Don’t Let Clients Take Their Passwords to the Grave

October 22, 2014 at 12:25 PM

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Greek mythology depicts the Ages of Man: The Golden Age, Silver Age, Bronze Age, Iron Age. The Digital Age, on the other hand, is far from mythological.

Indeed, the digitalization of wealth brings up all sorts of estate-planning issues, not the least of which is that digital assets you think are yours to leave to loved ones may not be yours at all.

Financial advisors helping clients plan for the disposition of digital assets post-death, or if they become incapacitated, are performing a new and valuable service: When online assets — like investment or bank accounts — are left out of estate planning, often heirs won't know they exist.

Americans value their digital assets at $55,000 on average, according to an MSI International survey conducted in 2011 for McAfee, a security technology company. But 93% of Americans who have digital assets have no clue as to what will happen to these when they die, a Harris Interactive 2013 survey found.

Digital assets are broadly classified: personal, social media, financial and business. Some, like social media assets, have sentimental value; others are sources of income, current or potential. It is therefore essential that they're managed properly and not overlooked upon a client's death.

Estate planning for digital assets involves a complex mix of privacy laws, companies' restrictive service agreements and, sometimes, the challenges inherent in clients' secret accounts. Still, the digital estate plan must work in sync with the overall estate plan.

ThinkAdvisor recently interviewed digital estate planning expert Jamie P. Hopkins, associate professor of taxation at the American College of Financial Services — which issues the Retirement Income Certified Professional (RICP) designation — and associate director of the New York Life Center for Retirement Income.

Here are highlights from our conversation:

ThinkAdvisor: Digital estate planning is about the "virtual" world. How does it differ from traditional estate planning?

Hopkins: It's a lot different because the management is different. In the past if, say, we left paintings to somebody, it didn't impact anyone other than the person who got the paintings. With digital accounts, there's a bunch of management issues that you don't have to worry about with traditional assets.

Why is digital estate planning important?

Most people passing away today who are in their 60s, 70s, 80s and 90s don't have that many digital assets. But in another five or 10 years, we'll start seeing that the majority of those who are dying have these assets. It's going to become more and more of a problem if the accounts get stale sitting online and aren't shut down. No one will know whether or not they're simply "inactive."

I understand that the law is far behind tech advancements when it comes to bequeathing digital assets.

Right. Access is usually controlled by the service agreement with the online companies — the document that pops up when you're creating an account with all the fine print that asks you to agree. This usually tells us whether or not we can transfer the account to someone else at our death. Most people probably don't realize those docs specify that.

Some companies say you can't transfer your online account to anybody when you die — and that's it. In other cases, you're allowed to leave the account to someone. The idea is to be careful with passwords and usernames, and make sure they don't fall into unauthorized hands.

But unlike the "olden days," when everything was private, now companies have a say in what we leave or cannot leave to our heirs. Hmmm.

Yes. You have a username, a password and you've paid for the account; but then you find out that you don't really own it. It feels like it's your stuff, but you discover it might not be yours. iTunes is a good example. You download songs and pay for them. But guess what? The songs aren't yours, and you can't leave them to anyone in your will. All you bought is a lifetime lease. It's not the same as having a record collection and leaving it to someone.

How about client secrets? Suppose someone maintains an online gambling account or is having an extramarital relationship using a private email address.

A lot of people probably have an online account that they don't want somebody or family members to know about. Some have a tremendous amount of money saved in gambling-account credits. So you can have a lot of wealth tied to these accounts, and the client needs to see if they can transfer it to somebody when they die. The best thing to do is keep track of usernames and passwords and make sure that if and when anything happens, someone can get access to those accounts.

Are there special services that can handle accounts that account holders want to keep secret after they die?

Digital estate planning companies can go in upon your death and delete the accounts so nobody else finds outs about them. They can also perform a bunch of other services, like shutting down email. Some send out post-death emails saying that this is the last message the person wanted to send to their family and friends.

Broaching the subject of digital estate planning demonstrates advisors' added value. Does it not?

Yes, because you're bringing up something that the client [likely] isn't dealing with that has a financial or legal impact. Asking, "Have you thought about your online trading accounts? Who's going to manage them if you pass away or become disabled? Now you just go in with your phone, but nobody else knows how to get into those accounts."

A discussion like that could deepen and expand the client relationship.

Right. The advisor may ask: "What happens if you become disabled — go into a coma or develop Alzheimer's — who's going to take care of those accounts?" Then the client might say, "Maybe I shouldn't be putting all of this on me. Maybe I can rely on my advisor more." So now somebody else can manage those accounts if the client can no longer do so. Thus, addressing management of these assets should the client become incapacitated is part of a digital estate plan, too.

Yes. When you're 90, you may not be able to change your password and username and handle other problems if, say, your Home Depot account gets hacked. So somebody else needs to be able to do that for you.

Where's the biggest opportunity for advisors in digital estate planning?

It's with small-business owners. These clients often have done very well and have a lot of value built up. But [creating] a profitable succession plan has always been a challenge to them.

Where do digital assets come in?

Many owners have a lot of wealth tied up in these. They might have a website, online banking, online bill pay, processing orders and deliveries through online accounts. Their business model might even be an online service provider. So it's important to make sure you know where the digital assets are, how much they're worth and who has access to them. This will show that you're up to speed on how that wealth can be protected and become part of succession and estate plans.

