This article considers the role of "digital assets" in the evolving wealth management space.

There has been a lot of noise surrounding the topic of “digital assets” in recent months – at the most basic level what they are and more seriously around why and how advisors should incorporate them into the wealth planning process.

A number of firms in the wealth management space have started dedicating resources specifically to client and advisor education on the growing relevance and meaning of digital assets, such as US Trust, which last year extended its Financial Empowerment Program, adding modules focused on the risks to family wealth in an increasingly online world.

Many of the issues related to online reputation, identity theft, privacy and general security are relevant to anyone with even the smallest social media or online presence. But for high profile or wealthy individuals, there is even more risk attached to their digital footprint, particularly concerning where their personal (and financial) information is stored, how they access it and who has access to it.

Managing digital assets, it seems, has become a crucial element of modern wealth management and financial planning, particularly as (arguably, in certain cases) “there is no such thing as ‘quiet wealth’ anymore” (Jonathan Crystal of Frank Crystal & Company in Bloomberg).

“People have more value in digital assets than they may be aware,” Vanessa Schrum, a partner at Appleby (Bermuda), told Family Wealth Report.

What are digital assets?

Digital assets differ from traditional assets in several respects, Schrum explained. “Executors can find, see, collect and take control of traditional assets fairly easily,” she said. “Digital assets on the other hand may be difficult to locate or access, particularly if they are on devices and are password-protected. In addition, executors may be prevented from accessing digital assets due to privacy laws in certain countries.”

Digital assets are typically split into four categories: personal (photos, videos, emails, music, medical records and blogs, etc); social (information stored on social websites such as Facebook, Twitter and LinkedIn); financial (PayPal, tax documents and various online banking-related accounts); and business (such as domain names, blogs, patient/client information, intellectual property and file storage.)

“Like the internet, it is [this definition] limited by one's imagination, as well as web developers who are creating new sites,” Joshua Miller of Atlantic Trust told Family Wealth Report. “I would also include hardware – iPhones, etc., as being so attached to our mobile devices makes our digital and real-world lives tremendously interconnected.”

The risk of information attacks on personal or financial data is not just a cause for concern today; digital assets are increasingly coming up in conversations around legacy planning, and some social media sites such as Facebook are making inroads on this issue. Facebook's “living will” program allows users to appoint a “legacy contact” or otherwise decide what will happen to their accounts upon their death, for example.

Taking action

Miller strongly believes that considering how to dispose of digital assets and accounts, as well as the potential efficacy of trust ownership and powers of attorney, should be part of any estate planning discussion.

“Right now, the challenge in the US is that there aren't many laws that give a fiduciary access to digital accounts,” he said. “If you read the terms of most service agreements, they will say the account in question is not transferable.”

Likewise, Schrum noted that, since 2000, many US states have introduced express legislation to allow executors – on production of a death certificate – full access to digital assets on death, despite privacy and non-transferability provisions that appear on certain sites. “Digital assets are frequently overlooked assets and the law is still developing in this area,” she said.

The Uniform Fiduciary Access to Digital Assets Act, at least, provides a framework, but it is up to individual states to enact laws, Miller added, highlighting that Delaware is the only state to have done this to date.

What might a “standard,” comprehensive plan for digital assets look like?

Estate planning for digital assets is just as important as planning for other assets and similar considerations will apply, both Schrum and Miller emphasized.

A standard plan, Schrum said, might include: an inventory (so understanding what one has, where it exists and how to access it); access and control (ensuring that someone else has access and control of these assets following death or incapacity); and instructions after death.

“Digital assets could be placed in a trust to be managed by competent trustees during one's lifetime, or passed to beneficiaries under a will following death,” Schrum continued. “However, as a will becomes a public document once probated, it is generally advisable not to list sensitive assets or passwords (which often become outdated quite quickly in any event), or other private information in a will.”

Many people now consider a separate will (perhaps a “social media will”) to cover certain digital assets, Schrum said. “However, often times, a properly drafted will (usually containing an express clause concerning digital assets or enabling certain provisions...) will be sufficient.” She added that there may also be tax considerations that drive the need for separate wills, and that confidentiality concerns may also dictate the need for one.

“In most jurisdictions, once a will is probate it becomes a public document,” she said. “If the social media will contains sensitive information such as passwords, account numbers and the like then it may be advisable to seek to probate the other will instead. Multiple wills can work, provided they are drafted carefully and with the other will in mind so as not to accidentally revoke each other.”

Schrum, like Miller, also advises that individuals consider placing digital assets (particularly those that are transferable) in a trust for asset protection and “prudent estate planning reasons.”

“The value of assets placed in a trust if properly structured and administered by competent trustees can be safeguarded and protected for generations to come,” she said. “Some digital assets take the form of licenses that expire on death. If these digital assets are owned by a trust they may survive the death of the settlor.”

Moreover, a trust does not become a public document as does a will once it is probated, and can be kept private and confidential, she continued. “It can therefore be more suitable than a will in many ways for retaining account information. The trustees can be provided with detailed instructions regarding management and disposition of the digital property by way of a confidential settlor’s letter or memorandum of wishes.”

Education has been conveyed as perhaps the most efficient way to protect one's online and financial identity and information, but - as reinforced here by Schrum and Miller - there are also significant legal and financial planning aspects that wealth managers and clients need to be aware of.

“Ultimately, you want to make sure your estate plan is as flexible as possible, which should include digital assets, not just intangibles,” Miller said. “It's not just financial issue, it's reputational, emotional and financial.”

“Our biggest role in the private wealth management space is to protect our clients, protect their assets and protect them financially. Identity theft is an example, where, if we are proactive and talk to our clients about preventing some of these issues, we can save them money, hassle, time and any potential ‘clean up’ they might have to go through. We are a fiduciary company and it is our mission to serve and protect,” said Anthony Fittizzi, who was heavily involved in the creation and implementation of US Trust’s modules on digital topics, at the time.