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The Disasters of Digital Account and Asset Succession

By Anna Mouland and Oleg Perry

Estate planning is increasingly moving away from the use of bank deposit boxes and desk drawers. In 2023, the average American spent 7 hours and 34 minutes a day online.[1] The average smartphone user has 2,795 pictures in their phone.[2] Bank boxes are being phased out as digital vaults and currencies become more commonplace.[3] Seeing that the majority of our important accounts, documents, statements, and memories are stored digitally, the estate planning industry is in need of new methods to get the job done. Some planners have taken initiative and developed digital planning systems. Unfortunately, digital estate planning is deceptively complicated. This article will review the practical implications of planning for digital accounts and why it is so important.

One of the first considerations that an estate planner must make when dealing with a client’s digital assets is this client’s level of accessibility to the assets. Whether it be a correct email to a cloud-based storage account, a username for retirement funds, or the private key to cryptocurrency holdings, digital assets pose a new set of issues when accounting for a client’s estate. These issues are novel due to the nature of these intangible assets and the method by which they are stored. As opposed to a series of pictures tucked away in a photo album, cherished photos can now be found in the local and cloud storage of various devices or in computer folders. Bank statements and bills no longer sit on kitchen tables, they are buried deep in overflowing inboxes, intertwined with personal and private messages.

The devices are password-protected and that folder on the computer holding the photos requires an encryption code. If the client to whom these photos belong happens to forget either set of passwords, then access is denied until either the client finds the passwords on a slip of paper or engages in a lengthy workaround that requires access to other accounts, 2FA, and, increasingly, biometrics. Upon finding the “IWouldNeverForgetMyPassword123” password and gaining access to the photo album, the client suddenly realizes that they have moved a substantial portion of their photos to a flash drive, which they haven’t seen in the last eight years. Keeping track of every piece of important data is challenging enough for the living, pile on federal privacy laws, data custodians, and jurisdictional laws, and fiduciaries are in for a lengthy administration.

The Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA) is a nearly decade-old statute that has been adopted by all 50 states and provides some guidance to fiduciaries seeking to access a decedent’s digital accounts. Most countries outside the US default to similar systems, though all, even RUFADAA, still leave a lot of gray zones. The most common methods of digital account planning are i) writing down passwords, and ii) using built-in legacy contacts. Unfortunately, neither of these options are great. In the first case, clients have to leave behind account credentials including usernames and passwords. They also need to leave behind any 2FA instructions, which probably require other passwords to get 2FA codes. Biometric 2FA would need to be disabled. Security question answers would also need to be written down. Given that the average internet user has well over 100 accounts [4] this can get complicated, not to mention that 70% of Amercians want their private communications like emails and texts to remain private after they pass. At this point, some people are thinking, what about password managers? Well, unfortunately, password managers aren’t a great solution either. Less than a quarter of Internet users have password managers, and they have failed to gain significant market penetration as people often feel they are untrustworthy and worry about potential hacks.[5] However, even if password managers were common, they still aren’t a great solution. They are not immune to 2FA, device recognition, and security questions. They also provide no data segregation. If a fiduciary has access to a password manager, they have access to every account on there with no checks and balances to ensure they aren’t overstepping. Especially for individuals who run businesses, have complicated family situations, or have a significant amount of assets, giving access to every digital account on a device is likely a poor idea.

Legacy contact solutions also don’t work very well. Apple’s Legacy Contact, for example, allows a user’s iCloud data to be passed on to a designated contact. This should include all photos across all Apple devices, iCloud email, document storage, texts and SMS, notes, calendar, and optionally other apps. However, ⅓ Apple users never register with iCloud, meaning they cannot use this feature. Of the ⅔ who do use iCloud, 90% never pay for more than the 5GB of free storage provided by iCloud. 5GB of storage is equivalent to roughly 1,400 photos, while the average smartphone user in 2023 had 2,750 photos. And iCloud accounts cover multiple devices. So, even if an Apple user sets up the iCloud Legacy Contact, only a small percentage of their data will be retrievable. It is worth scratching the surface and doing some research into legacy contact options before recommending them to your clients as they tend to fall short.

