On this episode, join Partners Michael Clear and Vanessa Maczko as they discuss estate planning considerations for digital assets, which often require special attention when compared to more traditional assets, like real property and marketable securities. For example, sentimental digital assets (such as social media accounts, email, photos on your computer or cell phone), may require specific language in your estate plan for your fiduciaries to access and protect them after your death. Cryptocurrency and other valuable digital assets (such as NFTs) require even more forethought to transfer to your beneficiaries. With that in mind, Michael and Vanessa offer insightful commentary on creative estate planning techniques for properly incorporating digital assets in an estate plan.

Our article, "Understanding Digital Assets in the Context of Estate Planning" has additional reading on this topic. Read now.

Welcome to Future focused sophisticated Estate Planning with Wiggin and Dana. The show where CPAs, insurance professionals, investment brokers, trust companies, CFPs, and more confirm up on their understanding of estate planning strategies so they can better guide their clients to make wise decisions with their legacy. Future Focus is hosted by Erin Nichols and Michael Clear, partners of the private client services department at Wiggin and Dana. Subscribe to future focused sophisticated estate planning on your favorite podcast platform and share episodes with your clients. And now here are your hosts, Erin and Michael.

I'm Michael Clear, and today I'm joined by my partner Vanessa Maczko, of our Greenwich office. Welcome Vanessa.

Hi. Thanks for having me, Michael.

Absolutely. So we're going to focus today our talk on digital assets, which will encompass both sentimental digital assets and assets that we see that have a lot of value that are out there. So why don't we just jump right in. What do we need to ask our clients about digital assets?

So first thing is, do you have digital assets? And what do we mean by that? Really in my mind, there are two types of digital assets. There are this sentimental kind, which I'll use to refer to our social media accounts, our email, photos, blogs, everything. We are kind of using our iPhones for on a daily basis. And a lot of those types of digital assets have usernames and passwords. So we do need to advise our clients on how to help their heirs access those sentimental digital assets. The second kind, I'll call them valuable digital assets, although their value is speculative and changes from time to time. But what I mean by that is really cryptocurrencies, bitcoins, NFTs, stable coins, the type of investment digital assets. So we need to ask our clients, do you have those who has access to those? And how do you store those digital assets? And there are different kinds of storage options for them. There are hot wallets or cold wallets. And the important thing to know there is that cold wallets will involve an external device. So again, with our clients, we need to know who has access to that, where is it stored? It's the same thing we ask, you know, when it comes to what type of retirement accounts they have and what kind of investments they have, who knows about it and how can we figure it out when the time comes at their passing.

I think clients sometimes they think about digital assets and especially the ones with value. And we hear the stories, almost horror stories that are out there of what's happened. So generally, I guess that could happen from either a cold or a hot wallet.

Yeah, absolutely. So two horror stories come to mind. The first would be Matthew Mellon. So he passed away in 2018 and he was an early investor in Ripple, which was a cryptocurrency and digital payment network. His death was unexpected as often is the case in these horror stories. And his holding in as XRP it was called, which was a crypto managed by Ripple, is reportedly worth 193 million at his death. But nobody had the passwords to access the assets, and we believe those passwords were held in a cold wallet in this situation. So with Mr. Mellon's death, his executors and their council, they really had a highly fluctuating asset. The value was going down every day and they weren't able to access it, so they couldn't liquidate it. And they had an impending large estate tax bill coming up. There's one fact that was on their side, which is that XRP was managed by Ripple, so it had a centralized entity.

04:06

Michael Clear 05:00

Wow. And so we think of that cold wallet idea and effectively a cold wallet. And maybe you're going to hit on this and if so, we can talk about it later, but the cold wallet will hold the key to the crypto, but it is actually, it's housed in something generally it might be housed in A U S B or a hard drive. So you, you can have a disconnect even between tangible property and

That's exactly right. Yeah. So in addition to wanting to know whether they invest in cryptocurrency and digital assets, we need to know how they access those investments. So if they have a cold wallet, where is it stored? If it's stored in a safe, who has the password to that safe? These are the kinds of questions we'll need to, so you need to be familiar with what the wallets are and what the assets to be asking about are, and then understand how your clients are using them.

Yeah, so it's interesting. So you don't necessarily have to be an absolute expert in the cryptocurrency.

Right. And I'm not...

We need to be able to have and ask the right questions exactly relating to it to kind of pull out from the clients whether or not they have the assets, how they own them. Great. So then what do we need to do to advise our clients?

