By Lee Poskanzer, CEO of Directive Communication Systems
The time to address digital assets as part of your client’s estate plan may have begun to run out. We’ve all heard about digital assets, cryptocurrency and occasional lawsuits by family members against social media giants like Yahoo! and Facebook. But now the topic of digital assets will necessarily have landed on your desk when you begin the estate planning process for a client.
Are you fully prepared to help your clients plan for this new asset class, and to protect yourself and your practice from doing the wrong thing?
Digital assets are the new frontier for Trust and Estates practitioners. It’s time to get up to speed about this important asset class.
For the purposes of this discussion, we will limit the focus to the most critical area of digital property: the disclosure of an account’s contents. Closing an account, removing the name from a family share plan and other “action” oriented events will be saved for another day.
The Digital Asset Problem
For estates, digital assets greatly differ from their older cousins, real property and tangible assets. Before we begin to discuss their impact, we have to look at a couple of key definitions. According to the recent Uniform Law Commission’s 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 interest. The term does not include an underlying asset or liability unless the asset or liability is itself an electronic record.”
Furthermore, a Custodian is defined as:
“a person that carries, maintains, processes, receives, or stores a digital asset of a user.”
In other words, there is a lot more to contend with when planning and administrating an estate today. Estate plans now have to address social media, email, online storage, content of personal and home devices, ecommerce, etc. Think about it for a moment. The ULC determined it was important enough to form an independent commission to address this upcoming wave of change. They crafted a law to address accessing this property type. Now add to the commission’s work input from the ACLU, public policy firms and many others that were engaged in the bill’s legislative process. Why? The uniqueness of this new property classification presents complex challenges, many with permanent and serious impacts. These include
• Ownership of assets with no title or deed
• Ownership of assets that may expire as a result of lapsed of payment
• Accounts and files that are protected and safeguarded by privacy laws and Custodian policies
• Lack of a paper trail or any signs of existence
• Assets that are protected by virtual devices like bitcoin
• Assets that are easily hidden, lost or buried deep in file layers
Digital assets are disrupting longstanding law firm routines, processes and obligations. They’ve increased a Fiduciary’s duties. With that, they’ve increased risks and liabilities for the fiduciary as well as the attorneys who represent fiduciaries and clients with digital assets.
Why are digital assets so important?
While attending a Trusts and Estates trade event, a highly respected lawyer approached me declaring that he had his first client with over 50% of assets in or related to a digital format. I’m not sure what that even means, and I am in this field. How did he put a value on the digital assets? Number of accounts? Percent of financial property hidden in digital accounts or requiring access to information? I already know that a majority of his client’s portfolio has little to no paper trail. I began to envision the future. What will this look like at time the estate is settled?
Some background information may clarify the size of the digital asset problem.
A couple of years ago, Dashlane reported that the average person had over 150 digital accounts. That number is expected to grow to over 200 digital accounts by the year 2020. This means more assets, deeper valuation and innovative asset types that come in all forms including cryptocurrency, digital wallets, digital investing, emails pointing to private placement investments, IP addresses, domain names and so much more. And that’s the just the beginning! They all can have very significant value. Back in 2014, McAfee estimated that the average person had $55K in digital asset value. That study was conducted over 5 years ago…what does that number look like today?
Let’s return to the client scenario mentioned above. What could happen after the estate documents are complete? Let’s speculate. The client purchased 1,000 Bitcoins in the early years, when the value was $10 per coin. With the drastic increase in the market price, this account can now be worth over $12M, depending on the day or even the hour. Add to it, the client owns a few domain names with a market value of over $100K each along with a private placement investment in a startup -- where all the company’s correspondence is via email. Perhaps the client lent a friend some money and the only communication about it is on Facebook’s IM and a signed note in Dropbox. Or on the side, the client does day trading on eTrade, and no dividends have been declared. The dollar value adds up fast and can quickly move a client in and out of the level required to file an Estate Tax return.
What once were considered outlier stories are now the norm.
Unless this client dies in the near future, the likelihood of their digital asset inventory growing is all but guaranteed. And many of those accounts (along with several of the existing ones) would not have been captured via the traditional intake form or even addressed during the estate planning process. Without some systematic approach, how are they identified, claimed and reviewed as important property?
