Planning for Digital Assets and Cryptocurrency

THE MID-ATLANTIC FELLOWS INSTITUTEof the American College of Trust and Estate Counsel

KAREN A. FAHRNER, ESQ.Heckscher, Teillon, Terrill & Sager, P.C.

Planning for Digital Assets and Cryptocurrency

2020

Note: This presentation is for illustration purposes only and is not intended to replace independent research needed for particular circumstances. ©Karen A. Fahrner 2020. All Rights Reserved. 01729105.pptx

PLANNING FOR DIGITAL ASSETS AND CRYPTOCURRENCY

TRADITIONAL ESTATE PLANNING

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BASIC REQUIREMENTS

• WHAT ASSETS• GO WHERE• AND HOW• SUBJECT TO WHAT

TAXES


TRADITIONAL ESTATE PLANNING, PLUS

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NEW REQUIREMENTS

• WHAT DIGITAL ASSETS• GO WHERE• AND HOW• SUBJECT TO WHAT

TAXES


TODAY’S LIMITED FOCUS

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TODAY’S LIMITED FOCUS

• RUFADAA - OVERVIEW• DIGITAL ASSETS

• NON-MONETIZED• MONETIZED

• DRAFTING• TAXES


CLIENT’S DIGITAL ASSETS

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CLIENT’S DIGITAL ASSETS

Email Accounts - Gmail, Yahoo!Social Media - Facebook, Twitter, LinkedIn

Photos - Instagram, Google Photos, ShutterflyCloud Storage – Dropbox, One Drive, Google Drive

Cryptocurrencies – Bitcoin, Ethereum, etc.,Rewards Programs – Delta Skymiles, Marriott Rewards

Data on Devices - Content on Hard drive, app dataInternet Domains

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RUFADAA• Fiduciary Access to Digital Assets Act, Revised (2015) also

known as “RUFADAA”• Provides structure for access to electronic records by a

fiduciary (executor, trustee, guardian, agent under power of attorney)

ENDORSED BY: Association of American Retired Persons Center for Democracy and Technology Facebook Google National Academy of Elder Law Attorneys

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RUFADAADigital Asset: an electronic record in which an individual has a right or interest (excludes the underlying asset or liability unless that itself is an electronic record) - e.g., includes the emails you send

Custodian: person that carries, maintains, processes, receives or stores a digital asset of a user (e.g., Google)

User: person who has an Account with a Custodian (e.g., you)

Account: an arrangement under a Terms-of-Service Agreement in which a Custodian carries, processes, receives or stores a Digital Asset of the User (e.g., your Google email account)

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RUFADAAOnline Tool: electronic service provided by Custodian providing User with opportunity to give directions for disclosure or non-disclosure of Digital Assets to 3rd party (e.g. Facebook’s “Legacy Contact” form)Designated Recipient: person chosen by a User using an On-Line Tool to administer Digital Assets of the User.

Terms of Service Agreement: agreement that controls the relationship between User and Custodian (e.g., that form you accepted when you set up a Google account)

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RUFADAA

Catalog of Electronic Communication: Information identifying: * Each person that has had an electronic communication with a User;* The time and date of the electronic communication; and * The electronic address of the person who has had the electronic communication with the User.

Content of Electronic Communication: Information concerning the substance or meaning of the electronic communication which:* Has been sent or received by a User;* Is in electronic storage by a Custodian providing electronic communication service to the public or is carried or maintained by a custodian providing a remote computing service to the public and;* Is not readily accessible to the public.

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WHO HAS

ACCESS?

DESIGNATED RECIPIENT

DESIGNATED BY USER USING ONLINE TOOL

IF NONE, AS DIRECTED IN WILL OR

APPLICABLE ESTATE PLANNING DOCUMENT

IF NONE, SEE TERMS OF SERVICE AGREEMENT REGARDING

FIDUCIARY ACCESS

RUFADAA


ACCESS TO DIGITAL ASSETS BUT NOT CONTENT

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• Need written request

• Copy of POA• Certification –

POA in effect• No need for

court finding• No need to

state reason for access


• Cert. copy of death certificate

• Cert. copy of Grant of Letters

• If requested, identifier and evidence linking account to user; finding by Court, that user had account, or disclosure reasonably necessary for admin. of estate

