estate planning for digital assets

Your estate accounts for more than conventional assets, such as your real estate properties, bank accounts, and investments. These days, estate planning for digital assets has also become a necessity. Bypass that process, and some of your most valuable possessions may not end up in the hands of your intended recipients.

Despite how prevalent digital assets have become, not enough people set up clear succession plans for them. If you have not started digital asset estate planning, now is an excellent time to change that.

In this article, we will talk more about virtual assets and the unique challenges they present concerning estate planning. We will also discuss strategies you can adopt to safeguard and properly transfer these assets.

What Are Digital Assets?

Before we get into estate planning for digital assets, let’s first take a moment to discuss those properties.

As noted in this article from Nasdaq, the definition of a digital asset has significantly evolved in recent years. Not too long ago, we used the term in reference to valuable word, picture, and video files stored online. Today, digital assets also include items that hold monetary value.

Cryptocurrency is a digital asset with real value in today’s economy. Many people use them to purchase items online. Other individuals buy and sell cryptocurrencies to turn profits. Despite how often the valuations of cryptocurrencies fluctuate, they can still yield substantial gains for their owners.

NFTs, also known as non-fungible tokens, are also considered digital assets. The value of a particular NFT is largely dependent on the market. They can be risky investments because a once valuable NFT may become worthless if the market sours on it. Even so, this is another digital asset you should include in your estate.

Do not forget about your e-commerce accounts because they can also be considered digital accounts. Money and rewards stored in your e-commerce accounts can be passed on to your heirs. Your e-commerce accounts may be especially valuable if you frequently top them off.

We have only scratched the surface of digital assets with monetary value. Additional items that may be worth something to other people include domain names you own, social media accounts, online accounts eligible for monetization, video game accounts, online betting accounts, digital rights to artwork, and loyalty points for specific services.

You may be sitting on a treasure trove of valuable digital assets without knowing it. Learn how to manage those digital assets properly by continuing below.

How Do You Protect Digital Assets?

Estate planning for digital assets is worth getting into as soon as possible, but securing your valuable possessions should come first. Of course, keeping digital assets safe is easier said than done. After all, these are not items you can store in a safe inside your home.

So, how should you keep your virtual assets safe? We can offer tips that should prove helpful.

Be Mindful of Your Password Selection and Management

Most digital assets can only be accessed after entering the correct password. That is why nefarious online entities always try to get people to surrender their passwords through trickery. They may use malware to snag your password and access your account.

Even if you do not fall for their tricks, some bad actors may still use brute force to steal your digital assets. They may take numerous guesses at your password until they develop the right combination. Certain programs and items make it easy for them to cycle through numerous password possibilities.

Protect yourself better by putting more thought into your passwords.

According to this article from World Economic Forum, a twelve-character password with one uppercase letter, one number, and one symbol is nearly impregnable. Even a computer needs 34,000 years to guess that password. Aim to create that type of password for your accounts.

You should also frequently change your password. Consider changing passwords every few months to prevent hacks. Switching up your password after logging into a public network or removing another user is also highly recommended.

Using a password manager puts another layer of security between your digital assets and online thieves. Investing in that service is well worth considering.

Restrict Access to Your Digital Assets

Even the strongest password possible will only stay safe if it is kept private. As much as possible, you should avoid sharing your passwords with others. You may eventually need to share your passwords with the executor of your estate but hold off on doing that until it is necessary.

Seek to maintain sole control of your digital assets so you can keep track of their security. There is no guarantee they will stay safe if you make them accessible to more people because others may not value security the way you do.

Keep Your Devices and Software Updated

Digital criminals are always on the prowl. They are constantly seeking vulnerabilities to exploit to steal digital assets from their rightful owners. Often,  vulnerabilities emerge when people become lazy about updating their devices and software. Those updates developers roll out are critical for shoring up security.

Always download and install an update for your device as soon as it becomes available. If you need to use your device online all day, schedule the update for installation while you are sleeping.

You should also check whichever app marketplace your phone uses to see if there are available updates. Go ahead and download those updates so your apps remain safe to use.

Set Up Two-Factor Authentication for Your Digital Accounts

Earlier in this section, we talked about passwords and how critical they are to maintaining the safety of your digital assets. While setting up a strong password can effectively protect your virtual assets, you can still do more to keep them safe.

For example, you can set up two-factor authentication for your accounts with access to your digital assets.

When two-factor authentication is activated, a user has to provide more than a password to access a particular account. In some cases, a user may need to respond to a prompt sent to their smartphone before they can log in. The service in question may also send a one-time password that must be entered manually.