So I think the most important thing our clients need to be doing is maintaining records. So clients should keep records of the prices they paid for each digital asset as well as the price that each digital asset is sold. And this is important because cryptocurrency, for example, like NFTs and like stablecoin, but cryptocurrency is not actually currency. So it is not money, it is property, which means that when it's bought and sold, it's at a gain or a loss. So we need to know what the fair market value of that asset is at the time. For example, if a client uses cryptocurrency to purchase an NFT, the client has a taxable event when the cryptocurrency is exchanged for the NFT. And when the NFT is later sold or gifted, we need to know what the value of it was at the time so we know the basis and then at the value at the time of the disposition in case of a sale.

That brings up a story in my head, which is often actually, I feel how a lot of our crypto questions come, which comes from a client who says, Hey Mike, my kid has a question... And here the kid's question, you know, the kid provided services and was paid in Bitcoin. So you know, he was paid an hourly amount, but ultimately in Bitcoin. So that payment to him was income to him. But we have a valuation question. So what was it valued at the time he received it? And then if he sold it, if he transferred it to, if he bought an NFT or he turned it into cash, what was the value then? And depending on how long he owned it may have had a short term capital gain or loss depending on the movement of it. So that constant movement, because it's not currency, right, it's not a fiat currency, really does add another level for the record keeping, but also for, you know, valuation perspective.

Absolutely. And the other side of record keeping again goes back to what is it that you have and who has access to it. So cryptocurrencies, so when we're talking about the investment type of digital assets, they don't often allow a user to name a contact or individual to access that information after the user has passed, probably because many exchanges don't have that centralized entity or because the value of the investment's so tied to the actual ownership. In fact, Coinbase, which is the largest trading platform, it won't even flag unclaimed assets. So it's up to the family to know what assets there are. It's another reason record keeping is so important for the sentimental digital assets, there are mechanisms to allow access to a designated contact. Google, for example, offers an inactive account manager tool, whereas Apple and Facebook allow users to designate a legacy contact and set related preferences. And I know we have a instruction list on how to do that with your Apple and Facebook accounts.

Yeah, it's one of those things where you just kind of, those terms of service that we constantly agree to, every time we do an update, let's just kind of throw it at us. But almost all of those service providers now provide some mechanism to allow access. I mean, we've had situations where it may be possible or necessary to go to court to get an executor appointed for the digital assets, which can be tricky. But if you can have a person listed in those various important account, especially for those sentimental assets, it becomes very helpful. So let's move on to testamentary planning and what we talk to clients about and what we can do from a planning perspective surrounding digital assets. So how do we incorporate digital assets into someone's basic plan?

Okay, so I think there are a few things to remember here. Obviously the question comes to mind is who do you want to use as your fiduciary? So it's a testamentary plan, which means our client has passed away. And regardless of the asset, I generally tell clients that the trustee or executor that you're naming should be someone you trust, somebody who's responsible, maybe somebody who's thoughtful. But when the asset itself is unique, which I would say a digital asset is you may also want a fiduciary who has the knowledge about investing, managing, and storing that asset. And for a lot of clients, there's not one individual who will check all those boxes. You may have a spouse that you trust wholeheartedly, but who lacks the expertise to manage the digital asset or vice versa. In this situation, the client may want to use a digital fiduciary, which would be someone tasked only with handling the digital asset.

So it's really a bifurcation of the trustee or executor's role and allowing one single fiduciary to be the one who manages, invests in or stores the digital asset. And if you're talking about lifetime planning, so I know we started by talking about testamentary, but if you're talking about lifetime planning, clients may wish to use a directed trust to hold their digital assets. So in Connecticut and also in states like Delaware, a trust can have an investment trustee or an investment trust director. And the investment trust director will exclusively handle responsibilities for investments. So in other words, the investment trustee or director is responsible for investing, managing, or storing the asset. In many cases, if we're talking about lifetime planning, the client, him or herself can be the investment trust director. The other thing to consider when talking about testamentary planning or even lifetime planning is that the governing document, the trust or the will should refer to the state's fiduciary access statutes.

So in Connecticut, that's the Connecticut revised uniform fiduciary access to Digital Assets Act. A fiduciary's ability to access the digital asset should be made clear in the document. So that's why you wanna reference the fiduciary access statute. And then the last thing, and we, we do this generally with all of our documents, this isn't new, but many states will require fiduciary to invest prudently or as a reasonable person would, and they'll do that through an acting prudent investor statute. So most documents will waive the prudent investor rules. And I'll say that when you have a digital asset, it's a pretty safe to say that due to the volatile nature of the digital asset, you're going to want to waive prudent investor rules.