Gen’l. Power of Attorney Pers’l Representative Trustee - not original

user


• Cert. copy of trust instrument (or trust certif.) Certification by trustee – trust exits & trustee is current

• if requested, identifier and evidence linking account to the trust

• Court may grant guardian access to digital assets

• Catalog & digital assets provided if given court order granting guardian authority over digital assets

• If requested, identifier and evidence linking account to user

Guardian or Conservator


RUFADAA

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CONTENT OF ELECTRONIC COMMUNICATIONREQUIRES EXPRESS AUTHORIZATION AT

MINIMUM

REMEMBER: Fiduciary Duty and Authority - RUFADAA:

• Legal duties imposed on a fiduciary charged with managing tangible property apply to management of digital assets and include duty of care, loyalty and confidentiality

• On-Line Tool over-rides other express authority given to a Designated Recipient by User (e.g., authority given to Executor in a Will). If no On-Line Tool or other express authority (e.g., Will), see Terms of Service Agreement

• Fiduciary may not impersonate User



Steps for Fiduciaries to Review Decedent Accounts Underthe Revised Uniform Fiduciary Access to Digital AssetsAct

NO willor trust

If will or trust says DELETE

accounts

Provide custodian

with proof ofdeath and

request account deletionIf will or trust

saysDISCLOSE

private communicatio

ns to a namedparty

If will or trust designates a

THIRDPARTY

DIRECTIVE Contactthird-party

operator per

directive in will or

trust.

Check thedecedent’swill or trust

No choice made by

decedent in a service

provider tool

Decedent made choice

through service

provider tool

START: Determine where decedent had accounts

and choice about access

Contact desired service provider and provide information.

May include:

• Deceased user name

• Proof of death

• Information to identify the account

• Evidence of appointment

as fiduciary

User choice toolcontrols

disclosure, access, and

deletion, possibly after selected

period of inactivity

No will or trust OR will or trustis SILENT on electronic communications

Fiduciary can obtain:• Digital assets other than private

communications; AND• Records of private communications (but

NOT content)

Written request to the custodian; Certified copy of death certificate; Certified copy of letter of appointment;Any of following if requested by custodian:

• Information to identify the account• Evidence linking account to decedent• Affidavit: disclosure reasonably necessary

for estate administration• Order of court finding:

• User had account identified• Disclosure reasonably necessary for

estate administration

Will or trust says to DISCLOSEcontent of private communications

If requirements met – fiduciary can obtain both content of communications and other digital

assets

Written request to the custodian; Certified copy of death certificate; Certified copy of letter ofappointment;Any of following if requested by custodian:

• Information to identify the account• Evidence linking account to decedent• Affidavit: disclosure reasonably

necessary for estate administration• Order of court finding:

• Decedent had the identified account• Disclosure would not violate federal

or other applicable law• Decedent consented to disclosure• Disclosure reasonably necessary

for estate administration

Disclose content ofprivate, electroniccommunications

Examples Include:• E-mail

messages &

attachments

• Social-media posts

• Text messages

Disclose records of

communications and other digital

assets

Examples Include:

• Photos &documents

• Public blog posts• Records of

electronic

communications

(sender,

recipient, time,

date)

If will or trust is SILENT on

account access to private

communications


HOW DOES CLIENT FEEL ABOUT DIGITAL ASSETS AND FIDUCIARY ACCESS?

THIS? THIS? $OR THIS?

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NON-MONETIZED DIGITAL ASSETS?

• Photographs• Family History• Emails• Phone Contacts• Social Media• Electronically Stored Financial Data


MONETIZED ASSETS? • Digital Currency• Purchased (vs. licensed) Product

• Virtual real estate• Purchased music/books/movies

• User Created:• Domain Name• Blog• Photos• Artwork• Manuscript• Music • Documents• Videos


Client intake• Include on questionnaire• Ask in interview

Who best to handle digital assets?Authority and consent in documentsOnline toolsInventory – Who keeps it and in what format? Updates? Special directions

• Delete accounts?• Transfer content to others (if transferable)?


Drafting:• Give authority and physical possession and control

of devices to executor – including access to content?

