Estate Planning in the Age of the
Internet and Digital Property
We are rapidly moving toward an electronic and paperless society. When I first started practicing law, administrative assistants used typewriters (and I used a lot of white-out). Paper legal documents were the exclusive method to do business. Letters were sent to clients by regular mail.
But then Al Gore invented the Internet and everything changed.
As our personal, financial, and business lives move into the electronic age of computers and the Internet, we need to examine how this new electronic world affects our estate plan and planning for our eventual death or possible disability.
Why does estate planning need to change as technology changes?
In a typical estate plan, a person has established a durable power of attorney
which appoints another person to manage his or her financial affairs in the event of a disability. A typical estate plan also consists of a will
or revocable living trust
that appoints a personal representative, executor or trustee to manage and/or transfer property at death.
Whether a person dies or becomes disabled, one of the first things that needs to be done is locate the deceased or incapacitated person's property. Traditionally, this has been accomplished by looking through a person's mail and shifting through paper records. That search typically resulted in finding checkbooks, brokerage statements, credit card bills, loan statements, tax returns and similar documents. If a person owns real estate, a real estate tax bill will eventually show up. A safe deposit box bill can be used to locate valuables in a safe deposit box. Brokerage statements or tax returns can be used to find investment assets.
Today, e-mail is largely replacing regular mail. BIlls can arrive and be paid online or by telephone. Financial records, including brokerage statements and tax returns, may be maintained in a paperless format. Metal file cabinets containing paper documents are being replaced with virtual file cabinets and paperless records.
All this means that the paper trail we once relied on may not lead to the same results as we move into a digital environment. Without proper planning, locating, accessing and/or deposing of information, documents and assets may be more difficult.
In this issue of e-Counsel, we examine estate planning in the age of the Internet and digital property. We will analyze new planning points and offer insight into some things to consider as you prepare or review your estate plan.
Please note that this issue of e-Counsel is only intended to be educational and informative in nature and is not intended to give legal or other advise regarding any person's particular situation. If you have any questions about the contents of this newsletter, please do not hesitate to contact us.
What is Digital Property?
Digital property consists of electronic assets that are stored on your computer or on the Internet, or on external hard drives, CD's, DVD's, memory cards, flash drives, thumb drives or other types of storage or back-up storage systems. Digital property includes:
- E-mail accounts;
- Internet or online accounts;
- Electronically stored financial information (including tax returns) or financial accounts;
- Websites and web pages;
- Social networking accounts (such as Facebook, MySpace and Twitter);
- Domain names; and
- All other digital or virtual accounts or information, including personal pictures, music, movies or literary or other creative works.
Digital property can have monetary value, sentimental value, or no value. For example, registered domain names (words, letters or numbers that refer to an Internet address) can have value and can be sold. According to midFlux, a company that appraises domain names, some of most valuable domain names that have been sold include Business.com ($7.5 million), Diamond.com ($7.5 million), and Beer.com ($7 million). A person may also operate an online business which has value or a business can otherwise have a web presence which has value. A web-based business may have funds that are due from PayPal or other online payment vehicles.
Other digital property may have little or no monetary value, but can have sentimental value. For example, a person may have family photos and movies which are stored and maintained electronically instead of keeping scrapbooks.
Other digital assets may not have monetary value, but may contain valuable information which needs to be known in order to act in the event of a person's disability or death. For example, online brokerage statements and paperless tax returns which you maintain may hold the key to finding and locating your investment assets. Bills that are delivered and paid online may only be accessible if someone else has an awareness of your digital world.
How to Plan for Digital Property
In general, the same principles that apply to planning with traditional assets also apply to planning with digital assets. The problem is that digital assets are generally harder to find and conceptualize.
Think about your digital property for a moment. How quickly or easily can you find all the valuable documents and files on your computer? Are your documents scattered among many virtual folders, several computers, flash drives and CDs or DVDs? If it is hard for you to quickly find or identify these documents, how hard do you think it would be for someone else in the event of your death or disability? Would this person even know your passwords and user names to be able to gain access to your digital property and information?
In order to incorporate digital assets into your estate plan, consider taking the following steps:
1. Identify and Inventory Your Digital Assets. Create an inventory of your digital property. The more detailed and accurate the better. Your inventory can include:
- Hardware Inventory. Create a list of your hardware with a summary of what is on the hardware. Hardware includes desktop and laptop computers at home, work computers, and other original or back-up hardware and documentation (such as flash drives, hard drives, CDs and DVDs). Hardware can also include smartphones, digital cameras, iPods, iPads or any other "i" that Apple may develop later.
- Software. Create a list of your software. Do you use Quicken or other financial programs? What income tax preparation programs do you use? Do you create excel spreadsheets or Word documents with important financial information? If you blog, is there a program that someone would need to use to post news to your blog?
- File Structures. Your inventory should sketch out the main folders and places where you keep personal and financial files and documents. You might have an important collections of family photos or videos. You might maintain a paperless personal balance sheet. Your tax returns or even estate planning documents might be stored on your computer. Your file structure should provide a roadmap as to where these documents are located.
- Online Presence. Create a list of your website(s), blog(s), social media accounts (such as Facebook), e-mail accounts, online accounts at banks or other financial institutions, photo-sharing sites and other online resources you use like e-bay, Amazon (or other shopping sites), PayPal, or Go Daddy. In short, the list should include any online account that contains a user's sentimentally or economically valuable content.