Digital Assets and Directives
Now that we’ve touched upon the significance of digital assets to an estate, it’s important to look at the options for your clients. Like a roadmap, there are several twists and turns in determining the options available when handling digital property. You will need to map out the appropriate directives to achieve your client’s goals:
• Financial vs non-financial assets
• Information disclosure vs action-oriented directives
• Disclosure of account contents vs accessing an account (aka impersonating an account holder)
• Full disclosure of account contents vs data logs
• Ambiguous accounts that may lead to or hold property
• Expiring and subscription-based accounts and property
• Available Custodian options and privacy policies
This is an overly simplified breakdown of considerations but, with digital assets, there is so much more to consider. With each account and app, the Custodian has a great deal of responsibility, particularly when it comes to the disclosure of an account’s contents. Why? That leads into our next area about the new stakeholders.
New Players: The Protectors of Privacy
Every generation brings change that has a profound effect on society and our way of life. Over the last one hundred plus years, we’ve seen the introduction of the assembly line, the telephone, and a moon landing. Fast forward to the Digital Revolution. A recent study from the Pew Institute shows that 89% of Americans use the internet and 77% own a smartphone. The proliferation of devices and internet use in such a short time is amazing. Only two decades ago, we looked at email as a step into the future. Today, email has replaced most business and personal correspondence.
The innovators of this new world—giant and otherwise—are numerous and ever evolving. Each has its own Terms of Service Agreement and Privacy Policies which govern the authority over carrying out administration duties. The scope of our obligations is becoming larger, and it is becoming harder to manage them continuously. These companies make the decisions about disclosure of information and what will happen to a decedent’s online presence. In the Ajemian vs Yahoo! Case, 84 N.E.3d 766 (Mass. 2017), cert. denied, the Massachusetts Supreme Court re-affirmed the strength of online privacy protection. In an over-simplified summary, Yahoo! determines what it will share. There’s nothing, other than compliance with RUFADAA, that can compel a Custodian to disclose data.
What does all this mean? We now face an ever-increasing number of entities that are stakeholders in an estate’s affairs. More accounts, more emails, more customer service departments, MORE TO MANAGE. It simply can’t be avoided. We can no longer assume the same process will apply to all.
No one entity controls the internet. There are no internet police or enforcers. It’s still the Wild West. In this unsupervised dominion, each Custodian operates independently. As we discussed earlier, each of these organizations have created privacy policies and Terms of Service Agreements (TOSA) that we must “agree to” when we enroll in a new account or download an app.
TOSAs are an annoying nuisance when rushing to use a new app or website, so most of us just click on the “agree” button and completely miss the powerful provisions detailing the rules, guidelines and requirements applicable to an account holder’s death.
The Agreements remain in effect, even in the event of death. As account holders, we demand privacy while we’re alive and these provisions continue to be enforced when we die. And because of federal and state laws, the Custodians have obligations and liabilities to protect that privacy. The penalty for breaching privacy policies can be exorbitantly high, reaching multi-million dollars. Custodians don’t want to risk an account holder’s information being released. Who wants to pay $3M or more?
Each Custodian has its own way of handling these matters. Some have formalized processes and protocols, while others have set up committees to decide what information gets released and what access will be provided. Some, like Google and Facebook, have created proprietary online tools for users, while others haven’t addressed the issue. There’s no consistency.
In almost all cases, fiduciaries and other representatives will have to reach out to Customer Service departments or spend countless hours on the internet, researching specific Custodian policies.
In addition to the TOSA, fiduciaries and other representatives must comply with several federal and state privacy laws. The Electronic Communications Privacy Act (ECPA) and Computer Fraud and Abuse Act (CFAA) now play a role in estate planning. They are powerful, enforceable and inflexible. We will examine those laws in another installment in this series
As Google put it at the Washington Trusts and Estates Conference a few years ago, “there is no wiggle room, there is no spirit of the law, they are explicit and rigid”. These laws put forth the obligations for protecting privacy of digital communications and carry penalties if violated--up to $10K per violation. And we’ll need to abide by them until they are adjusted.
The RUFADAA recognizes digital assets and creates a narrow path for getting to important information and details. It is rigid and calls for strict adherence. The Uniform Law Commission, ACLU and site owners have spent millions of dollars and countless hours to take the first step in dealing with this problem. States have spent time debating and passing this important legislation. Trying shortcuts or circumventing the provisions can be costlier and riskier than you can imagine, possibly risking fines and worse, permanently lost information.
What Can You Do?
To be direct, the options for handling digital asset directives are limited. Currently, there are few proven or guaranteed paths to success. Those that do exist demand maintaining meticulous details about user names, links to identification, clear and specific declarations on an account level and more.
