Treatment of Digital Assets on Death

Click here to view original web page at www.grllp.com

Background

“Water is a useful metaphor for digital assets; they are just as fluid, ever-changing, and dynamic, which presents both challenges and opportunities for executors and those who provide services to them. And, like water, digital assets can simply slip through one’s fingers without care”

- Daniel Nelson, “The Challenge of Digital Estate Administration for Executors”[1]

In storing personal information or creating content on the Internet, individuals are storing or producing digital assets.[2] These digital assets are important personally to personal identities, and financially, as online loyalty programs, virtual currencies, and content stored on sites such as Amazon and iTunes are becoming as valuable as online bank and investment accounts.[3]

Bitcoin market cap reached US $1 trillion in February 2021. A report by a 2021 study estimates that 1.2 million Canadians (3.2%) hold Bitcoin.[4] Yet, BMO Wealth Institute finds over 57% of Canadians have failed to plan for their digital assets in their estate plans.[5]

Wealthsimple now offers 34 different cryptocurrencies on its investing platform. Some popular ones include[6]:

Etherium

Etherium is a blockchain network like Bitcoin. It can also be used as an alternative currency, but fewer vendors accept Etherium. Etherium is better known for its smart contracts - computer code that automatically executes the contract when the terms of the agreement have been met without the need for human intervention. Ether is the currency used to pay to run programs on the Etherium network.

Litecoin

Litecoin is another decentralized cryptocurrency that adopts many of Bitcoin’s features, in fact its founder announced that Litecoin would be the “lite version of Bitcoin” and the “silver to Bitcoin's gold”. Litecoin has faster transaction speeds and because of this its platform handles more transactions.

Ripple

Ripple is also a blockchain driven platform but its focus is on facilitating cross-border transactions in just a few seconds, which is much faster than the hours or days it might take a bank. Ripple’s XRP coins are intended to be a linking currency between the two international currencies involved in the transaction.

Cardano

Cardano is an “Ouroboros proof-of-stake” cryptocurrency that was created with a research-based approach by engineers, mathematicians, and cryptography experts. The project was co-founded by Charles Hoskinson, one of the five initial founding members of Ethereum. After having some disagreements with the direction Ethereum was taking, he left and later helped to create Cardano.

The team behind Cardano created its blockchain through extensive experimentation and peer-reviewed research. The researchers behind the project have written over 90 papers on blockchain technology across a range of topics. This research is the backbone of Cardano.

Dogecoin

Dogecoin is seen by some as the original "memecoin" caused a stir in 2021 as the price of the coin skyrocketed. The coin, which uses an image of the shiba inu as its avatar, is accepted as a form of payment by some major companies including the Dallas Mavericks, Kronos, and, perhaps most notably, SpaceX, an American aerospace manufacturer owned by Elon Musk.

Dogecoin was created by two software engineers, Billy Markus and Jackson Palmer, in 2013. Markus and Palmer reportedly created the coin as a joke, commenting on the wild speculation of the cryptocurrency market.

The price of DOGE hit an all-time high of $0.71 during the week Elon Musk was scheduled to appear on Saturday Night Live. As of November 2021, Dogecoin's market capitalization is $29.2 billion and one DOGE is valued at around $0.22, making it the tenth-largest cryptocurrency.[7]

Non-Fungible Tokens (NFT)

Additionally, Non-Fungible Tokens (NFT) have expanded into other asset classes. A Non-Fungible Token is a token stored on a blockchain. Blockchain itself is a secure distributed database with redundancy, immutability, and clarity into tracking data or ownership. A token proves ownership of an asset. For just like a deed to your house is a sign of ownership to that plot of land and building, in the case of the first digital token, Bitcoin, a single Bitcoin is the title of ownership to the underlying value of the Bitcoin.

