Digital assets turn estate planning on its head

When you imagine the settling of an estate, you might picture heirs receiving an uncle’s coin collection, grandpa’s boat or perhaps a distant relative’s cold, hard cash. But more and more, Canadians also own digital assets, which are changing the estate planning and administration paradigm and leading to a rethink of conventional estate-planning practices.

“Digital assets are part of an economic revolution,” says Adam Fisch, CFA and associate advisor at Stewart & Kett Financial Advisors in Toronto. “And like any revolution, the old ways of doing things aren’t necessarily going to survive.”

Unlike physical assets, digital assets are “decentralized,” says Fisch. This means there is no central authority or entity controlling or valuing the asset, and transactions are made through decentralized, peer-to-peer exchanges. Examples of digital assets include cryptocurrencies such as Bitcoin, decentralized protocols and platforms like Ethereum, and non-fungible tokens (NFTs), which are units of data such as photos, video or audio that are stored on a digital ledger, called a blockchain.

The lack of centralized authority can pose immense challenges in estate administration, because “there’s no customer service for Bitcoin,” Fisch notes.

In an estate-planning context, he says, digital assets pose two main challenges. First, an executor or heir may not know that the asset exists, and second, even if the asset’s existence is known, an executor or heir may have no idea how to access it. For example, it’s estimated that as much as 40 percent of the world’s Bitcoin has been lost forever, due to owners losing the private keys (or secret numbers) that allow Bitcoins to be accessed and spent.

If you own digital assets, keep in mind that the people you might want to leave them to – usually family members – may not know how to access, trade or sell them, says Fisch.

“There’s a huge learning curve in bringing a family member up to speed with digital properties like NFTs, so careful and detailed advanced planning is really a must,” he says.

Advent of a ‘social media will’

In addition to digital assets that have monetary value, many Canadians are building up a “digital footprint” with sentimental, not financial, value. This includes social media profiles on Facebook, LinkedIn, Twitter, Instagram and Google, where users might store videos, photos and documents in addition to maintaining their site profiles. Although it’s possible to have a social media profile with significant financial value – think the Kardashians – this is the exception, not the norm.

Some companies, such as Facebook, have evolved protocols that allow a user to specify what they would like to happen with their account or profile in the event of their death. Others, such as Twitter, don’t provide options. Facebook permits users to pre-select a legacy contact and decide whether they would like their account deleted or “memorialized,” while Twitter may simply delete an account that has no log-ins for six months or more.

In order to help Canadians manage their digital legacies, Epilogue, a provider of online wills, offers what it calls a “social media will,” a free tool that helps Canadians “plan how their posts, profiles and stories will live on.” Estate planning lawyer and Epilogue co-founder Arin Klug says that although our social media use continues to increase from year to year, most of us haven’t taken advantage of legacy planning features where they are available.

“Most people don’t know they can make a plan for how their social media profiles will be handled after their death,” says Klug, “never mind recording their wishes about their social media profiles for an executor to carry out as part of their estate administration.”

To help address this need, Epilogue’s social media will allows users to indicate whether they would like their profiles to live on after their death, or whether they’d like their profiles deleted.

It also allows users to leave instructions for an executor about how they want their social media accounts to be treated. For example, if planning tools allow a “legacy contact” (for Facebook) or “trusted contact” (for Google) to post something, change a profile picture or download data, a social media will can include specific instructions for an executor, such as “update my profile picture to one that includes me and my grandchildren,” or “download my memoir from Google Drive and publish it for future generations.”

“We designed the social media will to be accessible to users of any age and any level of digital sophistication,” Klug says. “If you have a Facebook account, you can set up a social media will.”

An expanded role for financial advisors

Financial planners increasingly need to support Canadians in addressing their digital assets as part of estate planning, says Sam Febbraro, executive vice president at Investment Planning Counsel in Toronto.

“Estate planning with digital assets – whether that’s assets with monetary value or those with purely sentimental value – is an evolving, complex area,” Febbraro says. He cites three main lessons that financial advisors and planners can use to help clients learn.

The first is that estate planning should not focus solely on digital assets with monetary value. For most Canadians, digital assets will have little financial value but may still have enormous meaning and significance in an estate-planning context.

Secondly, Febbraro notes, whether a digital asset has financial or sentimental value, access to that asset can easily be lost when the original owner or creator dies. As part of an estate plan, executors and heirs need to be provisioned with instructions, guidance and permission in order to access digital accounts and assets.

Finally, Febbraro adds, financial advisors are well-positioned to lead these conversations as they can bring together multiple generations and a family-office-style approach, including executors and other professional advisors such as lawyers and accountants, as necessary.

“We don’t have to wait for Thanksgiving any more to gather family members for multi-generational conversations,” says Febbraro, as planning via Zoom has become the norm with the advent of the COVID-19 pandemic. “These kinds of conversations allow advisors to understand their clients’ personal life stories, which is critical in building a meaningful estate plan.”

How estate planning needs to change

In the conventional estate-planning paradigm, assets with corresponding paper documentation (deeds, certificates, account statements) are built up over a lifetime, then distributed as part of an estate. The advent of digital assets, however, means that wealth can be amassed in new, decentralized forms.

Also, digital assets are most likely to be held by younger Canadians who don’t necessarily own traditional forms of wealth such as investment accounts or real estate.

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