2. Identify Appropriate Help and Grant Authority. With traditional estate plans, we typically name a surviving spouse, adult child, friend or institution to serve as an attorney-in-fact, personal representative or trustee to manage our estate in the event of our death or disability. That person or entity, however, might not be the best choice for dealing with our digital assets, especially if they are not computer savvy.
You will want to give some thought as to who should oversee and manage your digital assets upon your death or disability. You can name a person to do this in an official capacity (i.e., an attorney-in-fact, personal representative or trustee) or you can identify a "go to" person to assist others with your digital assets.
Also consider granting specific legal authority to someone to handle your digital assets. From an estate planning perspective, this may include updating your power-of-attorney, will and/or revocable living trust to add language and legal provisions to allow others to act on your behalf and deal with your digital property.
3. Provide Access. Security experts want us to create strong passwords, to use different ones for different accounts and to change them frequently. We are cautioned to never write down passwords, user names and PIN numbers. However, the simple fact is if we do not keep them in a safe place where they can be found at an appropriate time, no one will be able to effectively access our computers or online accounts. Think about it. If you do a great job on security, you all but guarantee no one can get easy and timely access to your digital world when the time comes. This can cause delay, frustration, increased cost and inconvenience.
Consider keeping track of your accounts and passwords electronically by using software on a computer or smartphone. You can also use one of many Internet-based service companies (Entrustet, AssetLock, Legacy Locker, Deathswitch) to store and maintain information about your digital property, including your passwords. With software or an Internet-based business, you can have an electronic list where a single password can unlock a database of accounts, passwords or other key information.
Obviously, no matter how you store your passwords or other information about your digital assets, you need to make sure someone knows about it.
4. Provide Instructions. Consider providing instructions as to how you want your digital assets handled in the event of your death. Some types of digital assets may be transferred to others at death, while other forms of digital property cannot. Digital property that cannot be transferred may still be able to be accessed and/or maintained. This is a relatively new, uncertain and evolving area in the law.
Determining what digital assets can be transferred at death is mainly dependent on how the digital assets are classified. If the digital asset is "owned" it can generally be transferred. If the digital property is not "owned" it cannot generally be transferred.
A digital asset is "owned" if you are considered to have a property interest in the asset. This type of property generally consists of intellectual property and user-generated content. A digital asset is not "owned" if you are using it pursuant to a contractual license (that is, a license to access and use an Internet service provider's service in accordance with a "terms of service" license agreement). The matter becomes complicated when a person is using an Internet service provider's service (such as Facebook) to create an account which contains user created content. The user may own his or her content, but not the actual account. In these cases, Internet service providers may have their own rules regarding how the account and content are handled.
Generally, there are many options that a person has to handle digital property after death. These options can include:
- Using Digital Assets for Notifications. Many of us now have Facebook "friends," LinkedIn "connections," Twitter "followers" and others we communicate with on a regular basis. If you have a blog or website, you might have people who read your words or visit your site on a regular basis. If you want those people notified of your death, for example, you need to make your wishes clear and provide access to the tools and give instructions so that can happen.
- Continuing or Closing Sites and Accounts. You should also consider whether you want various sites or accounts continued or closed after your death. Even for sites or accounts that you want closed, you might want to be sure that a copy is made and kept, and that pictures, audio or video are saved.
- Deleting or Keeping Items. People routinely digitize all kinds of important documents, photos and videos. You might have scanned family pictures or videos, or have a folder with the novel or screenplay you've been working on. If you intend that they be transferred, make sure that they are identified and not lost when a hard drive is deleted.
- Transferring Digital Property. If digital property has value, you need to consider how to specifically transfer it to a person or persons of your choosing.
Lets look at a person's Facebook account as an example of what can be done with a certain type of digital property after death.
Facebook has one of the most comprehensive death policies for an Internet service provider. Often, Facebook is used as a virtual memorial or to provide notification of a person's death to Facebook friends. I have heard where people say it actually helps with the grieving process. A Facebook account can also be deleted. This can be accomplished if you have access to a deceased person's account or by providing Facebook with proof of death (such as an obituary) and proof that you are a close family member or friend. You should note that Facebook does not formally allow access to deceased's account so this can only be accomplished if another person has access to the deceased's account information or e-mail.
Facebook is just one example. The point is a person should consider analyzing his or her digital property and make plans for its deletion, transfer or other disposition or usage after death.
The issues surrounding digital property are likely to increase, given the continual development of technology and the Internet. Therefore, it is important to consider digital assets from an estate planning perspective. An estate plan that addresses digital assets can help minimize or eliminate added costs and strain on loved ones.
If you have any questions or comments regarding the contents of this issue of e-Counsel, please do not hesitate to contact us.
CIRCULAR 230 DISCLOSURE
Under U.S. Treasury Department guidelines, we are required to inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or by any party to market or promote any transaction or matter addressed herein without the express and written consent of Helfrey, Neiers & Jones, P.C. and The Law Office of Richard C. Petrofsky, (2) Helfrey, Neiers & Jones, P.C. and The Law Office of Richard C. Petrofsky imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (3) any fees otherwise payable to Helfrey, Neiers & Jones, P.C. or The Law Office of Richard C. Petrofsky in connection with this written tax advice are not refundable or contingent on your realization of federal tax benefits from the advice contained herein.