Digital Asset Planning for Retirement -- A New Task for Financial Advisers

Digital Asset Planning for Retirement — A New Task for Financial Advisers

Ever wonder what happens to your favorite boutique’s online website when the owner retires, becomes incapacitated, or dies?  Far too often, the answer is nothing. The site ceases to operate but remains a permanent fixture on the internet, a mere reminder of what was once your favorite shopping location. The website, software, consumer contacts, and other property of the online store could have represented substantial financial value as a digital asset. Instead, failure to plan for the disposition and management of these digital assets upon the owner’s retirement, disability or death results in a serious loss of financial value. Such a scenario presents a prime opportunity for the financial advisor to add tremendous value to his or her client’s portfolio by properly identifying, valuing, and planning for the disposition of the client’s digital assets.

For a financial adviser, the digital world represents an exciting new domain, full of compliance concerns, security issues, and valuable business generation opportunities. Advisers are rapidly becoming more aware of their own digital responsibilities. Currently, regulators in both Massachusetts and Illinois are polling registered investment advisers regarding their own cyber-security policies and practices, which include questions about account authentication, encryption procedures, software, backup files, and third-party service agreements. In the same vein, financial advisers must start thinking about their clients’ digital assets. These can represent valuable financial resources, especially in the case of a cloud-based software company.

For example, Medidata, the leading global provider of cloud-based solutions for clinical research in life sciences, heavily invests in supporting, maintaining, and protecting the security of its digital assets through infrastructure improvements, continued monitoring, proactive assessment of emerging technology platforms, and extensive back-up and recovery planning. “Medidata is focused on innovation and the transformation of life sciences R&D through the maintenance and growth of all our digital assets including hardware, clinical data and analytical algorithms.  Among these the data is the most valuable since no amount of money could ever replace it,” said David Lee, SVP, Chief Data Officer of Medidata.  Since Medidata’s digital assets are a core function of its business model as a leading cloud-based clinical technology company the security, organization, ability to analyze, and on-going reliance of its scientific and operational clinical trial data is crucial to supporting its customers’ pursuit of effective, safe, and affordable therapies.

Facebook at Mozcon - Alex
Facebook at Mozcon – Alex

Large cloud-based companies like Medidata, LinkedIn, and Facebook rely heavily on digital assets in the form of cloud computing and cloud software programs to generate revenue.  However, they are not alone.  In 2013, McAfee estimated the value of digital assets per person at roughly $35,000 worldwide.  However, Florida based attorney Christopher Bijan Whelton, notes that the value of digital assets owned by small business owners is often significantly higher and in some cases reaching tens of millions of dollars. In addition, Mr. Whelton notes that “digital assets are often forgotten in the discussion of business assets as a potential source of income.” Furthermore, small business owners also rely heavily upon their digital assets to maintain a competitive edge and create value for the consumer.

While most clients do not have the vast quantity of valuable digital assets that Medidata, LinkedIn, or Facebook possess, small business owners still need to make sure that the wealth they have accumulated in their online presence, be it via their online services, products, assets, webpages, or social media, is not lost upon retirement. Financial advisers are perfectly positioned to assist their clients in protecting and maximizing the value of these assets. When a small business owner begins to plan for retirement, financial advisers need to start asking the right questions about digital assets and help their clients manage these assets to ensure that a potential source of income is not reduced or lost. Failure to properly manage digital assets could result in a financial loss to a small business owner when he or she tries to sell the company to create retirement income. Additionally, some digital assets could remain the property of the retiree and may even provide a continuing source of income throughout retirement.

In order to maximize the value of a client’s digital assets, one must first identify the assets.  This process could be expedited by utilizing a fact finding process or a checklist of questions that can help pinpoint potential sources of digital assets. Once this determination has been made, it is crucial to do a careful valuation of the assets in question. What monetary value do the assets have to the client? Do these digital assets have a marketplace or value to third parties? If so, could the assets provide an income stream today, or later in retirement? Once the client’s assets have been identified and valued, it is imperative to rank the financial and sentimental priority of these assets to the client. If the client uses his or her social media website and profile for both personal and business purposes, he or she might not be willing to sell or transfer this asset in the future. Conversely, pure business assets might have low sentimental value but rank high as financial assets.

One of the most important considerations in planning for digital assets is the legal right of the owner to transfer the property. In some cases, the digital service provider (e.g. Google & Yahoo!) will allow the individual to sell his or her digital website, domain name, etc., to another person. However, in other cases, these assets are specifically deemed non-transferable for any reason by a third-party service agreement. These legal details should be reviewed before setting up a webpage or creating any digital asset that might later be transferred. If one online service provider does not allow the transferability rights your client desires, identify a company that does.

