When we think of digital assets, we usually think of cryptocurrency, Bitcoin, etc. Although, the definition of “digital asset” does not appear in the Merriam Webster, Macmillan or Britannica dictionaries, it did appear in Free Dictionary, as follows:
"A digital asset is anything that exists in a digital format and comes with the right to use. Data that do not possess that right are not considered assets. Digital assets include but are not exclusive to: digital documents, audible content, motion picture, and other relevant digital data that are currently in circulation or are, or will be stored on digital appliances such as personal computers, laptops, portable media players, tablets, data storage devices, etc.
The list of examples of digital assets continues and includes, but is not exclusive to, photography, logos, illustrations, animations, audiovisual media, presentations, spreadsheets, Word documents, electronic mails, websites, and a multitude of other digital formats and their respective metadata.
The number of different types of digital assets is exponentially increasing due to the rising number of devices that are a conduit for digital media (e.g., smartphones). Due to this steadfast growth of software applications and immense diversity of user touchpoints covering a wide span of devices, our view of the total digital asset’s universe is growing. There are also financial digital assets, like digital wallets and cryptocurrencies, which are gaining popularity.”
The Revised Uniform Fiduciary Access to Digital Asset Act (RUFADAA) Section 2(10), defines a Digital Asset as: (10) “an electronic record in which an individual has a right or interest. The term does not include an underlying asset or liability unless the asset or liability is itself an electronic record.”
A digital asset can be a wide variety of electronic records and files that are stored online, on mobile devices, or on personal computers:
- Email, text messages, instant messages {electronic communications between private parties};
- Domains, websites, social networking sites {Facebook, Instagram} and blogs;
- Online reward programs—credit cards, hotel points, airline miles;
- Financial accounts —PayPal, online banking, investment or brokerage accounts;
- Digital collections —Photographs, iTunes, Kindle books; and
- Documents stored online; customer databases
Our clients may not realize that their family photos stored online, digital books, iTune play lists, access to email, social media accounts, may be lost due to improper planning in the event of incapacity or at time of death. These digital assets are not assets with ownership per se; rather, they are a right or an interest to use the various platforms. This right is given to the online user only, and often terminates upon death and is not transferable.
As estate planning professionals, it is imperative, in today’s environment that the client is aware of the digital assets he or she probably owns, and these assets must be taken into consideration in the event of incapacity or death. As stated above, digital assets are far more than virtual currencies, Bitcoin, etc. What makes planning with digital assets challenging is the fact these are not traditional assets that we own and can dispose of freely as we would a car or a bank account. Many of these common digital assets only provide a right to use the platform. When the various terms of service agreements are signed when opening these accounts, only the right to use the platform is provided. Usually, the terms of service agreement are between the provider, Facebook, Instagram, iTunes, etc. and the user him/herself and gives access to only the user. This is a safety precaution for the user but often acts a barrier at the time of death or incapacity for family members or beneficiaries to gain access to online platforms.
What is RUFADAA?
As provided in the prefatory of RUFADAA, its general goal is to facilitate fiduciary access and custodian disclosure while maintaining and respecting the privacy and intent of the user. This serves a dual purpose: First, the fiduciaries are given the legal authority to manage digital assets and electronic communications in a similar manner as they manage tangible assets and financial accounts, to the extent possible. Second, legal authority is given to the custodians of digital assets and electronic communications to work with the fiduciaries of their users, while respecting the user’s reasonable expectation of privacy for personal communications.
To summarize the purpose of RUFADAA:
- RUFADAA provides a comprehensive uniform set of laws that assists with the administration of digital assets in estate planning.
- RUFADAA provides a basic framework for how the state and an executor, fiduciary, or attorney should manage someone's digital assets after death or incapacitation.
- RUFADAA contains a hierarchy of protocols which clarifies how a person could go about managing or closing someone's online accounts.
- RUFADAA only gives an executor or trustee access to the content of electronic communications, including emails, chats, and DMs, if the decedent explicitly consented.
- Many states enacted RUFADAA as a means of directing how to manage someone's digital assets after their death.
- New York AB A9910A, effective September 29, 2016
A summary of AB A9910A is found on NYsenate.gov:
This bill provides for the administration of digital assets; defines terms; authorizes a user to use an online tool to direct the custodian to disclose or not to disclose some or all of the user's digital assets, including the content of electronic communications; provides that this article does not impair the rights of a custodian or a user under a terms-of-service agreement to access and use digital assets of the user; provides for a procedure for disclosing digital assets; makes related provisions.
In addition to these digital assets, which can be challenging upon death or incapacity, there is cryptocurrency, which in and of itself can be challenging due to its nature.
What Is Cryptocurrency?