What's the risk to entrepreneurs if the digital assets issue isn't handled properly?

If a client has a company with a great deal of assets online but can't give them to the next business owner [successor], that's a problem because it significantly reduces the value and ability of the company to continue.

What's the first thing about digital estate planning to discuss with a client?

Identifying and valuing the assets. Are they only social media assets, like Facebook or Twitter accounts? Probably those have mostly sentimental value. But the client might have online credit with companies that they purchase a lot of [goods and services] from, like airline miles. And then there's email, online bank accounts, e-trade accounts. All of those start to accumulate some financial value.

Hacking is of course a major concern.

Some digital assets open us up to risk. If the account holder dies or becomes incompetent, that can have a very big financial impact on the spouse or children regarding accounts with vendors, like Macy's — places where our credit card information might be stored. They can get hacked if we're not around to take care of them. That is, if the accounts are still active, someone can take advantage.

What about online investment accounts and robo-advisor accounts?

The client should leave their usernames and passwords outside their will and in a more informal estate planning-type vehicle — like an encrypted hard drive that's external to their computer — to let their spouse or one of their kids know about them. They can use an Excel spread sheet to show where their accounts are and what they want to happen to them when they pass away.

Please elaborate on the difference between access and ownership.

You might be able to give somebody access to an account once they die but not ownership of it. So this is something we have to deal with outside the formal estate plan; we can't put [passwords, logins, etc.] in a will because a will becomes public. The companies often won't let us transfer ownership. The laws don't help us here. What can be done to overcome this?

We have to be a little more creative. We might be violating the terms of the service agreement by giving somebody else our password, but that isn't illegal. The company might end the account because we're breaking a contract; but for practical purposes, it will work in most cases.

What about assets stored in the cloud?

They present the same problems, though you may have to deal with only one place: a cloud-based storage company, such as Carbonite. You can back up your whole computer there. But even if you keep everything in one spot in the cloud, somebody still needs to have access to that account to get anything. It's still going to be password- and username protected, and there will still be some service agreement that says it's either transferrable or non-transferrable.

What's a possible solution?

There are digital estate planning companies to which you can give access to your Facebook account, for example. They'll download your photos and music and other assets into their system. That way, when you die, in case somebody can't get access to your account, the company has already downloaded everything and can [distribute it] for you.

Yahoo is one company that, for example, doesn't permit email account transfer, I believe.

Right. It says you can only have the account for your lifetime. You can't give or sell it to anyone else.

Facebook has the same policy?

Yes. But when you pass away, they allow your family to memorialize your account; however, they don't transfer ownership. They'll leave your account up there but will make some adjustments so people can't post certain things. It's a little bit different from an active normal account.

And Twitter?

Unless you set up the account as a business Twitter account, you're not supposed to transfer it to anyone. So again, you could deal with that outside the traditional estate plan: give somebody your login name and password, and they can manage the account or delete it.

What about email in general?

You have a copyright in the actual writing — the content. There have been a couple of law suits about email, but the courts have been mixed.

And Google?

Google now has [a tool], The Inactive Account Manager, which you can use to set up a specific inactive-login time-limit; and then Google will transfer all your email, your password, username to whomever you've designated.

What if you have a Wikipedia page?

Wikipedia is owned by Wikipedia, so you can't leave it to anybody. No one else owns any of the pages, even if you create your own page. What happens to it when you die is up to Wikipedia.

How about your own website?

Web sites are the easiest ones. Most allow you to gift or sell them to somebody. They're pretty transferable. Those have been treated as an actual ownership in the domain names. Can digital assets be included in a trust?

If you've titled them properly, you could have them managed through the trust. But that won't help with, say, Yahoo. The trust will only transfer the rights where there is a right to transfer.

What about leaving online bank accounts to heirs?

With some banks, you're still going to need the traditional things — a will, death certificate, a court order saying you've been appointed the executor. But with others, if you know the username and password, [an heir] will be able to go in and terminate the accounts. It doesn't require face-to-face interaction at the bank. Of course, there's a risk involved with those. That's why we see people hacking these accounts. Once they get the username and password, they might be able to take out all your money, apply for a loan or close down the account.

Should clients appoint someone to be their digital estate planner?

It's a good strategy to put somebody in charge of your digital assets. Sometimes they're called "digital estate executors."

If clients want to avoid hassle, couldn't they just keep many of their digital assets in document form in their computer rather than online?

There's argument for that, at least for some of the things you want to leave people. Carbonite will back up everything onto another computer, like an external software program, so people can have access to it later. That way, it's on something you own: you can give your computer as a digital storage device to anyone you want.

Should the financial advisor coordinate with the estate attorney concerning digital assets?

Yes. It's advisable to have somebody who knows the state laws. For instance, Delaware recently passed laws that allow beneficiaries to get access to online accounts — but not ownership. You want to get that estate planning attorney involved to make sure you're not doing something on the financial advisor side that isn't matching up with the state law or the will. You want to be certain all three coordinate and work together.

Sounds like digital estate planning is a plus for both the client and the advisor.

Yes. For one, it can help advisors learn more about the client, such as what other assets they have. There might be an online gambling account with $50,000 in it. So the advisor is thinking: OK, now I know something else about this client.

— Check out Preparing Your Clients for the Digital Afterlife on ThinkAdvisor.