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.  

Piracy, Privacy and Money, Money, Money - Part III

This is the third and final part of a series.

Money. Money, Money

Deep Throat: Follow the money.
Bob Woodward : What do you mean? Where?
Deep Throat : Oh, I can't tell you that.
Bob Woodward : But you could tell me that.
Deep Throat : No, I have to do this my way. You tell me what you know, and I'll confirm. I'll keep you in the right direction if I can, but that's all. Just... follow the money. 

All the President's Men

Social networking, Internet businesses and technology are big business today.

Facebook has $4 Billion in cash and has filed papers to go public with speculation that its initial public offering price may put the value of the company at $100 Billion.  Facebook recently made an offer to acquire Instagram, photo sharing social networking site, for a reported $1 Billion.

"I'm excited to share the news that we've agreed to acquire Instagram and that their talented team will be joining Facebook."  Mark Zuckerberg

Apple, once counted out as an interesting piece of technological history, has seen its market capitalization eclipse the once mighty Microsoft and oil behemoth Exxon.  It is the biggest company on the planet.  If you go to the link at the beginning of this paragraph, the list of market capitalization includes Microsoft (now No. 4), followed by IBM (No. 5).  Google is at No. 11, just ahead of Warren Buffet's Berkshire-Hathaway.  Remember when we thought IBM was relic of the past?  There may be hope still for Yahoo!

Money makes the world go round
The world go round, the world go round
Money makes the world go round
It makes the world go round.

Money, Money, Money - Cabaret

This surely could be the sign of another technology bubble in the stock market, but it also is a sign of how important technology has become to our economy as well as the world economy.

Let's reflect a bit more.  In a prior column, I wrote about a new the new music service Spotify.  Spotify did not start in the U.S.  It started in Europe and became very popular there before coming to America.  Spotify had to negotiate first with the Neolithic music industry in this country, which seems unable to grasp the potential and power of digital distribution of music and unable to figure out how to fashion a new business model to capture that potential and power.  The U.S. music industry (and its global counterparts) seem to want the money, but only if they can collect it in the old fashion way -- one record, cassette tape, compact disk, song (??) at a time.  The music (and film) industry seems to be spending more time and money fixated on digital piracy.  It has failed again and again to realize that times have changed.  To paraphrase Satchel Paige, looking backward is likely to reveal that someone is catching up with you.

Most technological successes  did not start out as the product of trickle-down capitalism.  Whether you were named Hewlett or Packard, Steve Jobs or Steve Wozniak, Zuckerberg, or Gates, or Paige or Brin, their first was an idea, then there was a lot of  scrambling and tinkering and writing code, some fortuitous opportunities seen and taken, and, finally, in the modern era, a form of trickle-down capitalism:  venture capital firms.  NPR recently did an interesting series of reports on the rise of Silicon Valley, including a timeline and a profile of the early venture capitalists.

Venture capitalists started out driving around Silicon Valley almost literally trying to give money away (in return for a piece of the action).  Now, the investment side of the technology business is more like a tech version of American Idol, with bright innovators auditioning their start-ups to see if they can get funding from the venture capitalists.

So what are the venture capitalists looking for?  What, for that matter, is Mark Zuckerberg looking for when Facebook acquires Instagram for $1 Billion?  Look in the mirror.  Money is chasing money, specifically the money that we ("we" being the great huddled masses, the 99%) have.  We are were the real money is, and all of this consumer-based or social networking technology, in one way or another, is looking for us as users so that it can get to our dollars.  And in order to get to our dollars, these businesses need to know a lot about us; they need to create profiles of our likes, dislikes, interests, questions, searches.  From this information , these businesses can create a picture of us, so that, either directly or indirectly, someone can sell us something.

There are easy illustrations that I have used before.  Facebook posts ads on our pages that result from knowing what we "like" and, thus, are targeted to sell us something we are predisposed to like or want.  Facebook is being paid to broker this kind of advertising.  Amazon recommends products to us based on our shopping history, knowing that we are predisposed toward these items based on what we bought in the past.

Here is a more interesting example reported by Marketplace Tech in late April.  When we think of Walmart, the most immediate imagine may be of a mom & pop store gone wild.  The old  5 and 10 cent stores of another era on steroids.  (Interestingly, in typing this, I noticed that the modern computer keyboard no longer as key for the cent sign; you have to select it as a symbol and Google's Blogger does not seem to have this function.)

