Monday, July 21, 2014

Managing Digital Assets:A New Issue in Estate Planning

 Digital assets are online accounts containing credit, financial, and personal information stored on our computers and electronic devices. Adding them to estate planning is becoming more and more important.


Digital asset is a term that didn't exist ten years ago. It has grown over the last decade as consumers have flocked to the Internet for communicating, professional and job-related work, catching up with old friends, shopping, financial activity, and countless others. But as our online lives grow, it’s becoming increasingly important that our digital assets become a part of our estate plans. Without proper estate planning, they may not be transferred to your fiduciaries or loved ones when it becomes necessary. If no one knows your account names, passwords, or usernames, they may be lost.

The Internet offered us simplicity but as it has matured, it has become obvious that the simplicity and efficiencies it creates have birthed their own challenges.One of the biggest challenges is the development, and eventual management, of the digital asset. It has become clear that each account a user creates, whether it serves a lasting or fleeting purpose, becomes a digital asset that needs to be documented and managed.

What is a digital asset? Does it have tangible value or just sentimental value? Is it transferable? How do our heirs inherit it? These are all good questions and the answers are still elusive, especially as the federal and state legislation surrounding these assets is still very much in flux.

An asset must be owned or controlled to produce true value.Years ago, we stored letters and pictures in the hall closet. Nowadays, seeing the actual physical asset is much less common. We store emails electronically, photos are stored online, and family histories are locked up in the cloud somewhere. But that doesn’t mean we don’t own them. Each account has its own unique username and password. We control that account for as long as we live. We dictate what goes in and out. We own it, or as we will learn later, we mostly own it.

What Constitutes Value Online?

There are seven types of digital assets:

1. Sentimental. The sentimental favorite is likely Facebook, but there are others, like photo management services Flickr and Snapfish.

2. Valuable. Airline miles, credit card rewards, hotel points, and rental car rewards all have monetary value to the user. Bitcoins, though still an emerging currency, is also a digital asset with value.

3. Organizational. The online bill pay feature through your bank and credit-card accounts certainly qualify in this area. So does Evernote and many of the other note-taking websites.

4. Work and volunteer. Many volunteer websites like Rotary, ask members to create an online account to interact with charities and other volunteers. In addition, work-based websites like association forums and client relationship management (CRM) qualify.

5. Entertainment. Periodical subscriptions, online forums, gaming communities, and other sites dedicated to entertaining users.

6. Communication. Email is the way we communicate these days. Twitter may fit here or it may be developing its own category, but any site dedicated to communicating with others through an online account fits here.

7. Miscellaneous. This includes sites that are hard to categorize like Twitter. Is it communication, entertainment, work, or sentimental?

Organizing and Managing Digital Assets

A Microsoft study highlighted that consumers have on average twenty-six online accounts (Florencio and Herley 2007). While the number has likely increased over the last seven years, it’s unlikely it has doubled.

Most people are able to organize and manage their digital assets without much difficulty. However, with the number of online accounts each person has growing annually, it’s becoming as important to document your online accounts for yourself as it is for your heirs. Knowing where to turn and what’s there is a big benefit to those who will manage the estate and serves as a good annual reminder of your numerous accounts. Documenting the accounts is necessary but it is just as important for the account holder to have some way of passing the details of their digital assets to their executor or heirs. After all, documented assets are not beneficial if no one knows where to find the list.

The first step in organizing digital assets is to create an inventory or a list of what is currently ‘owned,’ or where the user has accounts.

Once a list of sites has been documented, it is important to write down or store the user names and passwords to those sites for the potential future use of the executor or power of attorney. This is the most difficult part because passwords change so often, and many websites are now doing a two-step verification process that either requires users to enter their usernames and passwords and then sends a six-digit verification number to their cell phone via a text message or asks the user a series of pre-determined key questions. If the cell phone owner is incapacitated or deceased, it’s wise to keep the cell phone active for a few months to insure access under these conditions. LinkedIn’s verification process is documented on their website: http://help.linkedin.com/app/answers/detail/aid/531/related/1.

An additional step that isn’t necessary for a user but could be very helpful to the users’ heirs is documenting the email address associated with the account, if an email address is not the username. In the all too common instance where the password is no longer active, it is good to be able to know how to reset the password. In most instances, resetting the password requires knowing the associated email account and some personal questions about the user, as websites seek to validate the account hasn’t been hacked by asking a series of personal questions that only the user can answer.

Finally, it is essential for the user to state the reasons why the website is important so heirs can determine when the website needs to be accessed. For instance, if a bank account is being listed for online bill pay, then it’s a good idea to explain the details of each bill. Or if listing an online forum where the user communicates with others, then highlighting the user names of key individuals within that forum could help heirs gather needed information or communicate with friends of the decedent. Each account has a purpose and the goal is to document the purpose so heirs can easily determine which accounts are important and which ones can wait. 

This last step is important—at least until there are reasonable legislative advancements. Users need to understand that, in most states, there are no laws on the books that govern how digital assets are treated after the user passes away. This allows websites to follow the strict privacy concerns in existing Federal legislation. 

If a user’s family can’t access an account during an emergency, then the website provider does NOT have to provide access—and oftentimes they will not unless legally challenged in court. This means that important information could be lost. 