As mentioned in a Thomson Reuters article[8], Mike Winkelmann, known as @Beeple, is a renowned artist who has worked with Nike and Apple Winkelmann. Winkelmann sold a collection of many of his works combined into a masterpiece, titled EVERYDAYS: THE FIRST 5000 DAYS at Christie’s for $69 million. These transactions occurred on Ethereum, a blockchain.

Winkelmann’s art itself was simply digital images, however people buy NFTs because it is feasible to collect royalties and resell the NFT in the future for profit.[9]

As digital assets become increasingly more mainstream serving as a form of alternative investment for many people, the need to protect those assets and have a strong succession plan in place is increasingly important.

It has been observed,[10] that disputes over digital assets are likely occurring but because mediation in Ontario is mandatory and confidential in estate litigation, the resolutions are not publicly reported. Having a digital estate plan is crucial to ensure that a testator’s wishes are adhered to.

Defining and Categorizing: Assets vs. Accounts

The categories of digital property are fluid, since digital applications, social media sites, and currencies spring up and are popularized every day. Further complicating classification is the issue of determining whether individuals have a license to use a digital asset or if they possess a full property ownership interest. The first step is to differentiate between digital “assets” and digital “accounts”.

While an asset typically refers to a singular file itself, accounts generally refer to the mechanisms used to control and access certain assets.[11]

A 2013 Law Society of Upper Canada article helps distinguish between the two:[12]

Digital Assets

The definition is endless, but digital assets may include photographs, videos, blog posts, iTunes music collections, emails, Microsoft Office documents, music collections or playlists, and tweets. Besides holding sentimental and nostalgic value for loved ones, these assets often also contain information that could be important for business owners, like customer emails or invoices, or contain health, medical or tax records.

Digital Accounts

Digital accounts are used to access files, including email accounts, social network accounts, file sharing accounts, and software licenses. Digital accounts are not the files themselves, but are how a person accesses those files.

Digital accounts can be separated into three categories:[13]

  1. “Virtual Currency Accounts”: Accounts that contain virtual currency that could be transferred to heirs, including Paypal, loyalty program accounts like credit card accounts and cash back, and Bitcoin;
  2. “Virtual Property Accounts”: Accounts containing virtual property like iTunes accounts – in this situation, the person does not actually own the files but only has a licence to use them;
  3. “Social Media Accounts”: Accounts containing information likely of personal or commercial interest like a personal email account, or a Facebook, Twitter, or LinkedIn account.

Virtual Currency Accounts

Digital accounts may hold actual currency that a testator may want to transfer to heirs or beneficiaries. These accounts hold any currency that may be converted into common fiat money. Examples include the contents of eBay, Amazon, PayPal, and crypto-currency wallets like Bitcoin.

Bitcoin, a form of digital currency, is transferable upon the death of the user. In unsophisticated terms, bitcoins are stored in a digital “wallet”. A Bitcoin wallet is password protected. There are no mechanisms to retrieve a lost password to a Bitcoin wallet. Without the password, the value is forever lost. If the Bitcoin account owner does not leave behind the key to their digital wallet, it is treated as though the account does not exist at all.[14]

Virtual Property Accounts

This category includes any account containing virtual property, like an iTunes collection, or a Kindle library.

Accounts containing virtual property hold digital content that individuals assume they own. However, in reality, customers only own a licence to use the digital files, with no ownership interest held by the individual. These accounts may not be transferable, as the assets are not actually owned (contrary to their physical counterparts, like a CD or a paperback novel).[15]

Social Media Accounts

Social media accounts include websites, applications and other means for individuals to share, create and exchange information, ideas, pictures and videos online. Facebook, Pinterest, Instagram, Twitter, LinkedIn and Tumblr are popular social media sites in Canada. Each social media site has its own terms of use and privacy agreements.[16]

The Law in Canada

To date, there is no law in Ontario or Canada that specifically addresses ownership and control of digital assets after someone dies.