• Provide instructions for delivery of devices - wipe clean?• Who “wipes”?• What protection is in place for delegation to expert?

• Provide for disposition of digital assets - to tangible personal property devisee?


Possible Language:“Tangible Personal Property. My tangible personal property may include one or more electronic devices on which my digital assets are stored or through which the trustee may gain access to or authenticate my digital assets. Prior to distribution of my electronic devices, I authorize my personal representative to determine whether a device stores or provides access to information or records, including photographs and documents, and I further authorize my personal representative to preserve separate from device, remove from the device or distribute as integral to the device such information and records as my personal representative deems appropriate.”


Note: This language is for illustration purposes only and not intended to be final full text. The model language used in this presentation was drafted by the Digital Property Committee of the American College of Trust and Estate Counsel

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Possible Language:

Disclosure of Electronic Communications. With regard to any electronic communication service or remote computing service, I expressly authorize any person or entity that possesses, controls or has custody of my account to divulge to my executor [Narrow Alternative Clause: the related catalogue of electronic communications.] or [Broad Alternative Clause: both the related catalogue of electronic communications and the content of such electronic communications.] The disclosure of such information, communications and records to my personal representative is reasonably necessary for the proper administration of my estate.


Note: this language is for illustration purposes only and not intended to be final full text. The model language used in this presentation was drafted by the Digital Property Committee of the

American College of Trust and Estate Counsel

Alternative Possible Language:

Disclosure of Electronic Communications. I direct that no person or entity that possesses, controls or has custody of my account to divulge to my executor either content [or a catalogue of electronic communications] regarding my account.


Note: this language is for illustration purposes only and not intended to be final or full text. The model language used in this presentation was drafted by the Digital Property

Committee of the American College of Trust and Estate Counsel.

Also consider adding language:

• Authorizing executor to hire experts or consultants as an estate expense, regarding decrypting stored information and to access computing devices and electronic information.

• Directing executor to take possession and control of devices that may contain electronically stored data, and authorizing executor to examine such devices.


Note: this language is for illustration purposes only and not intended to be final or full text


Consider: Google’s Inactive Account Manager

SPECIAL LANGUAGE FOR

AND MAYBE

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NOW IN DOWNTOWN PHILADELPHIA!

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Bitcoin is not alone! As of 11/21/18: 2,503 recognized cryptocurrencies https://www.coinrivet.com/how-many-cryptocurrencies-are-there/

Random samples:

LitecoinEthereum

Ethereum ClassicDogecoin

IOTAMonero

DashZcash

ZcashTRONNEO

CardanoBitshares

LiskOmiseGO

Ripple

XRPBinance Coin

StellarZeroBank

TetherOntology

Bgogo Token

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BITCOIN PROCESS (oversimplified; not a complete description):1. install virtual wallet onto to personal computer/mobile device2. deposit $ via online payment company or transfer via 3d party3. buyer can place an order for Bitcoin, similar to trading stocks4. can buy Bitcoin from third parties who deposit to virtual wallet.

Can pay for goods and services: Reeds Jewelers, private hospital in Warsaw, Poland, Dell, Expedia, PayPal, Microsoft.

https://blockgeeks.com/guides/what-is-bitcoin/

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BLOCK CHAIN (oversimplified; not a complete description): originally for Bitcoin, now has other uses per tech community shared public ledger whose integrity and chronological order are

enforced with cryptography time-stamped series of immutable record of data that is managed by

a cluster of computers not owned by any single entity each block is secured and bound to each other using cryptographic

principles no central authority transparent

https://blockgeeks.com/guides/what-is-blockchain-technology/

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William A. Zietzke v. U.S., 426 F. Supp. 3d 758, 761-762 “Bitcoin [footnote omitted] is a decentralized cryptocurrency that uses a distributed ledger system, or “blockchain,” to ensure the cryptocurrency’s security and integrity. To use a blockchain system, a user first creates a wallet, which contains information used to move units of a cryptocurrency on a blockchain. When the user downloads or purchases a wallet, software in the wallet generates a private key (a large integer number). That private key is then used to mathematically generate a public key (also a large integer number), which is used to create an address (a mix of numbers and symbols). This address functions as the name suggests: it is the destination for a cryptocurrency payment.”