Well, Walmart also sells things online.  Walmart noticed an interest fact about its in-store shoppers.  Many of them pay in cash.  (Many Walmart shoppers are a true part of the 99%, part of a cash based economy, which the Walmart spokesperson described as:

unbanked or underbanked, “meaning they either don't have access to a bank or they have limited banking services or they don't have credit."

Walmart also figured that many of these customers would like the convenience of shopping online but for one small, but important problem:  you cannot stuff cash into your computer to pay for your purchases.  So, Walmart is now letting people order online, then come into a Walmart store and pay in cash and have the items purchased online shipped to them.  This, of course, also gets the customer into the store and may result in them wander around and spending more money.  (Presumably, as the customer has to go to the store to pay, Walmart has enough stuff available online that the customer cannot simply buy in-store or that the customer may purchase online more readily than they would want to wander around the store looking for.)

Let's go a bit further.  Let's examine the concept of "free."  If you have a iPhone or Android smartphone, an iPod Touch, or a iPad or other tablet computer, you probably have apps (short of applications), those tiny little titles which take you to all kind of stuff.   iTunes tells me that I have 155 apps on my iPhone, iPod Touch and one that I purchased for an iPad that my partner loaned to me.  Some of these cost money, like the Brian Eno ambient music apps, Bloom and Trope, or the Notetaker HD app that I purchased for my partner's iPad.

Many apps are "free," which encourages you to grab a big handful of them each time go to the app store.  It seems like there is an app for nearly everything, so why not try these free apps and see how they work.  After all, they are "free."  Not exactly.

Most free apps do one or both of the following:  (1) try to sell you upgraded versions that cost money or other related apps and/or (2) mine your activities for data on you and your usage of the app.  This still may seem like a sweet deal, because you can ignore the ads and who really cares if you just played "exhalent" in Words with Friends for a ton of points (a word which the spell checking in Google Blogger does not recognize, but Words with Friends accepts, much to the delight of my wife, who played it in a game with me.)

Stop playing Words with Friends for a minute and think a bit more.  Like many newer apps, Words with Friends is designed as social interaction with others and pretty much requires that you connect through social networking sites like Facebook so that you can connect with your friends who also have the app.  (I admit that I took the easy way of connecting through Facebook, which allows me the joy of regularly being beaten by my youngest daughter.  There may be a way to connect using Facebook or other social networks, but is not likely to be as easy to use.)  This tie-in fosters more users for Words with Friends and for Facebook.

The dark side is in the details when you decide to connect to Facebook.  In a brief notice before you connect, you are told that in making the connection, you are allowing the app and Facebook to access your personal information and usage records.  You want to play the game with your friends, so you click and move on thinking that one day you will have to go review those privacy setting in Facebook.

There’s a saying that’s used a lot in the online world: if you’re not paying anything, you’re not the customer, you’re the product.

Where is all this going?  Go over to Marketplace Tech Report and listen to/look at this linked report:  Send a $5 gift card to your friend free? What’s the catch?  It tells the story of a new app called "Wrapp," which enables you to send "free" gift cards to your friends.  What a deal!  "Free" right?  Not really.  Wrapp requires that you allow access to your data on Facebook.  The social networking connection here is essential.  Merchants are not giving away free gift cards; they are buying customers much more cheaply and effectively than an old fashion sales ad in the newspaper.  As the Marketplace report states:

So instead of the newspaper bringing the product to the consumer, you bring the product to your friend.  “We already know that ties between people in social networks can be power channel for marketing a product or brand,” says Alessandro Acquisti, co-director of Carnegie Mellon University's Center for Behavioral Decision Research. “This new application takes things one step further, effectively enlisting your friends as their own marketing agents.”

So you are really selling yourself and your friends in return for those "free" gift cards.  Are you at the crossroads about to sell your soul?  May be not, but before you agree to the "access my personal information" deal the next time, thing a bit more about what that means and what your are sharing.  Perhaps all of that personal information results in a small window to your soul.

The best things in life are free
But you can give it to the birds and bees
I need mon-ey
(That's what I want)
That's what I want, hey!
(That's what I want)
I need money, that's what I want
That's what I want

source: http://www.lyricsondemand.com/soundtracks/m/madmoneylyrics/moneythatswhatiwantlyrics.html