3 Estate Planning Strategies for Low Crypto Valuations

Since its inception a little over ten years ago, Bitcoin’s value has ranged from less than a penny to nearly $20,000. Within the last year alone, it fell from $11,000 to a low of around $3,500. Many other digital currencies and tokens, commonly called “ALT coins,” lost 90% or more of their value from all-time highs.

These steep declines in crypto valuations can feel alarming, even for die-hard fans or HODL’rs who “hold” through any market dip. But if you believe in crypto’s long-term potential, now may be the perfect time to transfer wealth strategically. Depressed values offer a unique chance to reduce or even eliminate wealth transfer taxes.

Basics of the U.S. Estate & Gift Tax System

The federal estate and gift tax rate is 40%. Proactive estate and gift tax planning is essential to preserve long-term wealth.

The estate tax exclusion was $5.49 million in 2017. The Tax Cuts and Jobs Act (TCJA) raised the basic estate tax exclusion significantly from 2018 to 2025. In 2019, estates worth $11.4 million or more per individual, or $22.8 million for couples, became subject to federal estate taxes. Meanwhile, the annual Gift Tax Exclusion remains $15,000 per recipient.

Because of these high thresholds, many assume estate tax planning only applies to the ultra-wealthy. That’s a risky assumption. These tax cuts are set to expire after 2025. Congress is already debating lowering the exclusion, which would increase the number of estates subject to taxation.

Seventeen states and Washington, D.C. also impose estate or inheritance taxes. Maryland levies both. State exclusion amounts are often much lower. For instance, Massachusetts taxes estates worth $1 million or more. Residents in those states need to plan carefully.

Gift Taxes

You can give up to $15,000 per person each year without triggering gift taxes. Gifting crypto valued above that amount may incur a 40% tax on the excess, if you’ve exceeded your lifetime exemption. This federal gift tax exemption is the amount you can transfer without owing tax.

Federal gift and estate tax exemptions are tied together under the Unified Tax Credit. You can use this credit while alive to offset gift taxes or apply it at death to reduce estate taxes. In other words, you can use your unified credit while alive, through gifting, or at death.

Gifting Crypto to Reduce Future Estate Taxes

Now that we’ve covered how these taxes work, let’s explore how to use low crypto values to reduce your estate or gift tax burden.

The first and simplest strategy uses the $15,000 annual exclusion. You can gift that amount in crypto to as many people as you wish without tax. For example, you could gift three full bitcoins tax-free when bitcoin traded around $5,000 on 4/15/2019. When bitcoin was worth $20,000, you could gift less than one.

Gifting crypto removes the coins and any future appreciation from your taxable estate.

When you gift crypto, the recipient assumes your cost basis. If they sell for a profit, they may owe capital gains taxes.

If you’re hesitant to give crypto outright, consider using an irrevocable trust. It can hold the crypto until your death or another milestone, such as a grandchild reaching adulthood.

Gifting crypto means relinquishing control—something to weigh carefully. It also adds complexity, as recipients need to know how to secure and access digital wallets. A financial advisor and a tax attorney who understand crypto can help design your plan. (For more, see What Estate Planning Attorneys Need to Know About Cryptocurrencies.)

Gifting Large Amounts of Crypto

Gifting cryptocurrency for estate tax planning can be far more effective than simply staying within the $15,000 per person annual gift tax exclusion if you hold a substantial amount of cryptocurrency. While that limit allows for tax-free giving, it may do very little to reduce the overall size of your estate or future tax liability, especially if your crypto is expected to increase in value.

Instead, you may consider using part or all of your Unified Credit now, rather than waiting until your death. This approach allows you to transfer larger amounts without incurring gift, estate, inheritance, or income taxes, making it a powerful strategy for gifting cryptocurrency for estate tax planning.

For example, many people don’t realize they can gift up to $11.4 million (the federal estate tax exclusion amount in 2019) in cryptocurrency or other assets during their lifetime, without triggering gift taxes for you or the recipient(s). You’re not limited to the $15,000 annual exclusion, as larger gifts are allowed under the Unified Credit.

By gifting cryptocurrency while values are low, you remove not only the gifted amount from your estate but all of its potential future appreciation. That growth would otherwise be taxed in your estate later. If your estate is below the exclusion limit, transferring appreciating assets now could prevent you from exceeding it.

Remember, using your Unified Credit while alive will reduce or eliminate its availability at death. However, if the assets appreciate significantly in the recipient’s hands, gifting cryptocurrency for estate tax planning during your lifetime may prove more valuable than waiting to gift at death.

Here’s an example to illustrate the benefit:

If you were to gift $11.4 million worth of cryptocurrency today, or even a smaller amount that exceeds the $15,000 annual threshold, no gift tax would be due, assuming you haven’t already used your lifetime exemption.

Now, let’s say that crypto triples in value over time, growing to $34.2 million after it is gifted. That $22.8 million in appreciation would be completely excluded from your taxable estate, potentially saving $9.12 million in estate taxes under current tax rules.

