Digital assets have grown massively in popularity in recent years. One need only look at the explosion of cryptocurrency and non-fungible token (NFT) trading to understand how much money is being invested in this area. With this growth has also come a new, and sometimes tricky, set of considerations for those trying to plan their estates.
What Are Digital Assets?
A digital asset is a uniquely identifiable property or material that exists only in digital (i.e., nonphysical) form and includes a legal right to use it. The term can be applied to a wide variety of properties. Here are a few common examples of digital assets:
- Audio or video files
- Internet domain names
- Photographs and images
- Business data
Questions of ownership or other legal interest can be challenging with digital assets, as they are so easily copied. For instance, downloading a logo from a website does not give you any right to use it for your own purposes, much less sell it to someone. Ownership often may be demonstrated by documentation such as a copyright, bill of sale, etc., but sometimes it is almost entirely a question of who has the password, token, or other means of accessing the asset. In terms of estate planning, it is important to establish what it is you actually own and whether it can be transferred to someone else.
Keeping Track of Passwords
One of the biggest problems with transferring digital assets after someone has passed away is surprisingly mundane: no one has the passwords to access them. The assets may be encrypted on a hard drive or server, or may require an online account login, but the decedent never wrote the passwords down anywhere. Sometimes this issue can be resolved by proving the transfer of ownership to, say, the data storage company or email provider, but that is not always possible. Cryptocurrency has become notorious for this problem. There are several examples of investors losing very large amounts of money after misplacing their password.
Therefore, a key aspect of your estate plan should be to keep track of all passwords and store them in a secure location that can be accessed in the event of your death.
Additional Considerations for Digital Assets
For the most part, digital assets are treated like any other property that makes up your estate, but there are a few specialized concerns to keep in mind. The first is that it’s important to document all of these assets. This may apply to any estate property, but it is especially easy for an executor or administrator to overlook digital assets or simply be unaware of their existence. Cryptocurrency trading, for example, is virtually anonymous, so unless you’ve told someone about your holdings no one will know about them.
In fact, cryptocurrencies present a few challenges for estate planning and administration. Despite the name, the IRS considers cryptocurrency to be property, not currency (analogous to company stocks). The value of cryptocurrencies also tends to be rather volatile, potentially creating unexpected tax consequences. It helps to keep regular records tracking the values of these assets.
Southern California Estate Planning Attorneys
Digital assets have created new and potentially lucrative investment opportunities for many people, but making sure these assets are passed on to your successors takes careful planning and organization. Our experienced estate planning attorneys can help make sure these assets end up in the right hands and minimize the tax burden on your estate. Contact our office today to schedule a consultation.