Canadian Uniform Law Commission Model Act

In 2016, the Uniform Access to Digital Assets by Fiduciaries Act (2016)[17] was proposed. The UADAFA draws heavily from the American Revised Uniform Access to Digital Assets Act.[18] If adopted, it would authorized fiduciaries (i.e. lawyers, guardians, and estate executors) default access to digital assets where the terms of a will, grant of probate, a court order or an express statement in a user agreement, provides for such authority. The UADAFA would void any service agreement to the extent that a provision limits the fiduciary’s access to a digital asset, unless the account holder accepts its terms and consents to its terms in a separate document.[19]

However, this document has yet to be adopted in Canada.[20]

Canadian Privacy Laws

Privacy rights continue after death, and therefore privacy legislation might impose limitations on custodians (i.e. online service providers). Custodians are governed by the federal Personal Information Protection and Electronic Documents Act (PIPEDA). PIPEDA provides for specific situations where an organization can disclose personal information without the individual’s consent.

PIPEDA provides for the release of information about an individual if they have been deceased for 20 years or more.[21] Where an individual has been deceased for less than 20 years, a custodian’s disclosure of personal information without consent is permitted pursuant to an order of “the court, person, or body with jurisdiction to compel the product of information” and where required “by law”.[22] Therefore, PIPEDA does not compel online service providers to permit disclosure of personal information in estate administration.

US Case Law

Though there has been no prominent Canadian case law on the issue of a personal representative’s right to access and gather a deceased’s digital assets, there have been cases in the United States which may be illustrative.

In Ajemian v Yahoo! Inc.,[23] Mr. Ajemian passed away without a will, leaving behind a Yahoo! email account, with no instructions regarding its treatment. His siblings were appointed as personal representatives of their brother’s estate and sought access in this capacity to the contents of the email account. Yahoo! declined to provide access to the account, as prohibited by the Stored Communications Act (“SCA”). The Supreme Judicial Court of Massachusetts stated that the SCA does not prohibit this disclosure, as the personal representatives are capable of lawfully consenting to the disclosure on the deceased’s behalf.

In a 2019 US case, In Re Scandalios,[24] Ric Swezey died unexpectedly and his will did not explicitly authorize his husband to have access to his digital assets, including family photos in his Apple account. After Apple refused access, the New York County Surrogate’s Court ordered Apple to give the deceased’s husband and the executor of his estate access to his Apple account. The Court relied on Article 13-A, Administration of Digital Assets, of the New York Consolidated Laws, Estates, Powers and Trusts Law.[25] The Court found that, while disclosure of electronic communications required ‘proof of a user’s consent or a court order’, the deceased’s photographs did not count as ‘communications’. Therefore, Apple should provide the executor with the opportunity to reset the password to the deceased’s iCloud.

In Matter of White,[26] the estate administrator argued that he needed access to the contents of the deceased’s email communications in order to obtain information about his business that was necessary to administer the estate. Noting that the decedent did not address disclosure of his digital assets in his will, the court limited disclosure to the decedent’s contact information, finding that other information was too personal and sensitive to disclose. In applying the New York digital assets statute, the court took a cautious approach and limited disclosure to what it believed was “reasonably necessary” to administer the estate.[27]

There is no equivalent Canadian legislation to the SCA as in Ajemian v Yahoo! Inc , or to New York’s digital asset laws in In Re Scandalios and Matter of White. However, the relevant and overarching principle is that these judgments seem to favour fiduciary access to a deceased’s digital assets over total privacy. They also indicate the importance of planning for the handling of digital assets in a will by clearly delineating the authority of the estate fiduciary.[28]

Implications

Since there is a lack of legislation for digital assets, the estate trustee could be constrained by service terms outlined by digital account providers.[29] This presents challenges to executors who battle electronic service providers to gain access to accounts after a client dies. Different account providers set different rules. Many of these service providers do not have testamentary policies, but most have terms of use provisions that restrict access to the account by anyone other than the client.

