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Protecting your digital assets

Chief Investment Office Wealth Strategy Report October 2021

Man standing in a high floor of a office building with a cityscape in the background. There is an overlay illustration of several screen being projected between the gentleman and the window.

Introduction

Chances are you have a digital footprint that is continually expanding. The internet has quickly become the primary avenue through which our daily transactions are conducted. You increase your digital holdings each time you open a new online account, send an email, snap a digital picture, take a flight, or write a blog post. In many instances, you may even find it difficult to get through the day without calling on the aid of one or more of your digital assets.

Suppose your digital footprint closely mirrors the one described below:

  • Your family operates a business and maintains contact with customers and suppliers primarily through email.
  • You author a blog as a way of keeping a journal and thereby providing some family history to your children and future heirs.
  • You have an online storage account that houses numerous family photos and videos.
  • You use tax prep software each year to prepare your joint federal and state income tax returns.
  • Your family participates in various loyalty programs, including airlines with whom you travel regularly.
  • You have written two books and are collecting ongoing royalties from your publisher each year. Your third book, which you’re still writing, exists only on your laptop.
  • Your family are all avid users of various social media platforms.
  • Your spouse is a gamer and has collected various virtual assets in various online games.
  • No central list of your usernames and passwords, or the security questions often used to access them, has been prepared.
  • Your estate plan and Power of Attorney do not specifically address digital assets.

Imagine now what would happen to your digital life when you no longer are able to navigate your digital world either due to incapacity or death. Have you prepared a digital roadmap for your family and others to follow? Will they know about the digital wealth you have created and how to access this wealth, or will it dissolve into the digital ether?

Will they be able to manage your digital wealth in a manner that meets your intended objectives? What will happen to your digital legacy?

Why plan for digital assets? First, and perhaps foremost, is to make things easier for your family by facilitating the work of your appointed fiduciaries. In addition, forward planning will help prevent the theft of your identity while also preventing losses to the estate and avoiding unexpected costs. Finally, addressing your digital footprint will ensure that your personal story remains alive while secret things remain secret.

What is a digital asset?

According to the Revised Uniform Fiduciary Access to Digital Assets Act (described in more detail below), the term “digital asset” means “an electronic record in which an individual has a right or interest”. For the purposes of this definition, “electronic” means “relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities”, and “record” means “information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form”.

Although digital assets may be considered intangible, not all intangible assets are considered digital. For example, consider the following intangible assets: cash, stocks, bonds, bank accounts, brokerage accounts, franchise rights, patents, copyrights, trademarks and royalties among others. Although intangible, these assets would not fall under the definition of digital assets.

The difference between digital assets and digital access is also important. Simply possessing the username and password to a site does not necessarily give a non-owner the legal right to access an account. And while some digital assets are owned by individuals (e.g., domain names), other “assets” are merely rented (e.g., the right to listen to music purchased on your iTunes account).

Categories of digital assets

Although there are many digital assets, they typically fall under one or more of four categories, specifically:

1. Personal digital assets. Included in this category are photos, videos, emails, music, medical records, blogs, digital books, gaming assets, avatars, home security systems, non-fungible tokens (NFTs) and loyalty programs, among others.

2. Social digital assets. This category of digital assets includes information stored on social websites.

3. Financial digital assets. This category includes online shopping sites, payment services, bill pay, tax documents, credit card accounts, virtual currencies and online accounts for U.S. Savings Bonds, among others.

4. Business digital assets. These business assets include domain names, blogs, patient/customer information, intellectual property, and image and file storage, among others

What is the value of a digital asset?

Too often we equate value with an item’s monetary worth. When it comes to digital assets, many will have value beyond what someone might pay for it. Digital assets may have one or more of three separate values: (1) monetary value, (2) sentimental value, and what we call (3) “good steward” value.

Monetary value

Most digital assets will have a nominal monetary value. However, those that have more than nominal monetary value tend to have sizeable worth. Consider virtual currencies can be used to purchase anything from pizza to real estate. Even gaming assets can have significant monetary value.

Sentimental value

Digital assets such as information stored on social media sites and email accounts might have little monetary value. This might include personal blogs, family histories, photo albums and family videos. However, these can have significant sentimental value to the owner and family.

