It’s not everyday that an entirely new asset class surfaces in the estate-planning world. That day has come, though, as planners are now being confronted having to build an estate plan around their clients’ non-fungible token (NFT) holdings. The precarious and ever-murky legal footing of NFTs doesn’t change the fact that estate planners must now find ways to use existing estate and tax planning tools to help their clients manage, hold and transfer NFTs and related digital assets based on blockchain technology. For planners to wade through these waters, though, they must acquire a baseline understanding of this digital asset.
This article, though brief, provides a thorough primer for estate planners who’ve been, or expect to soon be, approached by clients seeking advice on how to build an estate plan around NFTs and crypto currencies. It provides an avenue for estate planners to avoid a gridlock in the planning process and overcome the inevitable learning curve associated with getting your hands around this new technology. Crucially, the article lays a framework for planners to follow and spot issues that are perhaps uniquely associated with NFTs.
The article paves its way through these issues by setting out a set of basic questions that planners will need to address during the process. Questions like: What is an NFT? What does an NFT represent? How are NFTs created? How’s an NFT stored and where? How do you establish and transfer ownership of NFTs? Do NFTs have any implications in securities law? What are the tax implications for transferring NFTs? And, perhaps most importantly, how do you assure that a fiduciary can obtain access to an NFT after the client’s death?
The article answers these questions by using analogies to existing, well-known legal principles. In the context of blockchain or digital assets, Bitcoin (like cash) is fungible, but NFTs are unique or nonfungible, like artwork. However, the article acknowledges that this is where the analogy may break down, as NFTs could also represent any number of unique items, concepts, ideas or representations. Whereas a casino chip is a physical representation of a specific number of dollars, NFTs are digital representations of virtually any type of specific property.
The nuances and difficulties regarding NFTs don’t end there, though. The article advises on how planners should guide their clients through the various other legal worlds that NFTs touch, such as intellectual property rights and securities laws. For example, if a client acquires an NFT that represents a specific piece of art, it doesn’t necessarily mean that the intellectual property rights associated with the real-life artwork follows along with the NFT. That will be dictated by the legal contracts embedded in the smart contracts associated with the NFT during the minting process. It’s therefore incumbent on the planner to make certain that the client truly understands what legal rights are associated with the NFT, and to do that, the planner must have a sufficient command of the legal rights attached to the digital token.
A lawyer will run into even more basic hurdles during the planning process. For instance, NFTs are generally held in digital wallets that may only be accessed with a unique key, which could be a series of randomized numbers or words. Without those keys, the client (or more likely, the personal representative of the client’s estate) can’t access the NFT, leaving the asset perpetually stranded on the blockchain. As such, planners should know how to advise their clients on storing the keys in a safe and secure location that’s nonetheless accessible to their family members or fiduciaries.
NFTs, and other digital assets based in blockchain technology, also have unique tax characteristics. For instance, the article explains that, because the Internal Revenue Service considers cryptocurrencies “property,” any sale or disposition of that asset would result in a capital gain or loss to the client. So, if the client purchases an NFT using cryptocurrency, the acquisition of the NFT would result in a capital gain or loss that’s calculated based on the client’s cost basis in that cryptocurrency. As such, planners should be advising their clients to track all of their purchases and sales of digital assets.
This article is an exceptionally useful and approachable primer for all planners, both the uninitiated and experts alike. Given the tremendous splash that this technology has made in the public recently, it’s only a matter of time until you’ll be confronted with some or all of these issues. Ultimately, the most useful advice to be taken from this article is that the best way to learn how to handle these assets is to create a wallet and mint an NFT yourself. I’ve actually gone through this process myself and can attest that you’ll naturally learn about how best to advise clients on managing these assets for estate-planning purposes. As the author aptly notes, “then you will not be like a marriage counselor who has never been married giving advice on how to maintain a successful marriage.”