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In today’s modern world, technology is ever-evolving. With the initial introduction of laws surrounding assets and property, the government did not account for the inclusion of things such as digital assets. This concept was still far off.
As digital assets have become more prevalent in estate planning, clients often assure me they have no digital assets. This includes the likes of Non-Fungible Tokens (NFTs), bitcoin or other cryptocurrencies.
However, digital assets and a person’s digital estate encompass more than that. In this article, I’ll be diving into various forms of digital assets, how to categorise them, and how to distribute them fairly.
What are digital assets?
The term “digital assets” encompasses a broad range of assets. It includes the likes of:
- Files on physical computing devices, such as your phone, laptop or tablet
- Cryptocurrencies
- Photos saved on computing devices
However, the law makes a distinction between:
- A person’s physical devices
- Files physically saved or saved to the internet/cloud
According to the Law Commission, files saved physically on a person’s device or on the Cloud do not form part of a person’s property. This is because, by definition, they are not “property.”
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What is property?
Currently the definition of “property” splits into 2 categories:
- Things in possession
- Things in action
Things in possession relate to tangible items, such as jewellery, furniture or any physical item that someone can possess.
Conversely, things in action refer to an enforceable legal right. For example, this can include a share in a company or a debt owed under a contract. Neither a debt nor a share is tangible. However, because of a contract, you can enforce your legal right to an asset’s value.
Most digital assets, such as NFTs, do not embody either of these qualifications. This is because there is no legal contract with a business which gives a person a legal right to the asset, nor is it tangible. As such, the Law Commission recently proposed to add a third category of “property”.
What was the Law Commission’s proposal?
The Law Commission’s proposal from July 2022 suggested a third “property” category to include digital assets. ‘Data objects’ is to be the name for this category.
For a digital asset to fall under the “data object” category, it must meet three criteria:
- It must be electronic;
- It must be rivalrous, meaning only a single person can use it at a time; and
- It must be independent of a person or legal system. This means it’s not dependent on a legal contract or a person’s control.
Files saved on physical devices or on the internet (e.g. social media) would fall outside this scope.
Whilst files on physical devices are electronic and are not dependent on a legal system, they are not rivalrous. This is because more than one user can access them simultaneously.
Uploads to the internet, whilst under view 24/7, do not meet the criteria of being independent of a legal system.
When registering an account with a social media platform, a person agrees to the terms and conditions. As such, they enter into a contract with that company.
Through the scope of the proposal from the Law Commission, neither emails nor digital files fall under “data objects.” This means they would not receive property rights.
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How do you manage a digital estate if not all digital assets are “property”?
Providing for the succession of any asset is always recommended in a Will. This protocol does not differ in relation to digital assets.
Despite this, a person’s Will should include a specific provision to ensure digital assets’ succession. It should give power to the executor, or a separate “digital executor”, to deal with a person’s digital asset. This kind of provision ensures there is certainty about who has power over digital assets, meaning who can delete or distribute the online files and accounts.
The provisions needed in the Will are more a matter of who is able to access the assets. In England and Wales, this area of “property” and a person’s digital estate is not yet legislated.
This clause creates clarity and certainty for companies as to who to nominate to deal with your accounts. While this provides for a written nomination in your Will, there are other tools which allow an executor to access an account.
Most social media companies allow a person to register their executor to handle their accounts after their death. You can find out more on the National Bereavement Service website.
Should I keep a digital asset inventory?
It’s important for people to keep a digital asset inventory. A digital asset inventory aids an executor in locating specific accounts. This provides them with relevant passwords and security keys they will require to access accounts and assets.
It’s best to keep this in a safe place that executors will be able to locate, or perhaps stored alongside your Will. A digital asset inventory should include:
- A list of all computing devices (phones, laptops, USBs, etc.)
- All accounts (email and social media) along with their passwords
- Identification of any NFTs or cryptocurrency assets and any other important files.
Alongside your digital assets inventory, it might also be useful to include a memorandum of wishes. This is especially so if there are any specific wishes which coincide with any accounts or files. This may include:
- What should happen with your digital files
- If there are any items that are for deletion or distribution
- What is to happen with the social media accounts and contents
Just as with any other asset in a person’s estate, tax may apply to digital assets when leaving them as a gift. It’s a common misconception that digital assets on social media platforms that are not registered with a business don’t need to pay taxes.
As with any other asset, a Will collates all assets and determines if there is any inheritance tax to pay. This includes:
- NFTs and cryptocurrencies
- Income or profits from social media accounts or content creation
- This is added to the estate’s total worth, and tax liability will change accordingly.
Ensure you thoroughly check your estate when collating your Will to stay compliant with tax regulations.
Why go through this process?
These formalities ensure that executors have all the necessary information and ability to deal with the estate. It also ensures a smooth distribution and administration of a person’s estate.
If you would like to know more about the succession of digital assets and estate planning or would like to update your Will, contact us today. Give us a call on 0203 007 5500 or send a direct email to [email protected].
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