Keeping track of the access information and the location of digital assets is also very important. Many digital assets, such as email and social media accounts, can only be accessed online with the use of a username and password. As such, the value of the assets is lost when the username and password are lost. Managing these passwords, usernames, logins, pin codes, and other identification information can be a formidable task by itself. One common solution is the placement of this private information onto an encrypted external hardware device for easy management and storage. However, safety and privacy concerns remain regarding the storage of any personal information.

As the financial planner, your next step will be to help the client think about ways to monetize the digital assets over time. In some cases, it might be as simple as making sure they can be transferred as part of the succession plan for the client’s small business. In other cases, value can be derived via leasing the assets to another company or engaging in an outright sale of the assets. When discussing the transfer or sale of digital assets as part of a small business succession plan, it is important to discuss the plan with the client’s lawyers to ensure compliance with other trust and estate planning documents. The client’s lawyer might be aware of other legal issues or planning concerns the client has not mentioned during your discussions. In many cases, the lawyer will actually be the one developing the digital estate plan and succession plan, and should be helping the client to manage his or her digital assets. Coordination between the financial advisers and the client’s other professionals is crucial to ensuring a proper retirement income plan is created that supplements and supports the client’s estate, tax, and other business plans.

As the digital world continues to evolve and the client’s goals change, the financial adviser must periodically review and maintain the plan to ensure no loss of value or opportunity for the client. While digital assets might not provide any retirement income for most clients, the opportunity should not be overlooked when available, and financial advisers need to be aware of these potential issues. Unfortunately, too many digital assets are currently mishandled, resulting in unnecessary, but serious, financial loss for the client.

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Digital assets are property and thereby allow the owner to manage, transfer, and bequeath them. However, the actual owner of a digital asset might not always be clear. For example, the creator of the digital asset might merely hold a lifetime lease, and the service provider who stores the digital asset might have full ownership rights. Therefore, individuals incorporating digital asset planning into an overall estate plan must consider the nature of and practical limitations surrounding a transfer of digital property. The transfer of digital assets generally involves the following four issues:

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CV V: Current Digital Assets Planning Tools

In its current developmental stage, estate planning for digital assets is being done through wills, trusts, and online digital estate planning services. This section explores these three methods of transferring digital assets and discusses their individual shortcomings.
Through the use of traditional wills, individuals may express their intentions and plan for disposition of their assets. However, disposition and transfer of digital assets through wills can be problematic, as briefly mentioned earlier. Given that the average number of specific digital assets per individual is nearly 3,000 files, providing identification and access to all of these assets can be overwhelming. Due to the continuing growth and the changing nature of the digital assets, the will provisions may become quickly outdated. The speed of the digital world seems to outpace these traditional estate planning tools, as passwords and access information can change daily, requiring constant updates to the will. Although the digital property may belong to the decedent, the third-party user agreements and term-and-condition contracts may limit or completely block a beneficiary’s right of access to the decedent’s digital assets. In addition, wills may become a public document upon the decedent’s death; therefore, security and privacy aspects of the transfer of digital assets may be compromised.

Trusts can alleviate some of the above-described concerns. Trusts provide for a more secure transfer of digital assets than wills because trust documents do not become public. Thus, key private information regarding passwords, accounts, and contents remain out of the public eye. Further, the law permits individuals to transfer digital assets into a trust while maintaining control and use of the assets for the remainder of the individual’s life. Sometimes, the trusts are subject to more relaxed formation requirements than wills, allowing for easier creation and modification. As such, trusts can more easily adapt to the changing nature of digital assets. However, very few people actually set up trusts specifically designed for digital estate planning. Although both wills and trusts can transfer digital assets from the decedent to the beneficiaries, they are becoming a tool of the past due to the speed of today’s technology. In response, several online estate planning services have developed in order to facilitate one’s digital asset planning needs. These services are designed to specifically address the digital management, location, and confidentiality of one’s digital assets during an individual’s lifetime.
As such, these digital estate planning services have latched onto the lucrative digital asset management industry—anticipated to be a $1 billion industry in 2013. While these online digital estate planning services offer a degree of efficiency that is unmatched by traditional estate planning techniques—enabling individuals to update, manage, and track their digital assets on demand—serious concerns exist regarding their reliability and sustainability as estate management tools. For example, while digital estate planning services claim to provide exceptional account security, caution is nonetheless warranted because, not unlike a traditional bank vault, these services create a large repository of wealth and property, rendering them prime targets for cybercrime and theft.

Additionally, these digital estate planning services are not regulated and are often not run by attorneys, creating concern as to who is being entrusted with the individual’s passwords, assets, and information.

Finally, there are serious stability concerns as to the continued existence of online digital estate services, as these services are relatively new and turnover in the industry has been significant. However, digital estate planning services such as Eterniam, a Seattle, Washington-based company, are beginning to realize the importance of establishing trust with clients by stressing their commitment to security, privacy, and long-term stability. Estate planning ultimately should not be a short-term solution, but rather should provide lasting peace of mind and planning options to an individual testator.