Vol. 83, No. 12, December 2010
by Nathan J. Dosch & Joseph W. Boucher
Digital assets: Why lawyers (and their clients) should care
Think your kids will automatically be able to access your digital accounts after your death or disability? Think again. Attorneys Joe Boucher and Nate Dosch explain what types of digital assets (including family photos) your estate plan should include and how to account for them.
In our modern society, people are increasingly conducting day-to-day activities via the Internet. The good news for individuals who rely on the Internet for everything from correspondence to commerce is that the Internet is not likely to go away anytime soon. According to International Telecommunication Union data and World Bank estimates, the percentage of U.S. residents who use the Internet increased from 30.7 percent in 1998 to 75.9 percent in 2008.1 In addition, a growing percentage of American adults are using social-networking sites such as Facebook, MySpace, and LinkedIn. According to a Pew Internet survey conducted in 2009, 46 percent of American adults 18 and older use a social-networking site.2 That percentage is up from 8 percent in 2005.3
Given the younger generation’s immense exposure to technology throughout their lives, it is no surprise that issues related to digital assets resonate with younger people. However, the concern over digital assets is not limited to college students and young families. The real-world example of the authors of this article illustrates the almost universal reach of digital assets. Boucher, 59, initially viewed digital assets as an issue primarily for younger individuals, because he himself was not using social-networking sites or other Internet services. When Dosch, 31, defined digital assets broadly to include online photo albums, Boucher quickly realized that the issues also directly affected him and his family. Like those of many families today, Boucher’s hard-copy family photo album had been replaced by an online photo album, and he had no idea how to access those photos if something happened to his wife. The threat of losing such sentimentally valuable family heirlooms drives much of the planning for digital assets.
As Internet use and capabilities continue to grow, a legal void has been exposed: current property, contract, and probate laws do not adequately address the category of property – or quasi-property – known as digital assets or digital property (hereinafter “digital assets”). The situation most commonly cited as an example of this void occurred in 2004 and 2005 when the family of Justin Ellsworth, a deceased U.S. Marine, successfully secured a court order from the Oakland County (Michigan) Probate Court to force Yahoo to give the contents of Justin’s email account to his family. Despite the ruling Yahoo stated that it would not reverse its policy that the family of a deceased user would have to petition the court to verify the family member’s identity and the family’s relationship to the deceased user.4 The Ellsworth case gained national attention, but its precedential value is minimal because it was a probate court order that was not appealed or published.
Because there is no other case law addressing this issue, answering the question “What are digital assets?” from a legal perspective is difficult. There are established methods for transferring assets that fall in the traditional property classification system, such as items of tangible personal property, real estate, and intangible assets such as stocks and bonds. Digital assets do not fit comfortably in the traditional property classification system, making it difficult to design a plan that properly disposes of them.
In addition to defining digital assets, this article explores the unique issues related to estate planning for digital assets, discusses why digital assets are important, and explains the planning options available to effectively handle digital assets through estate planning.
Defining Digital Assets
Planning for digital assets might be tempting to ignore because they fall outside the traditionally defined forms of property. However, consideration of the broad category of digital assets makes apparent that the issue is important to attorneys and clients alike. Digital assets can be broadly defined to include:
1) Any online account; and
2) Any file stored on a person’s computer or on a server.
Online accounts. Online accounts include things like social-networking sites, email accounts, photo-sharing sites, and blogs. This class of digital assets also includes online resources like eBay, yelp, PayPal, and Go Daddy, in short, any online account that contains a user’s sentimentally or economically valuable content. These online accounts are protected by usernames and passwords. Fiduciaries and heirs will need that information to access the accounts so as to carry out a decedent’s last wishes.
Files on a computer or server. The second class of digital assets comprises files that are stored on a computer or on a server through an online backup service like Mozy. Digital files can contain business documents, family photos, personal journals, family recipes, and a whole host of other types of information that clients want their heirs to eventually have. Files stored on a computer can be hard to find after the owner dies, unless the heirs know where to look for them.
In the past it was typical for individuals and families to maintain photo albums and shoeboxes full of letters. Today, many of those tangible collections have been replaced by digital photo albums and email inboxes full of digital letters. The sentimental value of those heirlooms has not diminished, but an heir’s ability to access them may be limited or restrained.
To fully address estate planning for digital assets, one needs to understand what digital assets are and what rights are transferable. The identification of digital assets highlights the intersection of property and contract law. The transferability issue highlights the intersection of property, contract, and probate law.
Why Digital Assets Are Important
According to statistics interpreted by a digital assets company, Entrustet, more than 375,000 Facebook users who live in the United States will die in 2010. Each of these users’ families will find themselves navigating the murky waters surrounding the administration of digital assets, that is, if the families are able to identify and inventory those digital assets in the first place.
