As digital assets become an increasingly significant part of clients’ wealth portfolios, estate planning and wealth management strategies must evolve to address the unique challenges they present. Digital assets range from cryptocurrency and intellectual property to social media accounts and other online assets that require careful management and planning. With this shift, legal and financial advisors must consider new frameworks for protecting and transferring these assets. This article highlights key emerging trends in digital asset management, exploring essential topics such as estate planning for digital currency, intellectual property management, digital legacy planning, and cybersecurity best practices.
Digital Assets in Estate Planning: Legal Considerations for Digital Currency and Online Assets
Digital assets—such as cryptocurrency, online investment accounts, and personal digital files—pose unique challenges in estate planning due to their intangible nature, rapidly changing regulatory environment, and varying platform policies. For clients with significant digital assets, estate planning should prioritize accessibility, proper documentation, and compliance with both federal and state laws.
Key Considerations:
- Access and Control: Many digital assets, particularly those stored online or on decentralized networks, require specific
credentials (such as private keys for cryptocurrency wallets) to access. Without these, heirs may be unable to retrieve the asset. Advisors should recommend that clients maintain secure, accessible records of passwords, keys, and other essential credentials. - Jurisdictional Challenges: Cryptocurrencies like Bitcoin or Ethereum may be subject to tax reporting requirements that vary by jurisdiction, and clients should be advised on both state and federal compliance. Additionally, some states have passed laws addressing fiduciary access to digital assets, such as the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), which establishes fiduciary access rights but still requires proper authorization.
- Tax Implications: Cryptocurrencies and other digital investments can present significant tax implications, from capital gains tax on sales or exchanges to reporting requirements. Advisors should help clients manage these assets to optimize tax efficiency within their overall estate plans.
Practical Strategy:
We encourage clients to establish a “digital asset inventory” that lists each asset, access credentials, and any legal or tax considerations. They should also consider appointing a fiduciary with the technical understanding and legal authority to manage digital assets, with clear instructions in their estate documents.
Managing Intellectual Property: Planning for Royalties, Patents, and Other Intellectual Property
Intellectual property (IP) assets, including patents, trademarks, copyrights, and royalties, represent valuable income streams that require specific planning considerations for efficient transfer and management. For clients with significant IP portfolios, these assets should be structured for tax efficiency and protected to ensure proper inheritance.
Key Considerations:
- Valuation of IP Assets: Determining the value of IP assets is essential for tax planning and efficient transfer. Regular valuations help establish the fair market value, particularly for patents or copyrights with ongoing royalty streams.
- Structuring IP for Tax Efficiency: To maximize the tax efficiency of IP, clients may consider holding these assets in separate entities, such as LLCs or trusts, to shield them from personal liability and simplify future transfers.
- Royalties and Income Continuation: Proper planning is crucial for royalties and other recurring IP income. For instance, setting up a trust to manage royalty income can ensure continued financial support for beneficiaries while providing professional management.
Practical Strategy:
For clients with extensive IP holdings, consider establishing an IP trust, which can simplify management, distribution, and tax reporting while maintaining control over future royalties. Additionally, work with valuation experts to establish the fair market value of IP assets as part of the estate planning process.
Social Media and Digital Legacy Planning: Access Rights, Terms of Service Agreements, and Client Considerations
Social media accounts and other digital legacies are often overlooked in traditional estate planning, yet they can hold sentimental and even monetary value. Planning for these assets involves navigating platform-specific terms of service agreements and ensuring that clients’ wishes are fulfilled with respect to their online presence after death.
Key Considerations:
- Access Rights: Different platforms have specific policies on account access after a user’s death. For example, Facebook allows accounts to be memorialized or deleted, while other platforms may provide limited access to authorized representatives. Advisors should review terms of service for each platform and incorporate instructions within estate documents to address each asset.
- Digital Legacy and Memorialization: Some clients may wish to preserve their digital legacy, maintaining social media accounts or websites in their memory. Specific instructions for account handling, including transferring account control to a designated individual, can help fulfill these wishes.
- Monetization of Digital Accounts: Influencers and individuals with monetized social media accounts may have ongoing revenue streams tied to their online presence. Planning for these assets ensures that this revenue can continue supporting beneficiaries or be transitioned according to the client’s wishes.
Practical Strategy:
Encourage clients to create a digital legacy plan that specifies their wishes for each social media account, blog, or website. This plan should detail whether accounts are to be memorialized, transferred, or deleted, and it should authorize fiduciaries to manage them in accordance with the platform’s policies. A comprehensive digital inventory that lists access credentials for all online accounts is essential.
Cybersecurity in Wealth Management: Protecting Client Digital Assets from Cyber Threats
The rise of digital assets brings an equally pressing need for cybersecurity in wealth management. From cryptocurrency wallets to digital vaults storing sensitive client information, protecting these assets against cyber threats has become critical in estate planning and wealth preservation.
Key Considerations:
- Secure Storage of Digital Assets: Digital assets such as cryptocurrencies require secure storage solutions, including
hardware wallets and cold storage. Advisors should work with clients to assess the best storage methods, especially for assets held long-term. - Two-Factor Authentication (2FA) and Encryption: Implementing strong security measures, such as 2FA and encryption, can significantly reduce the risk of unauthorized access to digital assets. Clients should be advised on best practices for securing accounts, including using password managers and regularly updating passwords.
- Cyber Insurance: As digital asset theft rises, cyber insurance policies are becoming an attractive option for high-net-worth clients with substantial digital holdings. These policies may cover the costs associated with asset recovery, liability, and legal expenses if digital assets are compromised.
Practical Strategy:
Develop a cybersecurity checklist with clients that includes secure storage options, 2FA, and encryption practices for all digital accounts and assets. Additionally, discuss cyber insurance options to provide an added layer of protection. Regular cybersecurity audits can also help clients identify vulnerabilities and enhance their digital asset protection strategy.
Conclusion
As digital assets grow in prominence and complexity, effective management and estate planning require advisors to embrace new strategies and legal frameworks. Digital currency, intellectual property, social media accounts, and cybersecurity are now integral considerations in comprehensive wealth management and estate planning. By proactively addressing these areas, high-net-worth clients can preserve their digital legacy, maximize their wealth’s longevity, and protect valuable assets from cyber threats. In an era where digital assets are increasingly valuable and pervasive, a well-rounded, future-focused estate plan is essential to preserving wealth for generations to come.
Emerging Trends in Digital Assets © 2024 by Durfee Law Group is licensed under CC BY 4.0 
Emerging Trends in Digital Assets