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William A. Zietzke v. U.S. (cont’d)“When two people agree for one person to send cryptocurrency to the other, the two reveal their public addresses to one another. Because the transferor’s address is associated with their public and private keys, the transferee can confirm the transferor’s ownership of the transferred cryptocurrency by verifying that the transferor’s private key, public key, and address correspond. And once the cryptocurrency is transferred, the transferee can spend or withdraw the cryptocurrency with their own private key, which will now be associated with that cryptocurrency.”

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William A. Zietzke v. U.S. (cont’d)

“Although cryptocurrency transactions can occur directly between individuals, those transactions are often handled through digital currency exchanges. Digital currency exchanges are businesses that hold large amounts of traditional and cryptocurrency, allowing them to facilitate third-party transactions of traditional currency for cryptocurrency. To help facilitate such transactions, these businesses also provide hosted wallet services.”

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So? Is this the final

word?


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TAXES: $11 billion – estimated unreported cryptocurrency

tax liabilities, per IRS Information Reporting Advisory Committee Public Report (Oct. 2018)

e-money – like bitcoin is virtual currency in a digital wallet, identified by public key, unlocked by private key (random letters and numbers); beware of scams, per Consumer Advisory, August 2014 by Consumer Financial Protection Bureau.

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Notice 2014 -21, 2014-16 I.R.B.938.https://www.irs.gov/irb/2014-16_IRB#NOT-2014-21

Virtual Currency - defined… a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.Intended to apply only to “convertible virtual currencies” (having an equivalent value in “real currency”). Notice 2014, Section 2.

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Notice 2014 -21 16 FAQs (a sampling):

Virtual currency is “property.” Notice 2014-21, FAQ-1.

If received for services, it is reportable as income. Notice 2014-21, FAQ-3.

Subject to gain or loss provisions of the Internal Revenue Code. Notice 2014-21, FAQ-6.

potential for realization on exchange for other property, refers to Publication 544 (regarding Sales and Other Dispositions of Assets).

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IRS News Releases in 2018 and 2019:

Reminding taxpayers to report virtual currency transactions.

Announcing campaign to identify risk of non-compliance. Stating it was sending letters to virtual currency owners

who potentially failed to report or pay taxes related to virtual currency transactions.

Planning to send 10,000 letters and provide sample letters.

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Rev. Rul. 2019-24 – re: hard forks and airdrops (means of acquiring cryptocurrency)

Cryptocurrency is a type of virtual currency that utilizes cryptography to secure transactions that are digitally recorded on a distributed ledger, such as a block chain. Units of cryptocurrency are generally referred to as coins or tokens. Distributed ledger technology uses independent digital systems to record, share, and synchronize transactions, the details of which are recorded in multiple places at the same time with no central data store or administration functionality

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2019 Expansion on Notice 2014-21 with 45 moreFAQs (a sampling):

Virtual currency is treated as property for federal income tax purposes and general tax principles applicable to property transactions apply to virtual currency transactions. 2019 FAQ 2.

If virtual currency is sold for real currency, the taxpayer realizes a capital gain or loss, subject to any limitations on deductibility of capital losses. 2019 FAQ 4.

Basis of the virtual currency is the amount the taxpayer spent to acquire it, including fees, commissions and other acquisition costs in U.S. dollars. 2019 FAQ 7.

https://www.irs.gov/individuals/international-taxpayers/frequently-asked-questions-on-virtual-currency-transactions.

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Also, see:

Form 1040 – Schedule 1 “Did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency” – See instructions describing a transaction involving virtual currency.

Game currency – if convertible it’s reportable (otherwise, it’s a “stay within the game environment” currency).

https://www.irs.gov/businesses/small-businesses-self-employed/virtual-currencies.

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Also, see: U.S. v. Coinbase, Inc. – IRS filed “John Doe” summons.

After litigation and reduced scope, turned over information after informing its customers.

William A. Zietzke v. U.S. – taxpayer application for refund resulted in audit and summons to Bitstamp for information re: taxpayer holdings. IRS reduced scope after court determination that it was overbroad.

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DIGITAL DO’S AND DON’TSIN ESTATE PLANNING & ESTATE ADMINISTRATION

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