tax entirely while still getting the stepped-up basis.
Understanding Grantor Trust Status
The distinction between grantor and non-grantor trusts creates another layer of tax planning opportunity. In a grantor trust, the person who created the trust pays income taxes on trust earnings. This might sound like a disadvantage, but it's actually a powerful wealth transfer tool.
Individual tax brackets remain favorable until very high income levels. For example, a married couple can earn close to $500,000 before reaching the top 37% rate. Trusts, on the other hand, hit that same 37% rate on income over only $15,000. The gap is enormous, and it’s why having the trust creator pay the taxes often saves thousands every year.
Think about compound growth. If a trust doubles a penny every day for 30 days, it reaches $10 million. But if the trust pays 25% tax on each doubling, the final amount drops below $100,000. When the trust creator pays taxes from outside funds, the trust assets compound untouched. This strategy effectively transfers extra wealth to beneficiaries without triggering gift taxes.
The LLC Layer for Digital Assets
Adding a limited liability company (LLC) between you and your digital assets opens additional planning opportunities. The LLC provides the full breadth of business tax deductions unavailable to individuals. Operating expenses, professional services, and other costs can offset income from staking, lending, or trading activities.
State and local tax planning improves dramatically with an LLC structure. Since 2017, many states allow pass-through entities to pay state income tax at the entity level, creating a federal tax deduction. For residents of high-tax states, this strategy alone can save thousands annually.
The Wyoming advantage deserves special mention. Wyoming's legislature has focused specifically on digital asset regulations, creating one of the most favorable environments for crypto LLCs and trusts. No state income tax, strong asset protection laws, and clear digital asset statutes make Wyoming a preferred jurisdiction for many crypto holders.
Avoiding the Completed Gift Trap
The pressure to make completed gifts - transferring assets irrevocably out of your estate - often leads to expensive mistakes. Remember that couple with $10 million in tokens? They made a completed gift fearing estate taxes, paid $1 million in gift tax, and locked in $3 million of future capital gains taxes for their heirs. Had they simply kept the assets in their estate, the total tax would have been just $1 million in estate tax.
Making a completed gift means giving up control entirely. You can't be the trustee, you can't be a beneficiary, and you can't retain any powers to change the trust. For digital assets requiring active management - participating in staking pools, governance votes, or DeFi protocols - this loss of control can be costly.
Professional trustees often lack the expertise or insurance coverage to manage digital assets properly. While some now handle Bitcoin and Ethereum, many won't touch smaller tokens or participate in complex DeFi strategies. Keeping control through an incomplete gift trust allows you to manage assets actively while still achieving probate avoidance and asset protection.
The Insurance Strategy
Life insurance presents another approach to estate tax mitigation. Private placement life insurance (PPLI) and premium financed life insurance can effectively double or triple an estate's value tax-free. The strategy works best for estates approaching $10 million or more.
The mechanics are elegant: borrow money to pay premiums, using digital assets as collateral. The policy grows tax-free, pays out tax-free to beneficiaries, and can be structured outside your taxable estate. Some clients choose this route specifically to avoid the completed gift dilemma - they keep control of their crypto while ensuring heirs receive enough tax-free insurance proceeds to cover any estate taxes.
State insurance regulations vary widely, and diversification requirements might limit how much cryptocurrency the policy can hold directly. But for those willing to navigate the complexity, insurance-based strategies offer powerful tax benefits without sacrificing asset control.
Practical Steps for Digital Asset Estate Planning
Starting with the right trust structure matters more than timing the perfect moment to implement every strategy. A properly drafted trust should be "plumbed and wired" for future transitions - ready to shift from grantor to non-grantor status, from incomplete to completed gift, as circumstances change.
Professional custody solutions deserve serious consideration. Cold storage might feel secure, but if you're holding keys personally, those assets remain in your possession for tax purposes. Professional custodians provide documentation, insurance, and the formal separation needed for certain trust strategies.
Credit worthiness develops over time. Banks and private lenders look at how long assets have been held in trust or LLC structures. Starting these entities early, even before significant appreciation, establishes the track record needed for future borrowing. Remember, borrowing against assets avoids capital gains taxes while providing liquidity.
The basis question haunts every decision. Your purchase price basis transfers to any trust or LLC you create. Only death (while assets remain in your taxable estate) or certain corporate conversions can step up basis. This reality should inform every structural decision you make.
When Timing Really Matters
The estate tax exemption won't stay at current levels forever. The scheduled sunset in 2026 will drop the exemption from $13.61 million to approximately $7 million per person (adjusted for inflation). Married couples face a reduction from $27.22 million to roughly $14 million in protected assets.
This timeline creates urgency for larger estates but shouldn't rush smaller ones into poor decisions. The capital gains versus estate tax math changes dramatically based on asset values, appreciation levels, and exemption amounts. What works for a $30 million portfolio might be terrible for a $5 million one.
State considerations add another timing element. Moving from a high-tax state to a no-tax state before selling appreciated assets can save hundreds of thousands. But establishing new state residency takes time and documentation. Starting the process before assets appreciate further preserves more options.
Building Your Digital Asset Legacy
Estate planning for digital assets requires balancing multiple competing goals. You want asset protection without losing control. You need tax efficiency without creating future tax bombs. You seek simplicity while maintaining flexibility for changing laws and asset values.
The conversation between these estate planning experts reveals how even sophisticated investors make costly mistakes. That $3 million capital gains tax burden could have been avoided entirely with better upfront planning. The key lies not in choosing a single strategy but in creating a flexible structure ready for whatever the future brings.
Your digital assets represent more than just current value - they're potential generational wealth. Protecting and transferring that wealth efficiently requires professional guidance tailored to your specific situation. The strategies discussed here provide a framework, but implementation demands careful consideration of your unique circumstances.
For those ready to explore these strategies in depth, professional guidance can mean the difference between leaving a legacy and leaving a tax burden. The team at Digital Ascension Group specializes in connecting digital asset holders with the right professionals for their estate planning needs. To learn more about structuring your digital assets for long-term protection and efficient transfer, contact the team by completing the form at https://www.digitalfamilyoffice.io/contact-us/. They can answer your questions and direct you to appropriate legal and tax professionals who understand the unique challenges of digital asset estate planning.