Wills, probate and inheritance
Wills and probate matters: how to protect digital assets
Practitioners dealing with both will making and estate administration must consider and discuss with their clients what will happen to their digital assets.
About the author
Emily Deane is Technical Counsel at STEP.
The phrase ‘digital asset’ is becoming more common. A simple definition is that a digital asset is personal property owned by an individual which is stored in digital form. This means that the digital asset is online or electronic, and the format can be by way of images, multimedia or textual content files. These kinds of assets have seen exponential growth over the last 20 years.
Without realising it, most people will have digital assets in the form of computers, external hard drives or flash drives, laptops, tablets, smartphones, digital music players, e-readers, digital cameras, and other digital devices. Any information or data that is stored electronically, whether it is stored online, in the cloud, or on a physical device such as a computer is digital. This will also include any online accounts, such as e-mail and communications accounts, social media accounts, shopping accounts, photo and video sharing accounts, online storage accounts and websites and blogs. Personal digital assets may have sentimental value, such as photos and e-mails which can be stored online via Facebook, LinkedIn or Twitter profiles, whilst other digital assets may have financial value, such as PayPal accounts, online gaming accounts, domain names, online businesses or other digital property which generates revenue.
Blogging has now become a very popular and successful profession, which can earn huge revenues from work online and is classed as a digital asset.
Cryptocurrency has also rocketed into popularity over the last couple of decades. A cryptocurrency is a digital or virtual currency that uses cryptography for security, which is difficult to counterfeit because of this security feature.
Bitcoin (BCH) was the first decentralised cryptocurrency in 2008, although there is debate around whether it can be defined as a currency or a commodity. BCH is not classed as an absolute digital asset but neither is it an absolute financial asset, so BCH currently falls within a slightly grey area.
However, the concept behind cryptocurrency was to produce a means of exchange, independent of any central authority, which could be transferred electronically in a secure, verifiable and immutable way. No single institution controls the BCH network. It is maintained by a group of volunteer coders, and run by an open network of dedicated computers spread around the world. The supply is tightly controlled by the underlying algorithm, and a small number of new BCH trickles out every hour. This drip feed of BCH will continue at a diminishing rate until a maximum of 21 million has been reached (unlike governmental authorities like central banks that traditionally control money supply and the availability of currency in the global market). Blockchain was also invented in 2008 to act as the public transaction ledger of BCH.
BCH is attractive as an asset (as are most cryptoassets such as Ethereum, Litecoin, Ripple, Dash) since users do not need to identify themselves when transferring the currency to another user or when a transaction request is submitted. The protocol automatically checks all
the transactions to confirm that the sender has the requisite number of BCH as well as the authority to make the transfer. The system does not need to know the sender’s identity, although this may be amended in the future if regulators begin to require identification.
In addition to the security risks which owners of digital assets face, estate planning for cryptocurrencies has become a challenging issue for executors. This is largely due to the fact that BCH is not held in an individual’s name and is, therefore, difficult to transfer to the beneficiaries after the owner’s death. It can be stored in a number of ways that usually involves a code or a private key which matches another code or key. However, if those unique codes or keys are untraceable, then the executor will be powerless to distribute the BCH in accordance with the deceased’s will and it will be lost forever. BCH is not printed like dollars or euros; instead, it is produced by computers all around the world. Therefore, if BCH is lost it is similar to losing cash because it is untraceable.
Executors or family members will be unable to trace the bitcoin in the same way that a bank account would be untraceable if there was no evidence of the bank’s location, or the account, or the account number, etc. An executor or family member will only be able to access the deceased’s BCH if the deceased left their code or key details in a physical format or, alternatively, if they held their BCH in a commercial wallet service, which will store the private security details. These wallets are computer programs that store the BCH addresses, keys and codes, and the wallet is able to collate and analyse information from the block chain. Most cryptocurrencies use a public-private key system whereby the public key is made public every time the investor buys or sells cryptoassets, but only the investor has access to the private key. Holding the cryptoassets in a wallet in this way gives the holder complete control over them provided the details are not lost or stolen, in the event of which they may not be recoverable. Wallet services also provide an exchange service, in order to buy and sell, which is governed by the terms and conditions of the exchange.
There is the risk of identity theft with any online asset. However, most digital assets can be protected by fairly advanced security measures. There are several security options that you should consider when dealing with your own digital assets and advising your clients on their portfolio:
- It is vital to download and back up digital assets regularly in order to mitigate the risk of losing them. Clients should be advised to collate as much information on these assets as possible. For example, user names and correlating passwords should be stored discreetly; in addition, it would be prudent to advise clients to consider how this information will be stored or recorded and whether it could breach the terms of service or data protection of each asset.
- Some digital assets will not be transferable on death, so it is advisable to check the terms in this connection also.
- Some financial and legal advisers recommend that their clients appoint an independent ‘digital executor’ for their digital assets in their will. However, this is unnecessary and may create consequential issues. Executors are empowered by the court to administer and realise all assets, including digital assets. Therefore, it may cause ambiguity and delay to have different executors for different tasks.
- The Society of Trust and Estate Practitioners (STEP) Standard Provisions provide non-technical clauses for their members to include in the wills that they prepare.* The provisions cover the law of England and Wales, and Northern Ireland respectively. They are currently being updated to include a specific provision confirming that executors and trustees have the power to administer digital assets. It is anticipated that will cause less difficulty and delay for personal representatives during the probate procedure, therefore incorporating the provisions into your clients’ wills would be advisable.
- Cryptocurrencies are generally being treated as though they are a normal currency when it comes to taxation, and capital gains, inheritance tax and income tax all apply in the UK on the basis of course that the assets can be located and transferred. Other jurisdictions do not seem to have encountered any taxation difficulties to date.
- Creating a physical copy of your private key for your cryptocurrency and storing it in a deposit box or safe will insulate your private key from hacking online, and will be required by your executors at a later date.
- It would be prudent to advise clients to prepare a letter of wishes for their wills or trusts, advising their executors and trustees how they would like their digital assets to be dealt with. In the absence of a letter of wishes, an inventory to accompany their will would be extremely useful listing their digital assets, including online accounts, devices and other important information that is stored on them. This should include details of obvious online security details for bank accounts and shares, but also less obvious matters such as social media profile details so that the photos can be transferred to family members and the accounts can ultimately be deleted.
- Any ancillary security information should be provided in a separate note to the will, since the will may become a publicly accessible document at a later date. It is important to ensure that this information is updated regularly and stored safely in a deposit box or a private safe alongside the will or a copy of it.
* STEP Standard Provisions - second edition (2011), available at: www.step.org/step-standard-provisions
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