Cryptocurrency is digital currency that can be used as a system of exchange to purchase goods and services. It is an encrypted data string that denotes a unit of currency. Unlike the U.S. dollar or the euro, there is no central authority that manages and maintains the value of a cryptocurrency. In contrast, cryptocurrencies are decentralized, which means they are not issued by governments or other financial institutions.
It is monitored and organized by a peer-to-peer network called a “blockchain.” This is a digital ledger of encrypted transactions that is duplicated and distributed across the entire network of computer systems. The blockchain technology creates a decentralized public ledger to record and manage transactions. Using blockchain technology guarantees the reliability and security of this digital ledger and generates trust without the need for a centralized trusted third party. The blockchain also serves as a secure ledger of transactions, e.g., buying, selling, and transferring.
Cryptocurrency is typically owned in one of two ways:
- through an account with a cryptocurrency exchange; or
- held in a “wallet” with an encrypted private key.
A cryptocurrency exchange account is similar to the traditional brokerage/ investment account in that a custodian, i.e., Coinbase, holds and maintains the owner’s account. Usually, no paper statement is issued.
A cryptocurrency wallet is where cryptocurrency can be held and be accessible by the use of an encrypted private key, usually a series of alphanumeric characters, that is unique to the owner. Whoever has the private key has the ability to buy, sell and use the digital money – making it highly susceptible to loss or theft. Wallets offer greater anonymity and more control over your assets because they are “noncustodial.”
- Cold wallet storage: offline storage devices such as a USB drive, computer, phone or tablet that are not connected to the internet.
- Hot wallet storage: online or desktop apps that provide the ability to store keys and passwords to access cryptocurrencies.
There are no traditional ownership or beneficiary designations on cryptocurrency accounts. If the holder dies without communicating ownership of a cryptocurrency and does not provide the corresponding password or “private key,” the asset dies with that person. In contrast to traditional assets, there is no personal identifying information associated with the crypto assets, and the wallet can only be accessed through the private key. A digital wallet without the private key is useless. Without the private key, there is no access, and without access, there is no cryptocurrency, and all the value is lost. There is no way to recover the funds. There is no “change password” option, no customer service to call for assistance. There simply is no help to recover a lost key.
Cryptocurrency is a challenging asset for an estate/executor/heir due to the nature of this asset. If held in an account, most cryptocurrency exchanges do not allow for beneficiary designations; if held in a wallet, the issue of the private key can problematic. The private key should only be known to the asset's owner, during lifetime. Remember, whoever has the private key can buy, sell and use the digital money, which makes this asset susceptible to loss or theft. It also could be lost if the owner does not properly consider a plan for these types of assets in case of his/her incapacity or death. There have been recently reported cases where passwords have been lost or not properly stored for beneficiaries or heirs in case of death.
How Do We Advise our Clients?
We need to advise our clients that they must carefully think of the various digital assets they may have, including cryptocurrency, and make an inventory listing and identifying all assets. In the case of cryptocurrencies, list where and how they are held.
A separate corresponding list of passwords must be maintained along with answers to key safety questions which are provided in the event of a lost password retrieval. Both these lists must be updated frequently.
The client must consider what will happen with the various online accounts. Would they like someone to have access if possible—i.e., to access family photographs, but not emails? Needless to say, there are some items stored that the user may not want others to have the ability to access that file, photo, etc. There are some platforms that have legacy plans that are briefly mentioned below.
The last will and testament should contain a digital asset clause, or a digital will can be created and added as a codicil.
A digital will can be created that will address how digital assets are handled. Traditional wills pass all property owned upon death; the digital will addresses only the digital assets.
A digital will:
- can list of all digital property, where it’s stored, and a reference to a separate document which includes user names and email address, passwords, phrases, keys associated with each account.
- appoints a digital executor to carry out wishes as they pertain to these digital assets.
- Can provide instructions regarding how to manage digital assets; i.e., shut down online accounts; post final message; memorialize the account; and transfer, if possible.
Choose the digital executor (DE) and alternative DE; ensure the DE is aware of final wishes; ensure he/she knows the location of the digital estate plan so they can gain access upon death or incapacity.
Review various online accounts to learn what happens at death or incapacity; be sure it is understood what is owned, what is licensed; which has a legacy plan, etc. Facebook, for instance, allows family members of a deceased person to memorialize their account. The user can choose who they authorize upon death to have access to perform limited tasks on their Facebook page, i.e., write a post to display at the top of the memorialized timeline; respond to new friend requests from family members and friends who were not yet connected on Facebook; update the profile picture and cover photo. If users choose to do so, they may give their legacy contact permission to download an archive of the photos, posts and profile information they shared on Facebook. Other settings will remain the same as before the account was memorialized. The legacy contact will not be able to log in as the person who passed away or see that person’s private message. Alternatively, users can advise Facebook whether they would prefer to have their Facebook account permanently deleted after death.
