Understanding Digital Assets

The world is becoming more and more digitized and so are your client’s assets. Most Americans own multiple digital devices and have tons of online accounts. Because the average person is unaware of the extent of digital assets they have, they usually don’t know how to begin identifying them for planning purposes and are unfamiliar with the legal complexities involved in accessing and transferring digital assets at their passing. To better serve the changing needs of clients, advisors should consider discussing digital asset planning as part of their routine practice to help better protect, manage and plan for their client’s digital assets and digital identities.  

Under the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), digital assets are defined as “an electronic record in which an individual has a right or an interest.” Most states have enacted a version of RUFADAA to better address the ability of a fiduciary to access a person’s digital assets at their death or incapacity. Digital assets are not devices, tablets, computers, smart phones or hard drives, but rather the underlying data and information stored on devices, or in accounts stored, maintained or accessed online or in a cloud.

For instance, digital assets include everything from pictures stored on devices to websites, copyrights, emails, financial information, social media accounts, loyalty programs, electronic books and online records. Cryptocurrencies, tokens, smart contracts and records stored or rights accessible on blockchain networks are also considered digital assets.

Planning For Digital Assets

Discussing digital asset planning with clients is necessary to help safeguard and transfer digital assets to the client’s intended recipients, or to carry out the client’s wishes in prohibiting access or ensuring digital accounts are deleted. Planning also helps curb the risk of identity theft and other cybercrimes.

Some digital assets are associated with a financial value, which could translate into a monetary loss if the asset is not identified, while others may have priceless, sentimental value. Videos, pictures, digitally saved journals, and messages from a loved one could be permanently lost if their existence is not properly disclosed. Proper planning will help fiduciaries expedite identifying, finding, accessing, and transferring digital assets that are able to be transferred during an estate administration.

Generally, a person’s digital interests will be transferrable if the required authorizations are clearly documented and the digital interests are properly identified. The default rule under RUFADAA is that a user needs to explicitly authorize a fiduciary’s access to the user’s digital assets. However, some providers of online accounts prohibit the transfer of a user’s digital assets under a Terms of Service Agreement (TOSA), which can explicitly limit the user’s right to transfer the asset or account. For example, iTunes are incapable of being transferred because the account holder only has a lifetime license. 

As a guideline for digital asset planning, RUFADAA provides a hierarchy of consent to access a user’s digital assets:

1. Online tool: An online tool is an agreement between the user and the service provider, separate from the TOSA, which specifies directions for the disclosure or non-disclosure of digital assets to the designated recipient. Google and Facebook already have online tools on their platforms, and more service providers will likely allow this planning option in the future.

2. Estate planning documents: Properly drafted estate planning documents such as a will, trust, or power of attorney, can also provide consent to access and transfer digital interests. However, the use of an online tool will trump provisions in estate planning documents.

3. TOSA: If there are no estate planning documents authorizing consent, the provisions in the TOSA for each provider are the final means to provide access. 

As digital asset planning becomes more prominent, advisors need to be aware that if a client uses an online tool and also has estate planning documents in place addressing access to digital assets, the planning should be cohesive to avoid any unintended consequences. The use of an online tool is akin to the use of a beneficiary designation and should be done with great care and reviewed and reevaluated as part of a client’s overall estate plan.

Identifying Digital Assets

The first step to digital asset planning with clients is to have them create an inventory of their digital assets. Each asset needs to be independently examined in terms of whether it can actually be accessed and transferred, how, and by whom.

Inventories provide fiduciaries with a starting point to locate, access, and transfer assets to avoid unnecessary loss. However, a digital asset inventory should list the user’s digital assets but should NOT contain login and password information. Sharing this information is generally prohibited under several federal laws, such as the Computer Fraud and Abuse Act and the Stored Communications Act. Revisiting and updating digital asset inventories is also crucial to help keep the plan current. 

The next step is to discuss updating the client’s estate planning documents to authorize or prohibit the access of digital assets by a fiduciary. As part of this discussion, it is necessary to confirm whether the client has utilized any online tools. If they have, advisors will need to ensure that the provisions in testamentary documents are consistent with the online tool designation, or if they are inconsistent that it is a deliberate decision.

In addition to the above, there are many other advanced techniques that can be implemented in digital asset planning, especially for people who have cryptocurrency, digital tokens or interests or rights in a blockchain or smart contract.

Planning for digital assets can become complicated depending on the types of digital assets owned, how they are stored, whether they are identified, and the technological expertise of the user and their intended beneficiaries and fiduciaries. Advisors should help educate clients on the existence of their digital assets to simplify transfer and disposal, reduce avoidable setbacks, ensure digital assets with financial or sentimental value are preserved, and to help protect against identity theft and other cybercrimes.

As the world changes and our physical and digital lives become more integrated, offering this cutting edge service will allow advisors to better handle the future needs of clients.

Jennifer Zegel, Esq., LL.M., is a partner at Kleinbard LLC in the business and finance department and is the practice leader of the firm’s Trusts and Estates Group. Founded in 1939, Kleinbard is a respected Philadelphia-based law firm that provides sophisticated legal representation.