Barriers to Access: Terms of Service and User Agreements​

There is No Automatic Right of Survivorship

There is no automatic right of survivorship for digital accounts and consequently no immediate right to access the online accounts of a deceased. Therefore, where clients have not considered digital assets in their estate plans, holes in the law coupled with privacy-oriented service agreements governing the account may create problems for managing a deceased’s digital assets. This may result in digital accounts being inaccessible to personal representatives, or may require them to obtain a court order to do so, which is a time-consuming and costly process.[30]

When an individual opens a digital account, a contract is formed between the individual and the company behind the service (also known as the custodian), often called a Terms of Service or User Agreement. While some of these custodians do not have a specific testamentary policy in place, many have provisions that restrict access to the account by anyone other than the account holder.[31] Many of these contracts also prohibit the transferring of accounts to different account holders and may contain provisions that deactivate an account after a period of inactivity.[32]

They often provide that the individual is the only person authorized to access the website account, and most of the agreements do not contain provisions regarding ownership and control of the account after the individual passes.[33] User agreements may prohibit access to estate trustees and deny them the ability to deal with content.[34]

Example: Court Order for Apple Password

For example, CBC reported on an elderly widow in Victoria, British Columbia, named Peggy, who did not know she would need her deceased husband’s Apple ID password to play her favourite game on the couple’s shared iPad. After he passed away, Peggy updated the game and had to sign back in to access it, but was locked out. Her daughter contacted Apple to retrieve the password and Apple refused. Peggy’s only option was to create a new Apple ID account and repurchase all of her applications and games. Even though she provided Apple with serial numbers for her Apple hardware, the deceased’s will (where he left everything to Peggy), and a notarized death certificate, Apple still refused and suggested that Peggy obtain a court order to obtain access. Apple later apologized after the CBC covered the story, and offered to solve the problem without a court order.[35]

Each service provider provides different terms that impact what happens upon the account holder’s death.[36]

However, Apple’s stance has now slightly changed. While Apple still requires next of kin to request a Court Order to obtain access to a deceased family member’s account, Apple no longer opposes these orders. Primarily they want the public to go through the process so Apple can maintain that it never violated anyone’s privacy willingly.

Terms and Conditions Governing Disposal of Assets on Death

Given that there is no law governing digital asset succession, the account providers’ guidelines must be complied with. Here are a few pertinent examples:[37]

Virtual Currency / E-Commerce Accounts:

Virtual Property Accounts

Points

Social Media Accounts

Estate Planning Considerations

Custodians are unlikely to assume that the deceased had any intention of sharing digital assets or accounts if the will is silent to that end. Even though a typical will clause gives the executor “all assets wheresoever situate” to administer, if a deceased’s will does not specifically address his or her digital assets, the personal representative’s authority to deal with the digital assets will be much more vulnerable to the service agreements of custodians. Furthermore, without an accessible record of the deceased’s digital assets, it is possible that certain assets may remain undiscovered and un-administered for many years after death, to the detriment of the estate beneficiaries.[38] Therefore, recording the type of digital assets owned and including the disposition of those assets in the estate plan is vital in properly carrying out testamentary wishes.

Certain digital estate considerations will be important when receiving instructions from a client:[39]

It is also suggested that practitioners may wish to implement certain digital asset steps in the estate planning process, including:[40]

Perhaps most critical, the testator should ensure that the inventory of all digital assets, usernames and passwords are stored somewhere that is password protected, separate from the will. This could be by way of an online service for storing passwords, or a handwritten list that is kept in a safe or safety deposit box. A PDF version is available to download here.

If you require any litigation assistance, our Tax and Estate PLanning Group are available to assist you.

Lindsay Histrop

Parish Bhumgara
Articling Student
T 416.865.6708
E pbhumgara@grllp.com

(This blog is provided for educational purposes only, and does not necessarily reflect the views of Gardiner Roberts LLP)