A-B Trusts

Another estate planning strategy that works well with today’s low cryptocurrency valuations is the A-B trust, also known as a credit shelter trust or bypass trust. For individuals or couples interested in gifting cryptocurrency for estate tax planning, this structure offers both tax efficiency and long-term asset protection.

Married couples can use an A-B trust to hold undervalued cryptocurrency, allowing crypto to appreciate over time and eventually pass to heirs free of estate taxes. Although most couples can combine their individual estate tax exemptions through the portability law (effective since 2011), an A-B trust can still be useful, especially for those concerned about state-level estate or inheritance taxes. It also benefits unmarried partners or blended families where one or both spouses have children from previous relationships.

An A-B trust is typically created as one joint trust that splits when the first spouse dies, or two individual trusts set up separately. In both cases, the trusts are revocable during the couple’s lifetime, until the first spouse dies.

When the first spouse passes away:

• Trust A becomes the survivor’s trust

• Trust B (the bypass trust) becomes the decedent’s trust, is irrevocable, and is funded with assets up to the federal estate tax exemption amount

Though the surviving spouse has limited access to the assets in Trust B, they can still receive income and certain distributions.

Because Trust B is capped at the exemption limit and the remaining assets qualify for the unlimited marital deduction, there is typically no estate tax due upon the first spouse’s death. In addition, any future appreciation of assets in Trust B is not included in the surviving spouse’s taxable estate upon their death.

When used strategically, gifting cryptocurrency for estate tax planning through an A-B trust can preserve significantly more wealth over time. If structured as a generation-skipping trust, the appreciated crypto in the B trust can also bypass estate taxation for multiple generations, helping heirs receive more and potentially saving millions in taxes.

In summary, funding an A-B trust with low-valued cryptocurrency expected to appreciate is a powerful tool. It allows you to transfer more wealth estate-tax free, protect your digital assets, and align your estate plan with long-term legacy goals.

GRATs

A third estate planning strategy for gifting cryptocurrency for estate tax planning involves using a Grantor Retained Annuity Trust (GRAT), a type of irrevocable trust often used for assets expected to appreciate significantly over time, such as real estate, stocks, business interests, or cryptocurrency. GRATs are especially effective in low-interest rate environments, where it’s easier for assets to outperform the IRS’s assumed growth rate.

The main goal of a GRAT is to transfer appreciating assets—like cryptocurrency—out of your taxable estate while minimizing or even eliminating gift tax liability, and preserving your Unified Credit.

The success of this strategy hinges on two key factors:

First, under IRS rules, when you transfer assets into a GRAT, only the value of what you’re giving away, not the portion you retain as annuity payments, is treated as a taxable gift. This allows a large share of the asset’s value to be transferred with little or no impact on your Unified Credit.

Second, the GRAT works best when the cryptocurrency you contribute grows faster than the IRS Section 7520 rate, which was 3.0% as of April 2019. If it does, the excess growth can pass to your beneficiaries free of gift and estate taxes.

Here’s how gifting cryptocurrency for estate tax planning through a GRAT works in practice:

You would work with an experienced estate planning attorney and financial advisor who understands digital assets. Together, you’d create a GRAT and fund it with bitcoin or another cryptocurrency you don’t expect to need during your lifetime. Then, you’d name your beneficiaries, such as children, grandchildren, or other loved ones.

Next, you’d determine how much you want to receive in annuity payments from the trust and over what time period, typically between two and five years. The goal is to structure the annuity so that the actuarial value of what’s left in the trust at the end of the term is close to zero, based on the current 7520 rate. This minimizes the taxable gift.

Although transferring crypto into a GRAT is technically a taxable event, the taxable gift is reduced by the present value of the annuity payments you’ll receive. This structure allows you to transfer appreciating cryptocurrency from your estate with minimal or no gift tax liability.

There are a few key risks to keep in mind:

• If the grantor dies before the GRAT term ends, the IRS pulls the trust assets back into the taxable estate, negating the benefits.

• If the cryptocurrency underperforms the 7520 rate or declines in value, you may see little or no tax savings.

If successful, however, the GRAT terminates at the end of the annuity period, and you transfer any remaining appreciated crypto to your beneficiaries free of estate and gift taxes. This makes GRATs a highly effective option for gifting cryptocurrency for estate tax planning, particularly if you believe your crypto holdings will likely appreciate significantly in the future.

Conclusion

Whether using the annual gift tax exclusion or more advanced tools like A-B trusts or GRATs, gifting low-valued cryptocurrency can be a highly effective strategy for reducing estate taxes, especially in states that levy their own estate or inheritance taxes.

High-worth individuals and couples holding bitcoin or other digital assets should take a team-based approach to estate planning. That means working with a financial advisor and an estate planning attorney who understand the unique challenges of cryptocurrency.

Unlike traditional assets, crypto requires special care. In addition to having an up-to-date estate plan, it’s critical to develop a secure, well-documented access plan so your loved ones can securely access your crypto if you become incapacitated or pass away, preventing it from being lost or stolen.