Contributing Author: William A Raabe
One aspect of estate planning that will be of interest to your students is the treatment of a decedent’s digital assets upon death, as to taxes but also just in determining the proper access to and ownership of those assets after a death.
Start with this question: If you were to die today, who would get your photo archive, banking records, and email history? How do you plan ahead for your Instagram account outliving you?
Just from the federal transfer tax standpoint, any asset of the decedent is included in the gross estate, usually at date-of-death value. But that presumes that an executor is able to identify, find, and place a value on all of those assets, no small task where digital assets are concerned.
On top of that, a young person (like one of your students) almost never has executed a will, financial power of attorney, or other legal document that addresses the successive ownership of those assets. That means that the dense language of user agreements for web assets, documents that likely no one actually reads but for which everyone blindly clicks Agree, controls the disposition of those assets, and most early court cases say that survivors can have no access to the assets without explicit directions from the decedent. What a mess.
Let’s say that digital assets include at least the following:
- Archives of photo, music, and video files.
- Financial records, including bank accounts, PayPal and Venmo, mutual funds and investments, gaming accounts, “auto pay” arrangements, and similar resources.
- Histories and contacts involving email, blogs, social networking sites, and the like.
- Reward programs, such as for airlines, credit cards, and retailers.
- Domain names and other branding devices.
- Databases used for business and other purposes, perhaps including names, id numbers, transaction histories, investment records, etc.
- Cloud-based and other backup files.
- Rights and formulas involving cryptocurrencies.
Assume that you are the executor of an estate where the decedent led an active digital life. Your task now is to pull together records involving the digital portfolio, make valuations of various assets, and carry out the disposition of the assets as the decedent would have wanted, without incurring the wrath of the courts or of potential beneficiaries who feel shortchanged.
A first step is to gain access to the assets. In the best case, the decedent has left you a list of accounts, user names, passwords, and written permission to work with those assets after his/her death. Perhaps there are directives in the user agreements for the decedent’s assets that address these access issues. Google’s Inactive Account Manager, and apps like it, could be of help. But Yahoo requires the submission of a death certificate, and Facebook sometimes requires a court order to obtain access to a decedent’s data.So this may not be easy.
Many states have adopted versions of the Uniform Fiduciary Access to Digital Assets Act (UFADAA), draft legislation that controls a fiduciary’s access to and management of, the online resources of the decedent, although some of the states have enacted only narrow aspects of the provisions. This is important because state law controls “what is property” and “what happens to it after one’s death.”
From a planning standpoint, every client should be encouraged to make an inventory and keep it current for as many digital assets as they can think of. Current passwords, answers to “secret questions,” and other access tools must be in the possession of the key survivors, whether they be financial, legal, or family members. This is another reason to use a good password manager, like LastPass, to organize potentially disparate data, and accommodate the frequent “change your password” rules of many sites.
Explicit permission to “take over” one’s digital life should be granted, as broadly as possible and allowing great discretion by the survivor, who must act quickly so as to pre-empt scam artists from opening new credit cards, filing for tax refunds, and otherwise committing “post-mortem identity theft.”
For some decedents, one or more of their digital assets could be of great value, such that transfer tax and other liquidity issues may arise, or that multiple claims to the asset will be made. Violations of various federal laws, such as the Stored Communications Act and the Computer Fraud and Abuse Act, must be avoided. The story gets more complicated when digital assets are held overseas – PS does it matter where the servers are located that make up “the cloud” that holds your assets?
The decedent’s assets that are not found can revert to the state or to the company that helped to create them, under unclaimed property laws that act like 100%-rate taxes on those who did not plan well. Don’t let this happen to your students or their eventual estate planning clients.
CLASS ASSIGNMENTS
Tax Policy
- Accounting and law students must be trained in identifying issues and finding resources concerning succession issues for digital assets. Discuss.
- State and federal asset valuation principles, like those discussed in text Section 19-1, are grossly inadequate when digital assets are involved. The AICPA should take the lead in crafting new directives for this purpose. Discuss.
Tax Research
- Summarize in two Power Point slides the status of your state’s adoption of rules like the UFADAA. Be specific and give good citation links.
- Find two “horror stories” involving difficulties encountered by survivors involving the digital assets of a decedent. Summarize your findings in a one-page memo to your instructor. Offer a change in controlling law that would have led to a more reasonable solution. Start your search with narratives involving Facebook, Google, Twitter, or Apple.
- Make a list of “best practices” in planning for an individual’s digital assets. Construct your list from articles posted by law and consulting firms, all of which you link to. Assume the decedent was a successful entrepreneur with well-developed branding and e-commerce activities.
SWFT CHAPTERS:
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