Joseph W. Boucher, U.W. 1978 cum laude, is a CPA and a shareholder in Neider & Boucher S.C., Madison, where he practices in business law, with an emphasis in emerging companies. He chaired the State Bar committee that originally drafted Wisconsin’s LLC law. He also coauthored LLCs and LLPs: A Wisconsin Handbook, published by State Bar of Wisconsin PINNACLE. He maintains the blog LLCsMadeEasy at www.josephwboucher.com. He can be reached at email@example.com.
Nathan J. Dosch, Marquette 2004, M.S. Taxation, is a tax private-wealth-services manager with Grant Thornton LLP, Milwaukee, where he assists individuals and business owners with tax, estate, and succession planning issues. He previously practiced with Neider & Boucher S.C., Madison, in the areas of business, tax law, and estate planning. He frequently writes and speaks on estate planning and digital-asset topics, including on WisconsinEstateandTaxBlog.com and DigitalEstatePlanning.com. Reach him at nate.dosch@GT.com.
The authors have worked with Madison-based Entrustet on various matters including designing the service to address estate-planning issues in a legally binding manner.
The traditional approaches used during probate and trust administration to identify assets, accounts, and the like might not be available to fiduciaries because the information needed to locate and access digital assets is often in the digital world itself. Many individuals today store important records online and do not maintain paper copies. Therefore, a decedent’s mail and hard-copy records might not include items such as bank and brokerage statements, tax returns, checkbook registers, credit card bills, and loan records. Fiduciaries and family members typically start administering an estate by reading the individual’s mail and sorting through records at the person’s home. Because many individuals use paperless-statement programs, complete and file tax returns online, and use online personal finance tools such as Mint.com, there may be limited paper records at a decedent’s home. Therefore, there is great potential for fiduciaries and family members to fail to locate and gain access to certain assets.
An example of a hard-to-identify digital asset is a domain name. For instance, assume an individual owns a handful of domain names through domain name registrar GoDaddy.com. GoDaddy.com does not send renewals or account information through the mail. Instead, all communication is sent to an email account. Assume also that the individual pays for the domains with a credit card and does not receive paper statements. The individual’s credit card statements are available online, and she is notified via email when a new statement is available. After the individual dies, if the fiduciary or family does not have access to the individual’s email account, they might never identify the various domain names. The failure to identify digital assets could lead to an unintended nonrenewal or the imposition of automatic renewal charges without the fiduciary’s knowledge. An unintended nonrenewal could cause a financial loss for the heirs if the individual’s domain names are associated with profitable or valuable online businesses, websites, or blogs.
Many people place more value on sentimental digital assets, such as online photo albums, than on financial or business-related digital assets. In many cases, digital photos never become hardcopy photos, and the digital family photo album is stored on the servers of Internet service providers (ISPs) such as Snapfish (Hewlett Packard), Kodak Gallery, Shutterfly, and Flikr (Yahoo). The tragedy of losing these family photos to the Internet abyss can easily be avoided by incorporating digital assets into the estate planning process.
It is important to determine whether items referred to as “digital assets” are truly assets in a property law context. In general, property is divided into two broad categories: real property and personal property. Real property is land and all the things that are attached to it. Personal property is anything that is not real property and that is not nailed down, dug into, or built onto the land. Personal property is further divided into tangible property (cars, furniture, jewelry, art, clothing, appliances, and so on) and intangible property (stocks, bonds, patents, trademarks, copyrights). The distinction is that you can touch, move, or feel tangible property.
Digital assets do not neatly fit into any of the categories noted above. Digital assets fit best in the intangible property category so long as they remain in digital form on a computer or on the Internet. However, a digital photo or email that is printed is tangible property because it can be touched, moved, or felt.
The distinction between tangible and intangible personal property is important because the distinction ultimately drives the probate process. In Wisconsin a person who writes a will (the testator) can append to his or her will a signed and dated list of specific items of tangible personal property to leave to specific heirs.5 There is no such provision for intangible assets. Therefore, a testator can either specifically dispose of intangible assets in a will, in a trust, and through contractual designations, such as transfer on death, payable on death, or beneficiary designations, or the testator can dispose of those assets through the residuary clause of his or her will. This requirement limits a person’s ability to change the distribution plan for some types of digital assets without first consulting with an attorney.
Copyright concerns. Certain digital assets fit more comfortably into a traditional property classification. The basic principles of copyright law provide that the creator of an original work of authorship that is fixed in a tangible medium of expression owns the copyright in such work.6 In addition, the creator and the copyright owner are generally the same unless an exception such as the works-for-hire doctrine applies or the work has been assigned.7 Therefore, the copyright in original works of authorship created by users of Internet services (such as blogs, websites, social media sites, and digital photo albums) is typically owned by such users. In most situations, the ISP’s terms of service (TOS) expressly provide that users retain ownership of the content they have generated.8 That is a user-friendly result; however, determining ownership is only half the digital-asset battle because access and transferability are still at issue.
