As the world becomes increasingly digital, technology becomes more and more part of our lives. From online bank and investment accounts to social media profiles to cryptocurrency holdings and more, these digital assets are crucial components of our daily existence. However, many individuals often overlook these assets when creating their estate plans. It’s important to include digital assets in your estate plan just like you would include physical assets. In this blog post, we’ll discuss what digital assets are, why they’re important to consider, and how you can incorporate them into your estate plan.
What are Digital Assets?
Digital assets are intangible assets that are stored electronically. They include, but are not limited to:
- Online accounts, such as online bank accounts, email accounts, social media profiles, and subscription services
- E-commerce accounts (accounts associated with an online marketplace business or other business site)
- Digital files, including documents, photos, and videos stored on your devices or in the cloud
- Intellectual property, such as copyrights, trademarks, or patents
- Domain names
- Cryptocurrencies, such as bitcoin
- Password managers, which store login information
Challenges and Considerations
While including digital assets in your estate planning process is important, there are several challenges you should be aware of before getting started. Creating plans for assets that are digital can be complex. A digital asset also changes as technology changes, making it challenging yet crucial to stay up to date. It can also be difficult to find the balance between providing access to a digital asset while keeping it secure. If you have multiple online profiles or accounts that require usernames and passwords to access, managing all that login information can be overwhelming.
When incorporating digital assets into estate planning, consider who should have ownership of and access to your assets, how you will keep those assets private and secure, and what legal or regulatory issues might arise.
Ownership and Access to Online Accounts and Other Assets
Including digital assets in your estate planning is crucial because it helps protect personal data and other valuable information. A digital asset can have financial value or sentimental value, and creating a plan for it helps you trust that it will be managed properly. In your estate plan, be sure to mention who should become an owner of each digital asset, whether or not that asset is in a trust, and how the right people can access the assets. This can include providing instructions on where people can find certain files on your computer, or writing down a list of usernames and passwords needed to access online accounts.
Privacy and Security Concerns
Make sure your plan clearly states your wishes regarding asset protection and the distribution of personal data. Your plan should also align with any relevant privacy laws. This helps maintain privacy and security for your heirs while protecting against identity theft or unauthorized access to your online profiles and digital accounts.
Legal and Regulatory Issues
The laws and regulations around digital asset management are constantly evolving. Staying informed can help you create a comprehensive plan for your assets that adheres to legal requirements. When planning your estate, consider any terms of service agreements that are related to your assets, as online platforms often have specific terms that state what happens to your account upon death. It’s also helpful to research any state law or federal law that’s relevant to digital estate planning. These laws can vary by location, so it’s crucial to know which ones apply to you and your estate.
What Could This Mean for Taxes?
Transferring digital assets to your heirs can have tax implications that you should be aware of when planning your estate. In many locations, estate tax applies to digital property as well as physical property, and the value of your digital assets is part of your taxable estate. This means that the financial value of your digital assets could be subject to estate tax or inheritance tax. It can be tricky, however, to determine the exact value of more volatile digital assets, such as cryptocurrencies, so working with a tax professional or attorney can be helpful during estate planning.
A lawyer can also explain the strategies that are available to help you minimize the tax liabilities associated with your assets. These strategies may include giving the digital assets to someone else as a gift during your lifetime (gift tax may or may not apply) or creating a trust to hold the assets. A lawyer will work with you to determine the best course of action based on your specific assets and your goals.
How to Incorporate Digital Assets into Your Estate Planning
When you’re ready to incorporate your digital assets into the estate planning process, there are a number of steps that can help you stay organized and make sure you add all the necessary information to your plan. These steps include taking inventory of your digital assets, appointing a digital executor, documenting your wishes and instructions, securing your digital assets, communicating your plan, and regularly updating your plan.
Take an Inventory of Your Digital Assets
Start by making a list of all the digital assets you own. Be sure to include account names, login usernames and passwords, where files are located on your devices, and where your devices are located. Maintaining an inventory of assets helps ensure a smooth transition when the executor distributes your assets to your beneficiaries during probate. It can also help prevent potential tax issues.