Two-factor authentication is a powerful security tool. Use two-factor authentication whenever it is available to protect your digital assets.

Backup the Data for Your Digital Assets

Lastly, you need to back up the data for your digital assets. Backing up your data protects you from a malware attack, but it does more than that. Since you have backup data ready, you will retain easy access to your digital assets even if your devices malfunction for some reason. You would not go through lengthy discussions with companies to regain access to your accounts.

The most common data backup options are using an external hard drive or paying for cloud storage. See which option makes more sense for you and start backing up your data.

What Does Estate Planning for Digital Assets Involve?

You understand digital assets and have taken the appropriate steps to keep them safe. With all that out of the way, we can now focus on digital asset estate planning.

The process of sorting out your digital assets and accounting for them in an estate may be familiar to you. That will likely be the case if you have previously engaged in conventional estate planning.

Check out the steps detailed below to get a better handle on the process.

Create a Document Detailing Your Digital Assets

Begin the digital asset estate planning process by listing the virtual properties in your possession. List the virtual assets we mentioned earlier if you own them too. If you are unsure if a particular item qualifies as a digital asset, you can ask your lawyer for clarification.

Aside from assets, you should also include their corresponding account names and passwords. Make sure you are writing the correct details, or else a particular account may be lost entirely.

When you are done composing the physical document that contains the details mentioned in this section, you need to keep that in a secure location. Store the document in a safe or a safety deposit box at the bank. You can also ask your lawyer to protect the document.

Determine How You Want the Digital Assets to Be Managed

Digital assets are remarkably varied with regard to how they maintain value.

Your e-commerce accounts are generally stable. The money you store in your accounts will stay there until you spend them. Meanwhile, cryptocurrencies and NFTs have valuations that fluctuate wildly.

Because of how those digital assets behave from a value standpoint, you need to consider their management on a case-by-case basis. Discuss the individual assets with your prospective heirs and lawyer to determine how to manage them moving forward.

Draft Your Digital Estate Plan

Now that you have identified your digital assets and worked out how they will be managed, you can start creating your digital estate plan. Note that this digital estate plan is only concerned with your virtual assets. You should use a different document to manage your conventional properties.

Seek the guidance of an estate planning attorney while writing this document. They will ensure that your digital estate planning document will hold up to legal scrutiny.

Consider Setting Up a DAP Trust

Legislators and courts are still figuring out how digital assets should be handled from a legal perspective. Digital assets are still new to many courts and jurisdictions, so you should expect to run into some issues occasionally.

That said, laws have quickly developed an understanding of how to handle those assets in terms of taxation. According to the IRS, transactions involving virtual assets must be indicated on tax returns. The agency further clarifies that taxable income may be generated from selling digital assets or accepting them as payment for services and products provided. You may even be taxed for trading one digital asset for another.

Taxes can have a sizable impact on conventional assets. Due to taxation, the value of a conventional asset may be significantly diminished. Estate owners use trusts and other legal instruments to shield their conventional assets from taxes.

So, can you do the same for your digital assets? That is indeed a possibility.

Talk to your lawyer and discuss the possibility of setting up a DAP (digital asset protection) trust. DAP trusts are specifically designed to manage digital assets and offer more comprehensive protection than conventional trusts.

You can wait until later to decide if a DAP trust will work best for your estate, but you should at least learn about it now.

Check if a Will Makes Sense for Your Digital Assets

Do you want to see how things will play out with DAP trusts a bit more before establishing one for your assets? If so, you can stick to using a will for now.

Integrate your digital estate plan into your will to ensure that it will be honored by the executor of your estate. Use a codicil to a will to make the necessary amendments. Once again, loop your estate planning attorney into the process so they can check if you are correctly managing the process.

Select Your Trustee/Executor and Heirs

The last step involved in estate planning for digital assets is choosing the right people. More specifically, you need to identify your heirs as well as the trustee or executor of your estate.

Choose heirs who can get the most out of the virtual assets you are leaving behind. If you have a child with a knack for business, you can leave them in charge of your digital storefront. You can also leave your cryptocurrencies and NFTs to heirs who keenly understand how those assets behave.

Selecting a trustee or executor for your digital estate will be more challenging. Legal protections for trustees and executors assigned to manage digital estates are still not as comprehensive as they need to be. Err on the side of caution by leaving that critical responsibility to your lawyer.

Are you seeking legal guidance for digital estate planning? We at Alber Law Group have you covered in that regard. You can also hire us to be the trustee or executor of your digital estate. Contact us today and let us know how we can help with your plans!

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