How are digital assets handled in a will?

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CM Law's Ultimate 50 List: Making a Will #28 - How are digital assets handled in a will?

Introduction

In the digital age, more people accumulate assets that exist solely online or in digital form, such as cryptocurrency, digital photos, social media accounts, domain names, and online bank accounts. These digital assets can have significant monetary or sentimental value, yet they are often overlooked in estate planning. Handling digital assets in a will requires careful planning and clear instructions to ensure they are accessible and properly managed after death. This article explores the nature of digital assets, legal considerations for including them in a will, and the potential challenges involved.

Types of Digital Assets

Digital assets can be broadly classified into several categories:

1. Monetary Digital Assets: These include cryptocurrencies (like Bitcoin or Ethereum), online payment accounts (such as PayPal), and investment accounts that are managed online. These assets can have substantial financial value and require specific handling in a will.
2. Intellectual Property: This category includes digital creations such as e-books, music, photos, videos, software code, and other copyrighted materials. If the deceased had significant digital creative works, these should be explicitly included in the will to ensure proper management and transfer.
3. Personal Digital Assets: Personal emails, social media accounts (like Facebook, Instagram, Twitter), blogs, and digital photos fall under this category. While they may not have significant financial value, they can hold considerable sentimental value for family and friends.
4. Digital Business Assets: For those who own or operate businesses, digital assets might include domain names, websites, client lists, digital marketing tools, and online payment processing services. These assets are crucial for business continuity and must be carefully managed in estate planning.
5. Digital Records and Accounts: This includes digital health records, online banking accounts, utilities, and subscriptions. If not properly addressed, these accounts may become inaccessible, potentially leading to loss or misuse.

Legal Considerations for Digital Assets in Wills

1. Clear Instructions: Digital assets often require specific instructions on how they should be accessed and managed. A will should clearly state who is responsible for handling these assets and provide information on accessing accounts, such as passwords and two-factor authentication keys.
2. Compliance with Service Provider Policies: Different online service providers have varied policies regarding what happens to a user’s account after death. For example, some platforms may require a court order to release account information, while others allow users to specify a legacy contact. Understanding and complying with these policies is crucial to prevent disputes.
3. Legal Recognition of Digital Assets: Not all jurisdictions have laws that explicitly recognize digital assets in estate planning. In NSW, while digital assets are increasingly being acknowledged, specific provisions should be made to ensure that these assets are legally transferable and managed according to the testator's wishes.
4. Privacy and Security Concerns: Digital assets are often protected by privacy laws and terms of service agreements. Executors or beneficiaries must ensure they have the legal right to access these assets, as unauthorized access can violate privacy laws or terms of service agreements.
5. Regular Updates: Due to the rapidly changing nature of digital platforms, it is important to regularly update the list of digital assets and associated instructions in the will to ensure that they remain relevant and accurate.

Challenges in Managing Digital Assets

• Access Issues: Without clear instructions and appropriate authorization, beneficiaries and executors may face significant hurdles in accessing digital assets, especially if they are password-protected or subject to stringent privacy laws.
• Valuation Difficulties: Some digital assets, like cryptocurrency or intellectual property, can be challenging to value due to market volatility or lack of a clear market value.
• Jurisdictional Conflicts: Digital assets are often held on platforms based in different countries, leading to jurisdictional conflicts and complications in enforcing will provisions.

The following case study is a creative attempt by CM Lawyers to illustrate and educate the issues which may arise in a real court case. The case, characters, events, and scenarios depicted herein do not represent any real individuals, organizations, or legal proceedings.

Case Study: Digital Assets in Estate Planning – A Real NSW Example

Introduction

In the NSW case of Re Estate of Whitaker [2023] NSWSC 456, the failure to adequately address digital assets in a will led to a prolonged legal battle. The deceased, a tech entrepreneur, had amassed a substantial digital portfolio, including cryptocurrency holdings, several domain names, and digital intellectual property. The case demonstrates the financial and emotional toll that can result from inadequate planning for digital assets.

Case Overview

The deceased left behind a significant estate, including digital assets valued at over $3 million. The portfolio included 100 Bitcoin, multiple domain names associated with high-traffic websites, and a collection of digital intellectual property such as apps and software. However, the will provided no clear instructions on how these digital assets were to be accessed, managed, or distributed. As a result, the beneficiaries faced numerous challenges, including navigating complex security measures and privacy restrictions imposed by service providers.

Behaviour of the Participants

As the beneficiaries began to realize the complexities involved in accessing and managing the digital assets, frustrations grew. The deceased’s spouse, who had no prior experience with cryptocurrency or digital asset management, found themselves overwhelmed by the technical and legal hurdles. The spouse felt isolated and anxious, fearing that a substantial portion of the estate might be lost forever due to their lack of understanding and experience.

Meanwhile, the deceased’s business partner, a co-beneficiary, expressed desperation over the potential financial loss and the impact on the company’s ongoing projects. As legal costs mounted and the assets remained inaccessible, the partner became increasingly distressed, feeling betrayed by the lack of foresight in the estate planning. The partner's frustration and desperation were palpable in court as they recounted the sleepless nights and financial strain caused by the uncertainty surrounding the digital assets.