Instagram also has legacy planning options. Various social media accounts and other online platforms should be researched for any legacy planning options.
When considering cryptocurrency, the last will and testament must refer to the cryptocurrency owned and should also refer to where the separate inventory of the cryptocurrency and the list of passwords and the location, etc. If held on an exchange, the executor should be able to handle as with other assets, through the administration process, including providing a death certificate, Last Will and Testament, Letters Testamentary etc. There are no paper statements issued, so unless these accounts are referenced in the will itself or added in a codicil, beneficiaries and executors may be unaware of their existence.
If creating a trust, many trustees may not understand the value or risk of retaining crypto investments. Due to the inherent risks and volatility, it should include language allowing the trustee to select an investment advisor to specifically make investment decisions related to crypto assets. This advisor should have the knowledge and experience to work with cryptocurrency. Consideration should also be given regarding a trustee’s ability to retain the crypto assets in a trust. This specific language would direct the trustee and/or investment advisor to retain these assets; or to ensure the retaining of an experienced investment advisor as well. Also, one should consider language limiting the liability of the trustee and/or investment advisor because of the volatility of these assets.
As part of the planning process, the client’s power of attorney should be updated to permit an agent to access digital assets and cryptocurrency in the event of incapacity.
In order to pass on digital assets in accordance with the client’s wishes, it is best to ensure that the estate plan:
1) provides for disclosure of virtual currency and digital assets;
2) provides for a secure method of transfer of the private key to the intended beneficiaries;
3) ensures that the list of digital assets and virtual currency is up to date; the passwords and answers to security questions are up to date and listed and stored somewhere safe;
4) arranges for a trusted person—i.e., an attorney —to store this list; although it can go into a safe deposit box, there may be a lag with opening the safe deposit box;
5) includes specific language that must also be included in the client’s estate planning documents to permit fiduciaries to access, retain, and manage cryptocurrency.
Assure that a power of attorney is updated and permits an agent to access digital assets and cryptocurrency in the event of incapacity.
Planning with 401(k) Plans and Cryptocurrency
On March 10, 2022, the Department of Labor (DOL) issued Release No. 2022-01 (“Release”): The DOL cautions plan fiduciaries to exercise extreme care before they consider adding a cryptocurrency option to a 401(k) plan's investment menu for plan participants. The Release is the DOL’s first written guidance on the appropriateness of cryptocurrency as an investment option in a 401(k) account. In the Release, the DOL warns that at this early stage of the cryptocurrency market, plan fiduciaries should exercise “extreme care before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants.” This also applies to any “other products whose value is tied to cryptocurrency.”
The Employee Benefits Security Administration will “conduct an investigative program aimed at plans that offer participant investments in cryptocurrencies and related products, and to take appropriate action to protect the interests of plan participants and beneficiaries with respect to these investments.”
The DOL listed five reasons for why it has serious concerns about offering investment options in cryptocurrency or related products in a 401(k) plan:
- Cryptocurrency assets are speculative and volatile investments.
- It is challenging for plan participants to make informed investment decisions and “to evaluate these assets and separate the facts from the hype”;
- There are custodial and recordkeeping concerns with holding cryptocurrency assets, such as losing private wallets and being more vulnerable to hackers and theft;
- Cryptocurrency valuations can be unreliable or inaccurate; and
- There is an evolving regulatory environment, including under securities and money- laundering laws.
DOL also said that it “expects to conduct an investigative program” aimed at plans that offer cryptocurrency and related products as investment options or that allow such investments through brokerage windows.
Melissa Gillespie, JD, CPA, MST, has her own law practice which is devoted to international taxation including estate and global wealth planning for high net worth, non-resident individuals; non-U.S. individuals working in the U.S., and U.S. citizens working abroad. The past several years she has working extensively counseling and representing clients making voluntary disclosures to the IRS. Before practicing as an attorney, she worked as a CPA for 12 years. During her career, she has worked McGladrey & Pullen, LLP, Arthur Andersen, the Goldman Sachs Family Office, and Skadden, Arps, Slate, Meagher and Flom practicing in the field of both U.S. and international taxation. She is past chair of the Society’s International Taxation Committee; she is a member of the AICPA, the American Bar Association, and the New York State, New York City and Suffolk County Bar Associations. She is admitted to practice in New York and the Law Society of England and Wales. She has her Masters of Science in Taxation and is also a CPA. She also served on both the Society’s Tax Division Oversight Committee and the Virtual Currency Task force. She is the immediate past committee chair of the Digital Assets Committee; and she is a member of the Society of Trust and Estate Professionals (STEP) as well as other professional organizations. Ms. Gillespie lectures frequently and has authored various articles on international issues. She has recently authored “Foreign Bank Account Reporting Compliance Guide” and the “Foreign Bank Account Reporting Compliance Guide (with FATCA coverage) both published by CCH.