Let's talk a little bit more about kind of that lifetime gifting idea and different ways of owning it. So you, you hit there on the idea of using a directed trust. So the person who owns the digital assets may continue to direct the investments, but you maybe also let's talk a little bit about the idea of using an LLC to facilitate the ownership of some of the crypto

Assets. Yeah, absolutely. So an LLC is a great way to, again, bifurcate the roles of ownership. So a client can transfer the digital asset to the LLC and subject to certain limitations, the client can retain control over the management of the digital asset by serving as manager of the LLC. So administration of the digital asset, it can be pretty seamless cause control and decision making is staying with the client. Client will name us appropriate successor manager, and we had just have to remember that's only half the step. So if you name a successor manager, they must be cable of accessing and managing the digital asset. The LLC agreement itself won't get you there. The other benefit of the LLC is that it can facilitate the transfer of ownership of the digital asset. So here, instead of having to share access with the donee or donees, the client can transfer the membership interest in the LLC to the donee or donees.

By doing this, the client will not have to disclose any passcodes or even have to register the transfer on a blockchain. The other benefit is that transfers of LLC interest can provide discounts on the value of the transferred interest. So if you have an LLC that owns, say, million dollars in cryptocurrency and you have a client that wants to transfer a 10% interest, the transfer would not necessarily be a hundred thousand dollars or 10% of a million because the transfers of a minority interest. It lacks control and marketability, especially in the case of an LLC invested in a highly volatile, difficult to access asset like a, like digital asset discounts can range maybe from 15 to 40%, but if we use a 30% discount for the scenario, the client can transfer 10% interest and only use up 70,000 of the lifetime exemption. Last thing I'll say about LLCs is that they also can provide asset protection since in most states, LLCs protect a member's personal assets from an LLCs liability. In addition, in certain jurisdictions, the LLC can protect the digital asset from a member's personal liabilities. In these situations, a creditor will be the SNE rather than the actual member of the LLC. The creditor would have no vote or control and simply have to sit and wait for a distribution to be made, if ever. So I think LLCs offer a lot of benefits for the lifetime gifting structure.

And as we look at the sunset of our current high exemptions, using a crypto asset to make those lifetime gifts could be a strong possibility for some clients. Others may see it as a very volatile asset that they don't want to put in there, but because it's volatile could actually be a good opportunity for some of our strategies that we use.

Absolutely.

As we talk to people about their estate plan and we help design their estate plan, we talked a minute ago about cold wallets and sometimes that tangible property. How do we make sure that the right people receive the tangible property that actually holds or houses the crypto asset?

Yeah, Michael, I think you touched on a really important issue here. So your typical client upon our recommendation often will give their ary, meaning the balance of their assets in a trust for asset protection, creditor protection, tax savings. They'll give that their balance of their state to a trust for their loved one spouse or children. But they're tangible assets, which we generally think of as their furniture furnishings, their wallet, their car, those we generally give outright. It's hard to hold those types of assets in a trust. But when we get to digital assets like cryptocurrencies, we're talking about verse a cold wallet, which is that tangible storage device. And then the digital asset, which is that, you know, financial holding much like a brokerage account that'll pass as part of the ary. So in that situation, you're giving the cold wallet to your loved one. Maybe it's your spouse, but you're giving the underlying digital asset as part of the ary to the trust for the spouse. That alone can cause an issue in the best set of situations, but that's even worse if you're ary beneficiary is not even the same person or same family member as your tangible property beneficiary. So I think it's really important that documents will define digital assets in such a way to cover not just the digital investment, but also the tangible property associated with it so that they stay together and they flow to the appropriate beneficiary as one, one holding.

Hey, that really helps you understand kind of the complexity that's involved here. We have the digital assets that exists maybe in the ether, maybe inside of, you know, a USB drive that somebody else gets or somebody else throws out

...That can happen…

Hopefully not, but it goes back to your idea of good, strong record keeping and communicating. Well. That was great. Thank you Vanessa. I think it was an excellent overview of the things we as planners and referral sources should talk to clients about in the information gathering side. That encouragement to be proactive, especially on the sentimental side of digital assets. Excellent record keeping if you are buying cryptocurrencies or any NFTs, the fiduciary selection and some hints on gifting. So I, I think we hit a lot of those important topics today. Do you have anything you want to add?

No, I think you've covered it. And yeah, we're here to answer any questions less about the investing in the cryptocurrency, but more about how to transfer it and what we can do with it for lifetime or testamentary plans.

Great, thank you.

Thanks.

Thank you for listening to Future focused sophisticated estate planning, hosted by Erin Nichols and Michael Clear, partners of the private client services department at Wiggin and Dana at Wiggin and Dana. Our aim is preserving the wealth that a family has worked so hard to create and pride ourselves in offering value driven solutions and results. Subscribe to the show on your favorite podcast platform, share episodes with your clients and follow our highly talented, creative and experienced lawyers on LinkedIn for even more Great insight. We'll see you next time on future focused sophisticated estate planning.