Regardless of your age, wealth, or occupation, there is a good chance that you have accumulated a significant amount of digital assets over your lifetime. So, what happens to these assets when you die? Although estate planning for digital assets is a relatively new phenomenon, it has quickly become one of the most-important aspects of the estate planning process.
What Are Digital Assets?
Let’s start at the beginning. What is a “digital asset”? Perhaps unsurprisingly, this term is not clearly defined. Its definition is also constantly changing over time – and will continue to change as long as inventors and innovators continue to shape and reshape the online environment. This makes creating a finite universe of “digital assets” a virtual impossibility.
Even in this realm of infinite possibilities, you probably still own more digital assets than you think. If we think of a digital asset as anything you own that only exists on your phone, tablet, computer, or in the cloud, the list includes:
- Bitcoin, Litecoin, Ethereum, and other cryptocurrencies
- Digital photo albums and storage facilities (such as Flickr, Shutterfly, or Amazon Prime)
- iTunes, Google Play Music, and other digital music and multimedia libraries
- Social media profiles
- Domain names
- Blogs and personal websites
- Media and content published online
- PayPal and Square Cash accounts
- Documents and records stored online (including files stored with Google Docs, Dropbox, Box, and financial and medical records stored with third-party providers)
- Avatars and virtual property in games such as Second Life and World of Warcraft
- Loyalty program benefits
- Digital intellectual property
This list is by no means exhaustive. As you think about the apps and websites you use on a regular basis, you will undoubtedly think of several more digital assets that you need to address in your estate plan.
Why Address Digital Assets in Your Estate Plan?
Why is estate planning for digital assets important? Suppose you die and no one else knows how to access your bitcoin wallet or iTunes account. Also, suppose that you rode the wave and now own hundreds of thousands of dollars in bitcoin, or that you have amassed a music collection costing several thousand dollars. If no one knows how to access these assets . . . then no one can access them. They effectively die with you.
This simple reality of the digital world is the primary reason why all individuals with digital assets need to specifically address these assets in their estate plan. Even if you don’t own hundreds of thousands of dollars in bitcoins now, what if you do in the future? Isn’t any amount enough to leave to your chosen loved ones?
Estate Planning for Digital Assets
Although estate planning for these types of digital assets may initially seem similar to planning for the transfer of bank accounts and other intangible assets, there is one critical distinction: When you establish a bank account or securities brokerage account, you can designate a beneficiary. Generally speaking, this is not the case with true “digital assets.” When you die, your designated beneficiary is automatically entitled to ownership of the account, and financial institutions have procedures for transferring customers’ accounts on death. These assets transfer outside of probate (even without a formal estate plan), which is a good thing as long as you remember to keep your beneficiary designations up to date.
Of course, your digital assets are similar to your bank accounts in that, if no one knows about them, they are going to be forgotten. As a result, when planning your estate, you need to be as detailed and comprehensive as possible in order to ensure that all of your digital assets transfer as you desire.
Subject to these provisos, estate planning for digital assets involves the same legal tools and considerations as estate planning for other forms of tangible and intangible property. In the US, the tools most-commonly used to transfer digital and non-digital assets on death are listed below.
While a lot has changed with regard to the digital environment, on the legal front, things are progressing much more slowly. As a result, even if your estate is comprised almost entirely of 21st century digital assets, a will is still going to be a crucial component of your estate plan. This is true even if you form a trust (or multiple trusts) to transfer the bulk of your estate.
Having a will serves a number of important purposes. Most notably:
- It allows you to designate a personal representative to manage your final affairs (if you do not choose, your family members will have to go to court to get one appointed for you);
- It allows you to designate a guardian to care for your minor children (even if you do not have children currently); and
- It allows you to create “pour-over” provisions which essentially turn any non-trust assets into trust assets at the time of your death (thus avoiding probate and potential application of your state’s intestate succession laws).
2. Revocable Trusts
Revocable trusts are commonly used to transfer assets at the time of death. The reasons for this are many:
(i) using a trust avoids probate,
(ii) it allows you to place restrictions on when and how your assets can be used,
(iii) it provides the flexibility to modify your estate plan over time, and
(iv) with a pour-over will, you can effectively use a revocable trust to distribute all of your digital and non-digital assets.
3. Irrevocable Trusts
Although use of irrevocable trusts for transferring digital assets is less common (the benefits of using an irrevocable trust simply won’t apply to certain types of digital assets), these trusts can offer significant benefits under the right circumstances. Various types of irrevocable trusts offer substantial tax savings (especially when transferring high-value appreciated assets); and despite their name, irrevocable trusts can often be modified or terminated.
4. Other Estate Planning Tools
Along with wills, revocable trusts, and irrevocable trusts, there are several other types of estate planning tools that may be appropriate for transferring your digital assets as well. A private foundation is one option if you want to use a substantial digital asset to fund philanthropic endeavors. And depending on where your digital assets are located, it may be important to consider international estate planning tools as well.
Special Considerations for Estate Planning with Digital Assets
As you can see, you have lots to think about when it comes to preserving your digital assets beyond your lifetime. Here is a brief review of some of the key considerations to keep in mind:
- What digital assets do you own?
- Can you access all of your digital assets currently?
- Which companies’ apps and services do you use? Could it be that your digital assets are technically considered to be located overseas?
- Who do you want to have information about your digital assets? (You can begin planning for transfers during your lifetime, or you can keep your information confidential until your death.)
- Should any digital assets simply be deleted or destroyed upon your death?
- Where can you safely store information about all of your digital assets?
- Does it make sense to sell or give away any digital assets now, whether for tax planning or other purposes?
Discuss Your Digital Estate Plan with an Attorney at Jiah Kim & Associates
If you are ready to start putting together an estate plan, we encourage you to contact us for an initial wealth counseling consultation. To schedule an appointment at Jiah Kim & Associates (either in-person or remotely), please call (646) 389-5065 or tell us how we can help online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.