Cryptocurrency and NFTs, the Impact on Digital Asset Succession (Part 2 of 2)

by | Mar 3, 2022 | Uncategorized | 0 comments

In part 1 of our series, we discussed the blockchain and cryptocurrencies. In part 2, we’ll look at NFTs and the impact of all these assets on Trusts and Estates’ work.

What are NFTs?

Unlike cryptocurrency which is primarily used for payments, investments, and other high-volume transactions, NFTs are more like collectibles that carry emotional, sentimental, or investment value similar to a piece of art, video recording, etc. NFTs may grow in value over time with a limited volume of transactions. NFTs are singular in nature and unlike crypto which is more of a commodity.

Crypto value is driven by is regulated purely by market trends, NFTs take it to another level. They are Non-Fungible Tokens (an awkward name), made of imagery, art, music, writings, or symbols that are traded for their money’s worth in their digital state. The beauty of NFTs is that they are not duplicable and are traded in their electronic form.

A well-known example is Jack Dorsey’s first tweet which was sold for $2.9 million. Another is a short video clip of LeBron James doing a slam dunk that sold for about $200, 000. It’s not just for the wealthy. Almost everyone can afford NFTs. A 14-year-old girl launched Belugies, NFT illustrations of Beluga whales with different hats, apparel, and even eye patches. They can be “adopted” for $58 each. To date she’s raised over $240,000 for various charities. You can call these works of art, valued, auctioned, and sold on the surface of the internet, protected by the blockchain.

This new kind of money is decentralized and unregulated by any authority and highly volatile. Their value fluctuates from a bear market (at their minimum) to a bull market (at their maximum or continuing increasing rate) vice versa. Bitcoin for example skyrocketed to over $66, 000 in 2021 and shortly sunk to $36, 000 in a few months. The market experiences highs and lows now and then, but the job of an estate plan is to ensure that what is owned, no matter what value, is passed on to heirs after their death.

Blockchain Assets, Adding Complexity to Estate Planning, Administration and Distribution to Heirs

Unlike physical property, digital assets are less conspicuous and elusive. When a person approaches a lawyer or an estate consultant, it’s easier to imagine that they have physical and tangible properties or funds but only alert advisors will ask their clients about digital assets. According to the Society of Trusts and Estate Practitioners research, professional advisors are ill-prepared to tackle the subject of digital assets. About 80% of estate lawyers

rarely or fail to discuss digital assets with their clients; 40% advise clients to share passwords with friends and family (AKA account holder impersonation). Shockingly, a whopping 65% of those providing this advice are aware it can lead to criminal liability and can be ineffective.

Meanwhile, this is in direct contrast with the 90% of lawyers who expect client demand for digital asset advice will increase. They’re seeking recommendations on how to handle their property…all their property. And how do we know…because of the increase in their digital footprint?

93% of Americans use the internet

At least 17% of Americans own cryptocurrency

There is a 30% Increase in DropBox Users creating at least $1.91B Revenue

There is the widespread transition to cloud-based storage

The awareness of digital assets, personal security methods, and effective planning is a key to protecting income streams and preserving asset value. This is in the interest of all the parties involved including lawyers, fiduciaries, and their clients.

It is critical that professional advisors see blockchain assets like crypto and NFTs but all online accounts and apps as what they are; a component to a client’s estate. There are key features that need to be discussed when reviewing plans with clients including the layers of security necessary to guard against hacking; could operate as the layers preventing recovery.

Our Recommendations:

Where the asset holder uses an exchange to hold the crypto, they must review the service provider’s Terms of Service and all the policies, informing the client as to the process and requirements for handling an account holder’s death. It will also give the account holder the opportunity to determine whether they want to use this service provider.

As a reminder for crypto and NFT exchanges, these policies can call out their limitations on access and distribution of funds. Some may have access to funds, while others do not. This can influence a decision on which platforms the client feels comfortable with.

When an asset holder uses an exchange that doesn’t have access to account contents, it will be necessary to prepare the account keys and wallets, It may be best to either write the code on paper and place it in a safe and secure location such as a bank’s safe deposit box or at home in a vault, where it can only be accessed by trusted allies after death.

Additionally, it would help to have such assets included in a client’s will, trust, or other legal documents with disposition instructions and where the keys, and wallets could be found (if the documents are not made publically available).

It may be necessary for some personal data to be stored, but lawyers should NEVER ever

take possession of the key or wallet code, nor should they have access to the exchange. Doing so would place them at great risk and liability.

Read on to see more articles on asset holder succession tips.