Editor: Anthony S. Bakale, CPA
The rapid advance of technology has led to substantial portions of individuals' business and personal data being stored in digital formats. Many individuals may not realize the value and extent of their digital records and the potential for financial or sentimental loss if these assets are lost or inaccessible. A well-drafted estate plan should address the management and distribution of digital assets to mitigate additional administrative burdens on fiduciaries.
What is a digital asset?
The development of technology consistently outpaces the laws that attempt to regulate its subjects. What is considered a "digital asset" may evolve to include new and innovative asset classes. Currently, digital assets include (1) electronic communications, such as emails, social networking sites, and blogs; (2) online reward programs, such as for credit cards, hotels, and airlines; (3) financial accounts, such as PayPal or other online banking, investment, and brokerage accounts; (4) digital collections, such as music files, photographs, and videos; (5) business accounts, such as customer databases including personal and sometimes confidential information; and (6) cryptocurrencies.
Current federal and state laws regarding access to digital assets
Although digital assets should be considered a form of property, the rights to access these assets are scattered through a web of user agreements and federal and state laws, marking a fine line between a fiduciary's right to access and the decedent's privacy.
Terms-of-service agreements
Almost all digital service providers require individuals to enter into a "terms-of-service agreement" before they may create their digital asset. Many users fail to fully understand these agreements before accepting the terms. Often, users may not realize that they have agreed to prohibit third-party access, including by fiduciaries, to their digital asset upon their death or incapacity. This generally causes issues for fiduciaries when they are trying to account for a decedent's assets. Many service statements no longer are sent through the U.S. mail and instead are emailed to an individual's personal or business accounts. Without legal access to these email accounts, fiduciaries may not be aware of outstanding bank accounts, investment accounts, or contractual deals with the decedent's customers.
Federal laws
Federal laws governing the unauthorized access of digital assets often limit a fiduciary's ability to properly access a decedent's digital assets. Generally, these laws are focused on protecting privacy and combating hacking; therefore, violations of these laws are considered criminal acts (see, e.g.,the Stored Communications Act, 18 U.S.C. §§2701—2712, and the Computer Fraud and Abuse Act, 18 U.S.C. §1030). These laws generally provide broad protections through enforcement of terms-of-service agreements, which, as stated above, prohibit access by any user other than the individual who created the asset, including fiduciaries after the death of the original user. Therefore, even if a fiduciary is able to access the account (i.e., has the username and password on file), he or she may not have the legal authority to do so and does not want to run afoul of these criminal statutes.
State laws
To assist fiduciaries, the Uniform Law Commission (ULC), a not-for-profit that provides states with nonpartisan draft legislation, proposed state legislation intended to allow fiduciaries the authority to access and manage digital assets. In 2014, the Uniform Fiduciary Access to Digital Assets Act (UFADAA) was published by the ULC and adopted by Delaware. Because federal privacy law concerns were not addressed within the UFADAA, a second act was published in 2015, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). As of this writing, 41 states have enacted the RUFADAA, and four additional states and Washington, D.C., have introduced the legislation.
The RUFADAA allows fiduciaries to access, copy, and manage certain digital assets. Pursuant to this act, the original creator of the digital asset may give affirmative consent to disclosure of his or her electronic communications, either online or in a paper record. This consent is deemed to override certain terms-of-service agreements that would otherwise prohibit a fiduciary's access. It is important to note that absent affirmative written consent, a fiduciary may not be granted access under the RUFADAA. Therefore, even in the states that attempt to be fiduciary-friendly, appropriate planning is still required.
In addition to the UFADAA and the RUFADAA, certain states have enacted their own legislation as follows:
Connecticut (S.B. 262, Pub. Act No. 05-136):The fiduciary of an estate may access a decedent's email accounts if the fiduciary provides a written request including a death certificate and the order appointing the individual as the fiduciary of the estate.
Maryland (S.B. 239/H.B.507, Maryland Fiduciary Access to Digital Assets Act): An individual may authorize or prohibit access to his or her digital assets by a fiduciary in a will, trust, power of attorney, or other record.
New York (A.B. A9910A): An individual may use an online tool to allow or prohibit access to his or her digital assets. If a digital account does not have an online tool, the person's written instructions shall override any terms-of-service agreement.
Decentralized assets
Digital assets created through a centralized network, such as emails or traditional online bank accounts, may be accessed through the state fiduciary laws or through the courts. However, failing to plan for decentralized assets, such as cryptocurrency, may cause substantial unintended financial burdens for a decedent's family.
Planning for incapacity or death should be one of the first priorities for individuals holding substantial amounts of cryptocurrency. Each cryptocurrency has a unique electronic address that is used for transferring the cryptocurrency between a user's wallets. To transfer cryptocurrency, the user must have what is known as a private key. Without access to the private key, the cryptocurrency is immovable. If an individual becomes incapacitated or dies without providing another person with the private key, the cryptocurrency becomes inaccessible by anyone. This is known as a "black hole" wallet because the cryptocurrency remains valuable within the wallet but is unable to be transferred and, therefore, is essentially worthless.
This becomes an issue for fiduciaries that are required to file a decedent's final income tax return. If a decedent actively traded cryptocurrency during the year, he or she may have substantial income tax due on those trades. However, the remaining cryptocurrency trapped within a black hole wallet is unavailable to sell to cover any taxes due. Additionally, for estate tax purposes, individuals who die with considerable value in cryptocurrency that becomes irretrievable upon death may have an estate tax bill on essentially worthless assets.
Sec. 2033 provides that the value of a decedent's gross estate includes the value of all property to the extent that the decedent had an interest in it at the time of his or her death. The valuation of those assets is considered the fair market value as of the date of death or, upon election, the alternate valuation date (Sec. 2032, the six-month rule). It is unclear if a decedent's failure to provide a private key to a fiduciary will allow the estate to obtain a loss on the value of the inaccessible cryptocurrency. Therefore, it is possible that the estate may be subject to estate tax on an asset that it may never receive and may never distribute to beneficiaries.
Planning opportunities
Getting to know a client's digital assets begins with creating an inventory. Clients should determine the digital assets they currently hold and how they want their fiduciary to manage those assets in the event of death or disability. This list may include usernames, passwords, and answers to "secret" questions (including passwords to computers or cellphones if relevant information is stored on those devices). There are also many planning techniques for protecting cryptocurrency without providing another individual with the complete private key (e.g., break the private key up among trusted individuals so no one person has complete access). Access to this inventory should be limited during the individual's lifetime to prevent fraudulent use and should be created in a medium the individual can easily update. In response to the rapid technology growth, online password storage services have been providing clients with the necessary privacy and access they may desire.
Once a list of known assets is created, the fiduciary should determine under state law what planning options are available. This includes instructions within a will, trust, or power of attorney to allow a fiduciary to either access or destroy certain digital assets. Terms-of-service agreements should also be considered. Certain user accounts may have a set of requirements to ensure fiduciary access. For example, Google has an online tool called the Inactive Account Manager that allows users to indicate who may access their information upon Google's notification of the user's death.
Make a plan
The adage that "failing to plan is planning to fail" takes on new meaning in the digital age. Failing to consider a client's digital footprint in estate planning is the equivalent of planning to sacrifice financial or sentimental value.
EditorNotes
Anthony Bakale, CPA, is with Cohen & Company Ltd. in Cleveland.
For additional information about these items, contact Mr. Bakale at tbakale@cohencpa.com.
Unless otherwise noted, contributors are members of or associated with Cohen & Company Ltd.