Access and Transferability
As discussed above, the first issue of digital assets relates to identification and categorization. The second, and arguably more important, issue relates to accessing and transferring digital assets. The access and transferability issue highlights the intersection of property, contract, and probate law. Digital assets often comprise a property interest (that is, intellectual property and user-generated content) and a contractual license (that is, license to access and use the ISP service in accordance with the TOS).
The issue of access and transferability stems from the legal relationship between the user and the ISP. The user’s acceptance of an ISP’s TOS results in a contractual relationship between the parties. Typically, the ISP grants the user a license to access the service so long as the user adheres to the contract, which usually prohibits the user from allowing anyone else to access his or her account. In addition, the TOS typically prohibit the transfer or assignment of a user account. The result is a catch 22: the user indisputably owns the created content, but his or her estate cannot access the service where the content is stored. This was the situation in the Ellsworth case mentioned above.
Justin Ellsworth’s family was successful in procuring a court order forcing Yahoo to turn over the contents of his email account. However, Yahoo was not required to grant unfettered access to the account itself. Instead, Yahoo only turned over a CD of all incoming email messages in Justin’s email account, which was in compliance with the court order. Other ISPs have incorporated this approach, or some variation thereof, as a method for family members and heirs to gain access to a decedent’s mail or other online assets. A family member or heir is typically required to provide certain documentation, including a death certificate, proof of relationship and, in some cases, testamentary documentation from the court, before the ISP will turn over the decedent’s online assets.
Options for Including Digital Assets in an Estate Plan
Passive, Advisory Options
1) Create an inventory of digital assets, including:
• Hardware (laptops, desktops, external hard drives, USB flash drives, backup CDs, and DVDs);
• Software (Quicken, QuickBooks, important Word and Excel documents, and important documents created with other word-processing or spreadsheet software);
• Websites, blogs, social-media accounts, and other online sites where documents, photos, and other files are stored;
• Online accounts (eBay, Amazon, GoDaddy, and so on).
2) For each inventoried asset, list account information (username and password) including the domain name, username, and password. It also might be useful to include the date the account was created.
3) Designate the individuals who will receive each digital asset and who will be responsible for managing, distributing, or terminating each digital asset.
4) Talk to your family and personal representative about your wishes regarding identifying, accessing, and transferring digital assets.
Proactive, Legally Binding Options
In the body of a will or trust:
1) Include specific bequests of certain or all digital assets;
2) Incorporate by reference an existing list leaving digital assets to specific heirs; or
3) Combine option 1 or option 2 with the appointment of a “digital executor.”
The old adage, “failing to plan, is planning to fail,” certainly holds true in regard to digital assets. In many situations, application of the rules of intestacy result in the decedent’s traditional assets passing to the desired heirs in the manner the decedent would have directed if he or she had written a will. The probate process is well-developed to deal with intestate situations involving traditional assets. Given the advancement of technology and the intersection between contract and property law, the probate process is not as well-developed to deal with digital assets.
The most important tasks are for individuals to identify and inventory all their digital assets. The user/owner of digital assets is the person best suited to complete these essential tasks. Options for doing so are shown in the accompanying sidebar.
Internet Services Providing a Solution
Individuals who desire help with their digital-asset estate planning now have a few companies to turn to. The main players currently are Entrustet, Legacy Locker, and Data Inherit. These three companies allow a user to input account information, appoint someone as a contact person for that account, and designate a beneficiary. The output from each of these companies is not by itself a will or other estate-planning document because the output is not a legally binding directive. However, the process of inputting all digital-asset information helps clients create an inventory that they can work from when updating their estate plan or that they can incorporate directly into a newly executed will or trust.
Proposed Legislative Changes
Wis. Stat. section 853.32(2) provides a mechanism to incorporate by reference into an already signed and executed will, a list directing the distribution of tangible personal property. The statute specifically only references tangible personal property. The authors have proposed and are working with state legislators to either expand section 853.32(2) to include digital assets or to add a similar section to the statutes that would allow individuals to leave a list directing the distribution of intangible digital property.
The issues surrounding digital assets are likely to increase, given the continual stream of developments in technology and the Internet. Not only will the number of people using the Internet increase, but also the number of digital assets will increase for most people. Therefore, it is important to consider digital assets from an estate-planning perspective. An estate plan that specifically addresses the issue of digital assets can go a long way to minimize or eliminate any added strain for heirs and to ensure that a client’s wishes are followed.