Who will do all of that? We know it’s not realistic to expect clients to routinely preserve and regularly update these records? It’s an impossible task, and yet, representatives have a legal burden of finding property and handling the settlement. So, considering how few people do a decent job of this, we have to look at alternative solutions. Below are a few that are currently available.
Provisions - Estate practitioners are familiar with creating provisions. Most of the time, these are effective and acceptable. But, with digital assets these are speculative at best and are limited only to accounts that are visible.
Digital Executor - Establishing a Digital Executor (DE) has not been widely accepted as a means for declaring an account holder’s wishes. In most cases, the DE is still making assumptions for the account holder. Custodians want to know, on an account or app level, what the account owner wanted to be done, not what a DE assumes the account holder wanted to do. The difference is subtle but in matters of privacy, they’re as broad as the Pacific Ocean.
I’m aware of two scenarios where lawyers have included DE provisions in estate documents but failed when it came time for administration. They cited that DEs were to make assumptions but were not specifically aware of the account holder’s intentions. In addition, there is legal ambiguity when the TOSAs are “agreed to” after estate documents are signed. Most important, and I stress this, DE provisions do absolutely nothing to assist with hidden or invisible accounts.
I am referring to invisible accounts because many more people than you would think own these invisible accounts. They may not speak with you about them during a family meeting, or allow them to be included in an asset review, but they exist.
Site Owner Tools - A very small number of site owners offer on online option tool. Google has the Inactive Account Manager (IAM) and Facebook has their Digital Legacy Content Manager. Others have developed their own options as well. Recognized by the RUFADAA as the prevailing method for determining disclosures, these proprietary tools focus on the site owner’s needs. They can be unfriendly to the estate’s needs.
For example, if Google’s IAM is used, the estate will mostly likely have to play detective just to find the disclosure designee. And, if you’re lucky enough to find the designee, they may have already discarded the data. Regardless, there are other limitations to the program that may significantly delay data, if you can get it at all.
Password Sharing (AKA impersonating an account holder) - DON’T DO IT! Let me repeat this: don’t do it! It seems like a simple solution. Simple doesn’t always work and in this case, it can bring on far bigger problems. It violates several laws, TOSAs and encourages a breach of Agreements. It’s also unsecure. It opens up real liabilities to you, your firm and your clients. It may have worked in the past but new methods are being implemented to prevent this, including 2-factor authentication, biometrics, IP address lookup and others. If these accounts are compromised based on your recommendation, guess who’s responsible?
I actually heard an attorney advise a client to put all of the client's passwords on an Excel spreadsheet and send to a friend via email. Whoa, do they know what they exposed themselves to? First of all, the friend would be acting in violation of the law and likely the TOSA by logging on using the client’s information. Second, the attorney is advising the client to tell the friend to commit these violations. And lastly, information sent via an unsecured, unencrypted email message may as well be posted on the digital billboards on Times Square.
3rd Party Service Providers - Recognized by RUFADAA, these services have developed technology specifically to address digital assets directives management. Companies like Directive Communication Systems, Estate Map and Legacy Concierge are designed to solve this problem using innovation that complies with laws and TOSAs. They get your firm quickly up to speed on an ever-changing subject and relieve your firm and your clients of several obligations and concerns. Each of these companies tackles the issue via a different means but you can expect their options and services to enhance the digital experience.
CAUTION: In the same austere voice as used in the previous section, avoid any third party service that recommends or is comfortable with password sharing as their service. They may appear to be handling digital assets, but they can ultimately create a conflict with the actual estate plans.
In this instance, technology can truly provide you, your firm and your client with benefits. The T&E area is one of the last industries to adopt using technology to solve its challenges. Online activity and digital property will test our abilities and simultaneously bring us efficiency and streamlined processes. From intake forms, to communication to handling their affairs, technology can better prepare you and your clients for the effective planning and execution.
With these innovations, firms can attract more clients and more income with less work. So, are you prepared?
Should you have any questions about digital assets and estate planning, please feel free to contact Lee Poskanzer at 401.301.5337 and [email protected]
Meet the Author:
Lee Poskanzer is the CEO of Directive Communication Systems (DCS). With the recognition of the growing need for solutions for managing digital assets and online accounts, Mr. Poskanzer founded DCS, helping all aspects of digital assets directives management including estate professionals, their clients, and website owners with the planning and administration of their digital estate. DCS has become an established and respected authority on the digital afterlife. Mr. Poskanzer has authored several articles on this topic. In addition, he served as a Panelist for InterActive Legal's Complimentary Live Roundtable Event "Estate Planning in an Online World: Advising Clients on Managing a Digital Legacy".