A whopping 40% of Amercians own cryptocurrency as of January 2024 [6], including about 28% of people aged 44-59 (Gen X.) [7] Cryptocurrency poses a plethora of issues to estate planners. For example, cryptocurrency wallets do not provide the option to list specific beneficiaries for these holdings. Unlike a 401(k) or a standard checking account, cryptocurrency does not provide their account holders with a beneficiary form to make for a smooth and easy transfer. There are service providers that can help make these designations, but they are not available directly through the wallet providers so you must know about them separately. Without using the newest solutions, the only way that a beneficiary (or executor) is able to access these tokens and handle them according to the decedent is by having actual access to the digital wallet itself. As discussed in the previous example involving the photographs on the computer, accessibility is determined almost exclusively by way of the account holder. If this account holder has lost track of the private key or email that is associated with the account and proceeds to suffer an untimely death, then their assets could very well end up locked forever.

Cryptocurrencies are bearer assets. A bearer asset entitles its holder to all rights of ownership over it as there is no recorded title over the asset. Examples of bearer assets are cash and gold. If someone drops a $20 bill on the ground, whoever picks it up next can use it without requiring a deed or needing to register it with a custodian. Bearer assets allow their owners to remain anonymous and don’t require a trusted third party to custody the assets or maintain a ledger of title. Unfortunately, this feature of cryptocurrency makes it easy to steal and has forced the creation of cryptocurrency custody licenses in basically all developed countries. This is another thing you need to factor into planning: if a professional fiduciary is handling your client’s assets, do they have the requisite licenses to do so? Or, if an individual is going to be handling the administration, are they tech-savvy enough to access the assets and does your client trust them enough to handle a bearer asset? There are many ways you can help  your client navigate these questions, but there is a bit of a learning curve planners must undertake.

Tax implications arise out of the volatility experienced by particular digital assets, such as cryptocurrency and NFT’s. These assets have experienced dramatic rises and falls in their value, whether that be due to proposed legislation or a few comments on Twitter. Regardless of whatever the reason may be, the seismic changes in value may alter how an estate planner must handle a client’s estate when it comes to the issue of tax.

One potential tax implication surrounding cryptocurrency is that of estate tax. As it stands in 2024, the estate tax threshold sits at $13.61 million, meaning that an estate valued at $14.61 million will be taxed on the $1 million that sits above the threshold (at a 40% rate). While this statistic does not have much bearing on a vast majority of people, the unpredictable nature of cryptocurrency valuation means it could swing an estate above or below the threshold. For example, person A has an estate valued at $6 million and decides to cash out their $10 million worth of Bitcoin holdings, person A then decides to buy back into Bitcoin after seeing its price drop for months in anticipation of the price climbing back up, this never happens and now person A’s Bitcoin holdings are worth $7 million. While this $3 million dollar loss is objectively a large sum, the impact of this loss is mitigated by the fact it puts person A below the estate tax exemption. Had person A died with the original $10 million dollar Bitcoin holding in conjunction with the $6 million dollar estate, the tax bill for roughly $2.4 million would have been $960,000.

Another tax issue that must be considered when dealing with a client’s cryptocurrency assets is the Lifetime Gift Exclusion. As it stands in 2024, gifts can be made for up to $18,000 per year to an individual before they are subject to taxation. The value of this mechanism is to allow those with larger estates to mitigate the value to the amount mentioned in the above paragraph. However, if the individual making the gift crosses this yearly threshold, they will be subject to additional taxes on the gifts that they provide. The difficulty that cryptocurrency presents is similar to the one presented in the above section on estate tax, and that is the volatile pricing. Timing is everything when mitigating the tax liability, and it may be in the best interest of the client to simply wait out a bull run before initiating a gift of the cryptocurrency.

There is plenty more to discuss, but suffice it to say planning for digital accounts is challenging. Access control, user privacy, bearer assets, fraud, and data recovery are all major hurdles in estate planning that need to be dealt with sooner rather than later. There are new solutions like Bequest Finance that allow for easy, compliant planning without increasing grunt work. Bequest Finance handles everything from cryptocurrency to domain names, while generating new revenue and sourcing new clients for your practice.  Estate plans that don’t account for digital access are incomplete.




About the Authors

Anna is a software engineer and McGill graduate. She previously designed and implemented institutional web3 solutions at Aquanow, and worked as distributed systems engineer specializing in Rust. After raising a seed round for Bequest in the summer of 2023 and acquiring users, she has managed to get her mom to stop worrying about her employment status.

Oleg is a graduating law student from Texas Tech University School of Law. His areas of interest include taxation, estate planning and bankruptcy. During his time at Texas Tech, Oleg served as a member of the tax clinic, contributed articles to the bankruptcy journal, and submitted a paper on the development of the UCC regarding cryptocurrency. After graduating, Oleg will be continuing his education by enrolling in an LLM program for taxation. #AnnaMouland #OlegPerry #estateplanning #planning #digital #data #compliance #cryptocurrency #recovery


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