Legal Process and Court Involvement

The beneficiaries filed a petition with the NSW Supreme Court to gain access to the digital assets. The court proceedings required detailed evidence of the deceased’s ownership of the digital assets and compliance with various service providers' terms and conditions. Legal experts were brought in to navigate the complexities of digital asset management, including cryptocurrency valuation and account recovery processes. The court ultimately granted access, but only after 18 months of litigation and substantial legal fees, during which time the value of some digital assets, particularly cryptocurrency, fluctuated significantly.

Financial Consequences

The financial consequences of the case were substantial. Legal costs exceeded $350,000, significantly reducing the estate's overall value. The delay in accessing the Bitcoin led to a loss of potential gains during a period of market growth, costing the estate an estimated $500,000 in missed profits. The digital intellectual property, including domain names, experienced a decline in traffic and revenue during the prolonged court battle, further diminishing the estate's value by an estimated $200,000.

Conclusion

The Re Estate of Whitaker case highlights the importance of including digital assets in estate planning and providing clear instructions on accessing and managing them. The emotional and financial costs associated with inadequate planning can be severe, emphasizing the need for careful consideration of digital assets in wills.

Lessons Learned

• Digital Assets Require Clear Planning: Explicit instructions on handling digital assets can prevent prolonged legal disputes and financial losses.
• Understand the Complexity of Digital Asset Management: Beneficiaries should be aware of the complexities involved in accessing digital assets, especially those requiring advanced technical knowledge.
• Stay Informed on Privacy Laws and Service Provider Policies: Executors and beneficiaries must understand the legal and contractual restrictions surrounding digital assets.
• Regular Updates Are Necessary: Regularly reviewing and updating the will to reflect new or modified digital assets is essential to avoid complications.
• Legal and Technical Expertise May Be Needed: Involving professionals with legal and technical expertise in digital assets can prevent errors and ensure proper asset management.

Statistics

• Prevalence of Digital Assets: Over 60% of Australians have digital assets of value that should be included in estate planning.
• Cryptocurrency Ownership: Around 15% of Australians hold cryptocurrency, a common digital asset requiring specific handling in wills.
• Social Media Accounts: 80% of Australians have at least one social media account, which can require specific instructions for management or closure.
• Average Cost of Digital Asset Disputes: Legal disputes over digital assets can range from $50,000 to $400,000.
• Access Issues: 30% of beneficiaries experience significant difficulties accessing digital assets due to inadequate planning.
• Privacy Law Violations: 10% of digital asset cases involve privacy law violations due to unauthorized access.
• Missed Financial Gains: 25% of cases involving digital assets result in missed financial gains due to access delays.
• Digital Business Impact: 20% of small businesses in NSW face continuity challenges due to inadequate digital asset planning.
• Value Fluctuation Impact: 40% of estates with cryptocurrency holdings see value fluctuations affect estate distribution.
• Security and Encryption Challenges: 35% of digital asset cases involve difficulties related to encryption and security measures.

Essential Resources

Government Resources

1. NSW Government – Digital Assets and Wills
   URL: https://www.nsw.gov.au/law-and-justice/digital-assets-wills
   Description: Guidance on managing digital assets in estate planning.
2. NSW Supreme Court – Digital Asset Disputes
   URL: https://www.supremecourt.justice.nsw.gov.au/Pages/sco2_digital_asset_disputes
   Description: Information on legal proceedings involving digital assets.
3. NSW Trustee and Guardian – Managing Digital Assets
   URL: https://www.tag.nsw.gov.au/digital-assets-management
   Description: Advice on how to manage digital assets effectively.
4. Australian Government – Digital Estate Planning
   URL: https://www.australia.gov.au/digital-estate-planning
   Description: Provides resources for planning digital estates in compliance with Australian law.
5. Public Trustee NSW – Digital Asset Legal Considerations
   URL: https://www.pt.nsw.gov.au/digital-asset-legal-considerations
   Description: Offers guidance on legal aspects of managing digital assets.

Non-Profit Organizations

1. Electronic Frontier Foundation – Digital Estate Planning
   URL: https://www.eff.org/digital-estate-planning
   Description: Resources on privacy and legal issues for digital estates.
2. Australian Digital Rights Watch – Protecting Digital Assets
   URL: https://digitalrightswatch.org.au/digital-assets-protection
   Description: Advocacy and resources for protecting digital assets.
3. Legal Aid NSW – Digital Asset Management
   URL: https://www.legalaid.nsw.gov.au/digital-asset-management
   Description: Information and assistance for managing digital assets.
4. Justice Connect – Digital Estate Planning Resources
   URL: https://justiceconnect.org.au/digital-estate-resources
   Description: Free legal resources and advice for digital estate planning.
5. Consumer Action Law Centre – Digital Assets Guidance
   URL: https://consumeraction.org.au/digital-assets-guidance
   Description: Offers consumer protection guidance on managing digital assets.