The Drum Beat of Estate Planning for Digital Assets

Suddenly (or finally?), digital assets are moving to the forefront of discussion in the estate planning world.  Digital assets in estate planning have not exactly been ignored in recent years.  Extensive papers and articles on the subject have been written by noted academics and estate planners like Gerry W. Beyer, Naomi Cahn, James D. Lamm and Robert Kirkland.  There are websites devoted to digital assets and planning, such as The Digital Beyond (http://www.thedigitalbeyond.com/).

This year, however, may turn out to be a banner year for the topic. Let's look just at the Baltimore area.  In the May, the Maryland State Bar Association ("MSBA") Section of Estate and Trust Law  (the "ETL Section") invited Karin Prangley of Krasnow Sanders, LLP, in Chicago to give a presentation at its annual dinner meeting entitled Estate Planning and Administration with Digital Assets.  In October Michael Oliver and I presented a discussion entitled Dealing with Digital Assets as part of an MSBA Continuing Education Hot Topics Program.  Next week, the Baltimore Estate Planning Council presents American College of Trust & Estate Counsel ("ACTEC") Fellow Robert Kirkland, who is speaking on the topic Stay Linked With Your Clients by Helping Them Forever Friend Their Digital Property.  The MSBA ETL Section has formed a committee on Digital Assets and, in the near future, intends to post on its website resources on digital assets and estate planning .

Nationally, Gerry Beyer and Naomi Cahn just presented a webcast for the American Bar Association entitled Ownership and Transfer of Digital Assets.  ACTEC has just authorized a Digital Assets Taskforce.  The National Conference of Commissioners on Uniform State Laws ("NCCUSL") is reaching the final stages in drafting a uniform digital asset statute to address issues of definition and control under state law.  Several states already have enacted (widely differing) statutes and others, Maryland included, are considering such legislation.

With all this activity, it is not possible to present here an exhaustive summary of what you should know about digital assets.  What I would like to offer is a short overview of the primary issues involved in estate planning for digital assets.

What Are Digital Assets?

This question would seem deceptively simple, but in reality it is the complex starting point for any planning.  To capture some sense of scope of this term, I will borrow the four primary categories that Professors Beyer and Cahn used in their recent presentation:

• Personal Assets - Examples:  email, digital photographs, playlists, digital music files.
• Social Media Assets - Examples:  Facebook, MySpace, LinkedIn, Twitter accounts.
• Financial Accounts - Examples:  online bank, credit and investment accounts, electronic bill paying.
• Business Accounts - Examples:  commercial sales websites, online business records.

At the heart of any digital asset likely is the concept of digital rights - the exact legal ownership rights an individual holds to domain names, licensing rights to digital information, websites and accounts that contain digital information (blogs, online journals, writings, photographs, or posting).  After all, legal rights are what someone may be able to transfer to someone else.

In approaching the universe of digital assets, there is a quest for a universal definition.  Here is one attempt from NCCUSL's working draft of a state digital asset statute:

“Digital asset” means information created, generated, sent, communicated, received, or stored by electronic means on a digital device or system that delivers digital information. The term includes a contract right.

Also consider two other critical factors:

Location.  As the old saying goes, location is everything.  Digital assets can reside on physical media like hard drives, thumb drives or digital storage disks.  They also can exist online or in the "cloud" in electronic accounts, digital photograph albums, websites and blogs

Access.    Is there a box in the desk drawer that holds the thumb drive?  Are passwords, PINs and other access codes needed to reach digital assets online?  If so, safekeeping of access information also will be critical.

Location and access information thus are fundamental to any planning for the time when someone else must round up these digital assets -- after the client becomes disabled or dies and cannot access their digital assets.

Value.

The value of digital assets is also an involved issue.  Some digital assets, such as domain names or blogs, may have monetary value that can be significant. The IRS may be interested in the value of digital assets for gift and estate tax purpose.  There are valuation services that can help determine the value of some digital assets.  A client's commercial website may be a fundamental part of a client's business and its value.  Some digital assets may have little monetary value, but great personal value to the client and the client's family.  Think of digital photographs posted online at sites like Facebook or Instagram or personal online writings in blogs or websites.

Security.

Digital assets themselves and their access information likely should be secured to protect them from unauthorized access and loss of value.  This too is a complicate topic, especially after considering the next item --- legal issues.

Legal Issues and Developing Law.

•  What Legal Rights Does the Client Hold?  This is one of the most perplexing parts of digital assets.  In some situations, the client may "own" the digital information.  In other situations, particularly involving social media and certain commercially purchased digital information (e.g. music files from iTunes), the client does not "own" the digital content, because copyright protection or restrictions under the terms of service for the online provider, which usually only grant the user a license to use the service, while the provider retains ownership over content.  Understanding the issues here requires at least a short course in intellectual property and online licensing agreements.

• What Legal Rights Do the Client's Successors Hold?  Here is where the unwary enter the minefield.

1. Applicable federal law is designed to protect digital assets from the unauthorized use of electronic information.  Federal laws were written at a time when the primary concern was to criminalize hacking and illegal use of digital information.  In the context of planning for a client's disability or death, however, these laws complicate matters.  A client's spouse or children may have the necessary information (location and access information) to reach the digital assets, but attempts to do so often violate the federal laws broadly described above.  A critical concept here is whether the person trying to reach the digital assets is "authorized" to do so by the actual owner. 
2. State law is not uniform in giving agents under a power of attorney or personal representatives or trustees authority to control and dispose of digital assets.  State statutes that exist are not uniform.  Many states have no statute at all.  Thus, such fiduciaries may not have statutory authority that constitutes "authorization" under applicable federal statutes.  The NCCUSL draft uniform state statute discussed above is an attempt to reach such a uniform law.
3. Terms of service agreements with providers often contractually establish separate procedures and rights for online accounts that are governed by the laws of a state that is favorable to the provider.

Planning 

Thus, particularly because of the legal issues just discussed, it is important to plan and address the authority to control digital assets in estate planning documents.

General suggestions with respect to planning for clients include:

• Ask the client for a listing of digital assets (a questionnaire would be useful).  Ultimately, the client should have an accurate inventory.
• Discuss the digital assets and their disposition with the client.  What does the client want?
• Estimate the monetary and personal value of the digital assets.
• Discuss with the client current security protecting access to digital assets and a method of preserving passwords, PINs, etc. so that a fiduciary has access to them.  (Consider carefully whether you, as attorney for the client, want to hold this information.  If you do, how are you going to safeguard such information? What are your professional obligations to the client with respect to this information?)
• Draft documents granting fiduciaries authority over digital assets.
• Consider use of specialize planning, such as a trust or limited liability company that would own rights to certain digital assets.

Clearly, there is much more that could be said on this topic and, happily, a broader dialogue is emerging.

UPDATE:  November 26, 2013

I neglected to mention in the opening paragraphs of this post the excellent article by Anne W. Conventry, Planning, Administration in a Digital World, which appeared in the September 2013 Issue of the Maryland Bar Bulletin.