Many providers like Facebook and iTunes allow you to download your account in a .zip file, which can be useful to back up important pictures, music, movies and more that the user has purchased or uploaded to the service. For that reason, downloading information or writing down what important information is stored online may seem like a redundant process, but it’s simply backing up your files, just in case. Or equally important if necessary, families may want to quickly get into accounts and download or backup all the important files in case the website provider locks the account.

What happens if the Asset Owner is Incapacitated? 

Users must agree to a list of Terms and Conditions and a Privacy Policy when they create an online account. They are typically included as separate check boxes indicating that the user agrees (“I Agree”). If the user chooses not to agree when attempting to create an account then an account is rarely created. The terms and conditions typically define the parties to the agreement and set the parameters for the business relationship.

Most websites explicitly state that users are not authorized to share their account details. Many go further by stating that the contract is not transferable to another user. In the event the user becomes incapacitated and not able to access his or her account, families will not be able to login to the user’s accounts. Further, neither a power of attorney nor an executor are typically given the login credentials if they contact a website to report the user is not able to login on their own. 

Furthermore, if the user has passed away and the executor starts to contact website providers asking for the username and password, the website provider will typically lock the account. This means whatever information is stored with the provider is out of reach without a legal challenge.

Federal and State Laws Regulating Digital Assets

Federal legislation. The prevailing federal laws that govern digital assets:—the Stored Communications Act of 1986 and the Computer Fraud and Abuse Act of 1986 have both been amended on occasion over the last thirty years, but their frameworks are outdated because they use computer terminology based on how computers were used at that time. 

For example, The Stored Communications Act “regulates two types of providers: providers of electronic communication service (ECS) and providers of remote computing service (Kerr 2004).

According to the Legal Information Institute (2004), “Electronic communications service (ECS) is any service that provides to users the ability to send or receive wire or electronic communications. Electronic storage means any temporary, intermediate storage of a wire or electronic communication incidental to the electronic transmission thereof and any storage of such communications,” and “any storage of such communication by an electronic communication service for purposes of backup protection of such communication. 

Meanwhile, “remote computing service (RCS) means the provision to the public of computer storage or processing services by means of an electronic communication system.” And an “electronic communications system means any wire, radio, electromagnetic, photo optical or photo electronic facilities for the transmission of electronic equipment for the electrical storage of such communications (LLI 2004). You can quickly see that cloud computing could be seen as an electronic communications service or a remote computing service. Is there a need for differentiation anymore when it relates to personal assets?

State laws. Seven states have passed legislation regulating digital assets, including: Connecticut (2005), Indiana (2007), Rhode Island (2007), Oklahom (2010), Idaho (2011), Virginia (2013), Nevada (2013). 

This is great news, but it is complicated by the fact that each state has passed different legislation. Connecticut and Rhode Island passed very similar bills that only govern email accounts. Virginia passed legislation that only covers minors. The other four states have passed more comprehensive legislation, but they all have variations in the language they use. This poses a problem as consumers in the U.S. tend to move around a little and what prevails in one state may not prevail in another state.

Uniform Law Commission. In 2012, the Uniform Law Commission (ULC) formed a group to work on the issue, and model legislation should be ready this summer for each state’s consideration. Unfortunately, the legislation is state-based, meaning that all fifty states will need to pass it—and preferably with little to no changes. 

The working group is being challenged on many different fronts, but it has developed a strong piece of legislation with some key features—for example, Fiduciary Access and Authority (2014), which states: 

“…any provision in a terms-of-service agreement that limits a fiduciary’s access to the digital assets of the account holder under this [act] is void as against the strong public policy of this state, unless the limitations of that provision are signed by the account holder separately from the other provisions of the terms of service agreement.” 

In essence, the committee has drafted language that will require website providers to allow access to a user’s fiduciary unless that access is explicitly denied outside of the terms and conditions. This means that users would have to opt out of providing their future fiduciaries access rather than automatically preventing them from having access simply by creating an account. It’s not a perfect solution; however, it’s a very good solution given the current framework. 

How Can Professionals Help Clients Prepare for the Impact of Their Digital Assets?

The current professional landscape has grown up as a result of baby boomers. Financial planning is a clear example of this. In the 1980s when income taxes were high, life insurance as an investment and tax shelters were important topics of conversation. In the 1990s, financial planners talked about 401(k)s, Roth IRAs, and 529 Plans as older adults started to focus more on retirement and college savings. In the 2000s, advisors now discuss long-term care and estate documents as many clients face caring for their parents. Today, digital assets are significant planning topics that need to be discussed. There is far too much important information out there to be left untouched. Many consumers don’t understand the significance of the issue nor do they understand the outdated legal landscape. 

Those of us old enough to remember life without computers know that very little is the same. Technology has moved with incredible speed to change the way we do things inventory and documenting what is important. Prepare them to share the details of the digital shoebox in order that they can be protected. Otherwise, a generation of memories and knowledge will go untold, and critical personal and financial information may be lost. •CSA

William Bissett, CFP®, is a wealth manager with Pinnacle Advisory Group in Columbia, Maryland,and the founder of Principled Heart (www.principledheart.com), an online tool for organizing your estate. He can be contacted at wbissett@pinnacleadvisory.com.

Managing Digital Assets: A New Issue in Estate Planning was recently published in the Spring 2014 edition of the CSA Journal.

Blog posting provided by Society of Certified Senior Advisors 
www.csa.us