What are Electronic assets?
Electronic assets are any digital material that comes with a right to use that material. They are also called digital assets. There are two general types: the first are those that have sentimental or social value like social media accounts and the second are those that have financial value like cryptocurrency and NFTs.
We are all familiar with social media accounts, or at least most of them. NFTs are non-fungible tokens, these are digitally created images (bored ape is an example) that you have the exclusive contractual right to use or own.
Cryptocurrency is electronic currency, with Bitcoin, Dogecoin, and Ethereum being the most well-known. Those are held in an electronic wallet. Cryptocurrency and blockchain technology are becoming more and more mainstream.
Earlier this month Joe Biden signed an executive order instructing various government agencies and departments to answer specific questions regarding cryptocurrencies and blockchain. Part of this order seems to be leaning towards putting a federal agency in charge of crypto regulation, which is the opposite of what crypto is supposed to do but it will make it easier for executors to deal with those assets.
How are electronic assets dealt with in Estate Planning?
Generally, the electronic assets are dealt with the same as any other asset, it is part of the administration or probate process and valued and given to beneficiaries as a regular asset. The value is the fair market value at the time of death.
As it stands now, CRA takes the view that crypto is a commodity, not a currency so the estate must pay tax on that. This has not yet been challenged in the courts, but it will be soon, I imagine. This is because governments and lawmakers are often lagging behind technology.
For example, the government of BC has a what-to-do checklist for executors, which has no mention of digital assets. Keep in mind, digital assets are unregulated for the most part so that poses problems for estate administration and we are now just discovering ways to deal with it.
Dealing with death and an estate plan is a difficult task. Clearly laying out your digital assets and how you want them to be dealt with has now become very important because there is no roadmap.
What can a Will-maker do to ensure the beneficiaries receive the electronic assets?
First, you want to make sure you have an itemized list, kept somewhere safe, of all your electronic or digital accounts and passwords to all your cryptocurrency and NFT wallets as well as your social media accounts. The will-maker will need to have this list somewhere where the executor or their lawyer can access them. Otherwise, there is no guarantee it won’t all be lost.
You wouldn’t want to end up like James Howells, a UK man who accidentally put a hard drive that had his private key that is needed to access his account of 7,500 Bitcoins in the trash. The current valuation of Mr. Howells’ bitcoin that he cannot access is about 375 million Canadian dollars.
He has offered a reward for anyone, including his town council, who will help him mine the local garbage dump and locate the private key, which is a computer hard drive the size of a brick.
Some bitcoin wallet platforms such as Ledn allow you to name a beneficiary to your account. Keep in mind, we have seen recent cases that demonstrate that simply telling a financial institution who you wish to be the beneficiary does not necessarily mean that person is entitled to the asset.
Simard v Simard Estate (a 2021 BCSC case) was a case where a woman named a daughter as a sole beneficiary of a TFSA but did not mention that in her Will, which had the whole estate being split evenly between the siblings. The court found that the daughter was holding the TFSA in residual trust for the whole estate, so it wasn’t hers alone.
This could also happen to any assets that have named beneficiaries if it isn’t clearly set out in the will, so this could also apply to digital assets. That is why it is important to include digital assets when drafting your estate plan and will.
Most crypto exchanges like Coinbase or Newton do not have a service where you name a beneficiary. Therefore, they would likely require a copy of the will and other estate docs before transferring the assets as well as the private password.
The solution to this is to have a carefully constructed estate plan where your will lays out clearly what you would like to happen upon your death. BUT, you would not put the passwords in the will, as this becomes a publicly filed document during the Probate process, and then anyone could access your crypto accounts. You would list the existence of the digital asset, but not the password itself.
How has this changed the way lawyers deal with estate planning?
Now, lawyers need all the information regarding cryptocurrency, NFTs, social media accounts, and any other digital or electronic assets that we haven’t heard of yet. It can change our advice regarding who should be the executor, as access to these assets is complicated and requires some degree of knowledge not everyone has. They make estates more complex and with the changing laws and regulations, wills have to be reviewed more often to be sure it still does what the will-maker needs it to do.
Of course, it’s the client’s decision, but if you have extensive digital assets and you already have a will but know that your current executor doesn’t understand the assets or how to deal with them, then the will-maker may want to rewrite their will to name a more suitable executor or add co-executors.
A person may also want to revamp their POA because digital assets are very volatile, and may require a quick action while you are still alive but just incapacitated for a time, such as surgery or illness. In that case, a person may want to enumerate specific powers in their POA should they be incapacitated and their crypto bet hits big. The market can go crazy with these things, someone may need to be on top of that. It is also a much more complex process to get control over a crypto wallet than it is to access a traditional bank account through a POA.
One other thing we haven’t yet really figured out is the liability for executors or attorneys under a POA with digital assets. For instance, if the executor does not know about a particular account or doesn’t know how to deal with it there could be liability or tax implications if they have already dealt with the distribution of estate or if they miss a step and an asset can’t be accessed or distributed.
This area of law is really just beginning to emerge, it’s just the tip of the iceberg.
If you have questions and would like a consultation, or for more information, please contact Priddle Law Group at (250) 434-8911 or email reception@priddlelaw.ca to make an appointment.