“Good Steward” Value

Imagine the digital footprint example set out in the Introduction where you pass away without providing your heirs with a digital roadmap to the various assets. Not knowing what digital assets you may have stored on your devices or online, heirs may need to hire experts to track down your digital interests, determine how they might be accessed and navigate Terms of Service agreements so that any legal rights are transferred appropriately. They would need to do this quickly to ensure no loss in worth to any of the digital assets. The “good steward” is one who relieves their family of this burden by providing a digital roadmap.

Obstacles to planning with digital assets

When dealing with digital assets, a great deal of confusion may occur when the owner is no longer able to manage the asset due to incapacity or death. Speed bumps may occur even when a digital roadmap is provided. Although obstacles may at times  be unique to a given situation, the seven main obstacles to planning with digital assets are as follows:

1. Usernames and passwords

Usernames and passwords should be unique to the digital asset. Many accounts and devices require that the password be changed on a regular basis. The fluid nature of usernames and passwords can be an obstacle if not addressed as part of the digital roadmap.

2. Encryption of digital assets

The encryption process scrambles data so that a person cannot make any sense of it without knowing the password.This can be both a blessing and a curse.A blessing in the sense that it provides a layer of security for the digital asset, and a curse in that the digital asset may be lost forever without the means to decrypt it.

3. Digital assets are constantly changing

New digital accounts may be opened. Some digital services may change hands or cease doing business.New digital devices holding digital assets may be purchased. The possibility of personal changes and technology advancements is never ending.

4. Time

The passage of time may be an obstacle to planning. Some digital assets are deleted by service providers after a period of time without use. Domain names need to be renewed annually or else forfeited. Virtual currency may lose its value if unclaimed.

5. “Terms of Service” Agreements

When opening an online account, we click the button next to the words “I Agree” and by so doing, agree to the Terms of Service contract. The contract will typically address the following five factors: (1) Can someone else use the account? (2) Does the account terminate upon the user’s death? (3) Is the account transferrable?(4) What happens if the user violates the terms of the agreement? and (5) What state law governs? The Terms of Service contract may serve as a friend or foe depending on the specific situation.

6. Federal Criminal Laws

The Computer Fraud and Abuse Act (CFAA) (18 U.S.C. § 1030(a)(2)) makes it a criminal offense to intentionally access  a computer without authorization, or in a way that exceeds authorized access, including violation of Terms of Service contracts. Even if an heir or fiduciary possesses usernames and passwords, accessing the account could violate the CFAA.

7. Federal privacy laws

The Stored Communications Act (SCA) (18 U.S.C. § 2701 et seq.) creates privacy rights that protect the contents of certain electronic communications and files from disclosure by certain providers of electronic communications services or remote computing services. The law penalizes “unauthorized distribution” of information, including to the heir or fiduciary unless a “lawful consent” exception exists.

THE REVISED UNIFORM FIDUCIARY ACCESS TO DIGITAL ASSETS ACT

States recognized the need for clarity in the area of planning for digital assets and began to enact legislation as early as 2002. Over a decade later, the Uniform Law Commission (“ULC”)1 announced that it would create a uniform act to address the need to have more comprehensive and consistent legislation throughout the states in this area, and it approved the Uniform Fiduciary Access to Digital Assets Act (“UFADAA”) in July 2014.The goal of UFADAA was to provide states with a uniform law which they may adopt giving clarity to fiduciaries on how to proceed with digital property and online accounts. UFADAA faced tremendous resistance from the technology and social media industry, as well as various civil liberties organizations, causing it to die in almost every state in which it was introduced. Delaware was the only state to pass a version of this uniform act. Soon thereafter, an association of internet companies introduced a competing act called the “Privacy Expectation Afterlife and Choices Act”. This act was much narrower in scope with regards to the powers held by a fiduciary and was also only enacted in one state, namely Virginia.

In response to the apparent stalemate, the ULC and representatives of service providers met to reach a compromise, and the ULC approved the Revised Uniform Fiduciary Access to Digital Assets Act (“RUFADAA”) at its July 2015 meeting. Most states and the U.S. Virgin Islands have either enacted RUFADAA or have introduced it.

RUFADAA addresses access to digital assets for four different types of fiduciaries:(1) a personal representative (or executor)of a decedent’s estate, (2) an agent appointed pursuant to a power of attorney, (3) a conservator or guardian and (4) a trustee of a trust.It specifies under which circumstances such fiduciaries may obtain access to digital assets of a decedent or principal, as well as what they are required to do in order to obtain such access.