Appoint a Digital Fiduciary
A digital fiduciary, also called a digital executor, is someone you trust to access and manage your digital assets upon your passing. The fiduciary typically has a variety of responsibilities, including:
- Gaining access to your digital files and online profiles or accounts, including social media profiles, online accounts for your bank and credit cards, email, personal data, and other intangible personal property.
- Keeping your assets private and secure by protecting passwords, encryption keys, and other sensitive information.
- Carrying out the wishes you express in your plan, which may involve managing, transferring, closing, or deleting specific digital assets.
- Notifying online service providers about the death of the account holder and following necessary procedures.
- Backing up a digital asset to prevent data loss.
The specific tasks your fiduciary performs depends on the assets in your estate and your wishes for those assets as outlined in your plan.
Document Your Wishes and Instructions
Once you have a list of your digital assets, you should document your wishes for each asset in your inventory. This should include instructions on how you want each digital asset handled (such as saved, deleted, or transferred) and to whom your assets should be distributed. Be clear about your wishes to help make the probate process as easy as possible.
Secure Your Digital Assets
Keep digital assets secure by following best practices for online safety, privacy, and security. Utilize secure storage options and use a password manager to securely save and organize your login information. Be sure to list usernames and passwords for the accounts mentioned in your plan so the fiduciary can access the necessary files, accounts, and data. For example, prepare email accounts by making a list of your email addresses and passwords, allowing your fiduciary to access the accounts.
Communicate Your Plan
Next, communicate your plan with people you trust, especially your fiduciary. This allows them to carry out your wishes for each digital asset. You can also express your wishes to the heirs of each digital asset so they’re not caught off guard when they become responsible for managing your assets. Communicate what the asset is, what it does, why it’s important, how to access it, and what you want your heir to do with the asset.
Regularly Update Your Digital Plan
Once you have created a plan for your digital assets, update the plan on a regular basis. If your wishes change, the assets change, or the usernames or passwords change, update your plan so the information included is all up to date. Keeping your plan compliant is important, too, so consult an attorney to make sure your plan adheres to the latest laws and regulations.
Elements of an Estate Plan: Will, Trust, and Power of Attorney
Before starting the estate planning process, it’s important to understand the different elements of a plan, especially wills, trusts, and powers of attorney. This will help you decide what needs to be included in your plan and how your digital assets will be incorporated.
Wills: A last will and testament, also called a will, is a document that expresses your wishes for your physical, financial, and digital assets. A will states how you want your assets to be distributed during the probate process, including who the beneficiaries are and who should serve as executor. Wills ensure that your property is managed and distributed according to your preferences.
Trusts: A trust is an arrangement that grants a third party, called a trustee, the responsibility to hold and manage your assets on your behalf. At a future time – specific by you – the trustee will pass the assets in the trust on to the beneficiary. Trusts typically bypass the probate process, so placing property in a trust can be a great way to protect it from certain taxes and allow the property to be distributed to your heirs more quickly. Trusts also help you control your wealth by allowing you to determine when and how your wealth will be distributed.
There are several types of trusts. A revocable living trust, which is a trust that you can update or revoke at any time during your life, can be a smart option for your digital assets. This type of trust allows you to maintain control of your assets while you’re alive and can be a great way to protect high-value digital assets.
Powers of Attorney: A power of attorney is a document that grants another person permission to make decisions or take action on your behalf in the event that you become incapacitated. Power of attorney can be given for decisions about physical property, digital assets, medical care, investments, or finances, and the extent of authority can be broad or limited.
Hire an Estate Planning Lawyer
Incorporating digital assets into your estate plan can be a complex and intricate process. Fortunately, estate planning lawyers provide invaluable expertise. These lawyers are well-versed in the evolving legal landscape of digital assets as well as other components of estate planning. They’re familiar with different areas of law that are relevant to estate planning, including probate law, power of attorney law, business law, and the law as it relates to a will or trust. Attorneys can also provide guidance tailored to your specific circumstances, needs, and goals, ensuring your plan clearly expresses your wishes while adhering to any relevant state law or federal law.
Lawyers also know what it takes to create legally binding documents that will be held up in court, so you can trust that your wishes will be carried out. They can help with designating executors, managing privacy and security concerns, addressing the terms of service agreements on various online sites, and ensuring your plan includes all necessary information.
Taneff Law can help with all your estate planning needs. To learn more about us and our services, contact us today.