With individuals’ digital footprint continuing to increase year on year and businesses and government agencies moving towards the adoption of a “digital first” mindset as the default option, gone are the days when personal representatives could safely rely on the pile of unopened papers left behind by a deceased to glean a comprehensive picture of their assets and liabilities. To achieve this, at least a modicum (and preferably more) of planning for their digital estates is now required by most individuals. With the UK government and now the Law Commission setting themselves the goal of making England and Wales “a global hub for digital assets”, the need for estate plans to capture and provide for such assets is only likely to grow.
Given the relative novelty of many digital assets and constantly evolving technology that underpins them, it is hardly surprising that much of the conversation among estate planners and will drafters to date has been around access to email accounts, social media profiles and digital files of sentimental value. However, many a client’s digital assets inventory will reveal the existence of a whole range of other digital assets, some of significant financial value, such as crypto-tokens, Non-Fungible Tokens (NFTs), decentralised finance (DeFi) receivables, and so forth.
Thanks to a legal statement published by the UK Jurisdiction Taskforce in November 2019, UK advisers have had relative certainty that certain digital assets will be regarded as “property” and thus be capable of transmission on the death of their owner (in accordance with the terms of their Will or under the intestacy rules). However, this “certainty” is likely to be illusory in the absence of clear rules about the location of digital assets, not least for tax and succession purposes where the owner dies domiciled outside England and Wales.
In an effort to reduce legal uncertainty surrounding the recognition and protection of crypto-assets, the Law Commission published on 28 July 2022 their Consultation Paper on Digital Assets, the consultation period under which ended on 4 November 2022.
In its paper, the Law Commission makes the somewhat radical proposal that crypto-assets be recognised as a separate category of personal property, referred to as “data objects”, which is distinct from things in possession and things in action. For this to be the case, it recommends, crypto-assets would need to meet a three-pronged criteria: (i) be composed of data represented in electronic media; (ii) exist independently of persons and legal systems; and (iii) be rivalrous (meaning that use by one person limits use by another).
While this may sound exciting in terms of the law’s ability to be flexible and embrace crypto-assets’ unique features, personal representatives would want absolute certainty: in terms of the definition of what constitutes a data object and the boundaries with other categories of property. This is because categorisation as a data object will have legal consequences, including in the event of disputes involving such assets when comprised in estates.
Turning to what defines the relationship between persons and data objects, the consultation paper suggests that it is functional control, rather than possession. However, in opting to not set out the concept of “control” in legislation, the Law Commission has left the position regarding its meaning and ambit less than clear cut.
Importantly, the consultation paper addresses the issue of trusts – specifically in the context of crypto-asset custodial arrangements – concluding that no law reform is needed in order for trusts to be validly created in this situation. By analogy, one would assume that there is no inherent legal barrier to trusts of crypto-assets existing in a testamentary context. However, with the global nature of crypto-assets, the wallets in which they are held, the exchanges on which they are traded, and the distributed nature of the underlying technology, it may not be English law that determines whether or not such assets can be validly transferred into and held on trust.
Overall, the Consultation Paper on Digital Assets is a step in the right direction. With the Law Commission’s next law reform project, Digital Assets: Which Law, Which Court, already in the pipeline and expected to initiate a period of consultation with stakeholders regarding some of the private international law challenges arising in the context of digital assets disputes, further clarity is likely to emerge, in what may need to be an iterative process of reviewing and refining the applicable law.
In the meantime, estate planners, will writers and individuals looking to plan for their digital legacy need to pause to consider the idiosyncrasies that come with digital assets and how clauses standardly included in Wills might work in relation to them. For example:
- Does the individual’s choice of executors include people with the necessary skills and inclination to deal with an estate comprising an eclectic mix of crypto-assets?
- Should there by a “digital executor” named in the Will (drawing on the “literary executor” idea in a pre-digital age)?
- Should digital assets be gifted to specific individuals (preferably those passionate about the potential of technological solutions) and, if so, how does one account for the inherent risk and volatility of such assets when seeking to achieve equality?
- Is it appropriate for digital assets to form part of any trusts of residue?
- How much specific guidance in Letters of Wishes is needed to enable the executors/trustees to discharge their fiduciary responsibilities with confidence, and ensure that the testator’s wishes are duly implemented?
As with traditional assets, the answers to these (amongst other) questions will be very personal. In working through them with their clients, advisers need to remain alive to the nuances that arise from digital assets being included into Wills, and the possibility of concepts and prescriptive provisions becoming fast obsolete as the law evolves to keep pace with the technology and international consensus.
Antoaneta Proctor, Partner at Wedlake Bell LLP.