Importantly, RUFADAA also allows for custodians of online assets to develop “online tools” which allow a user to specify how the account should be handled after death or incapacitation. These tools supersede all other instructions, including the client’s Will, trust, or other documents that might name someone to oversee their digital asset.

How to plan for your digital assets

Now that you have amassed a good number of digital assets, what should you do to ensure that they are managed properly if you are no longer able to do so yourself? A four-step process can get you started and keep you on the path toward a stable digital legacy. These four steps are (1) prepare a personal Digital Audit, (2) address the proper and secure storage of the Digital Audit, (3) update and backup the Digital Audit regularly and (4) update your Power of Attorney and other estate documents to ensure the proper administration of your digital wealth.

Planning for digital assets should include the following four steps:

A progress bar going from left to right using boxes: Digital Audit followed by Secure Storage followed by Update & Backup finishing with Incapacity and estate plane

Digital audit

The Digital Audit is a comprehensive exercise that summarizes information regarding all of your digital assets. The first step is to prepare a Digital Inventory of your digital assets.The Digital Inventory accomplishes the following:

  • Indicates where physical personal records are stored.
  • Identifies the physical devices holding digital assets. Examples include computers, smartphones, flash drives, hard drives and other devices.
  • Creates an inventory of digital assets and internet services/accounts along with information on how to access the assets and services where permissible. Examples include email, online utilities accounts, loyalty programs, online storage, social networks and banking. Usernames and passwords should also be included in the Digital Inventory.
  • Provides answers to potential security questions in the event usernames or passwords have changed.
  • Determines which assets/accounts should be purged and provides necessary instructions.

Bank of America provides a Digital Inventory form that may be used to complete your Digital Audit. However, please note that the actual use of your passwords by anyone other than yourself may be a breach of the service provider’s Terms of Service Agreement and, in turn, a violation of the federal privacy and criminal laws discussed above.

Secure storage, update and backup

The Digital Inventory will contain information that is very private and perhaps even damaging in the hands of the wrong individual. Utmost caution should be used whether a written or an electronic Digital Inventory is maintained. If written, you can create two Digital Inventories, one listing the usernames and the other listing the passwords. They would each be secured separately in a safe or a safe-deposit box. If electronic, ensure that the Digital Inventory is password protected and even encrypted, particularly if stored in the Cloud.

A combination of a written and electronic Digital Inventory may work best. Prepare the Digital Inventory electronically along with usernames and passwords and securely store it using strong encryption. The master password used to access the encrypted Digital Inventory is then written and stored in a safe or safe-deposit box. Be sure that your fiduciary knows where to find the master password.

Passwords are often centralized in a password manager, an encrypted program that stores and syncs your usernames and passwords among your authorized devices. Some computer platforms will remember encrypted access information so that once access is granted to a computer, access to accounts are granted automatically.

Many online service providers force you to change your password every so often. Additionally, you may open new accounts or purchase additional devices, each with their own digital wealth, usernames and passwords. Accordingly, the Digital Inventory should be regularly updated and securely stored. Your devices should be backed up onsite and offsite, to ensure that neither a fire nor a hacking of your system would result in a total loss.

Incapacity & estate plan

Included in the Digital Audit is a review of your estate documents to ensure that they accommodate the proper management of your digital legacy. Your estate planning attorney should know whether your state has enacted RUFADAA and what the default laws are with regard to your fiduciaries’ access to and management authority over your digital assets.

The first step is to address your Power of Attorney. While a broadly drafted Power of Attorney may already provide your attorney-in-fact with power over digital assets, it is important for you to clarify your intent with regard to your agent’s management authority over your digital assets. Accordingly, the Power of Attorney should include provisions granting your attorney-in-fact with specific powers to administer your digital wealth, or in the alternative, specifically preclude them from having these powers.

The Will (and Revocable Trust if applicable) should also be addressed. Digital assets such as usernames and passwords should never be listed in your Will since the Will becomes a public document at death. Nonetheless, the Will should specifically address your wishes with regard to your digital wealth. The Will should include a broad definition of digital assets and include provisions addressing your executor’s authority to access your digital wealth. To assist your primary executor with this effort you may want to appoint a Digital Executor to work with your primary executor. This would be a technologically knowledgeable person appointed to assist the executor in handling your digital wealth.

Keep in mind that your attorney-in-fact/fiduciary may run into legal roadblocks when accessing your digital wealth no matter how much authorization you provide.

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