Estate Planning With An NFT And What An NFT Is

By: Randall A. Denha, Esq.

Non-Fungible Tokens (NFT) are a type of digital asset. NFTs are held in a digital wallet just like a cryptocurrency would be, but they work differently. Blockchain technology makes it almost impossible to forge records, ensuring that the purchaser of an NFT holds a token representing sole ownership of the original work that he or she has purchased. Because each NFT is unique, they cannot be traded for equal value like cryptocurrency or traditional forms of currency are traded. NFTs are more similar to original authentic collectibles, but they exist within the world of crypto. Due to both a recent increased demand for NFTs and their distinctive properties, more and more individuals are seeking information about estate plans that protect and provide for their NFTs.

Unlike other digital assets, NFTs are designed to show who has ownership of a virtual item. While one cryptocurrency held by one user is the same value as the same type of currency held by another user, an NFT is unique. NFTs are designed to provide proof of an original and therefore make it more valuable by that very virtue.

NFTs can represent photos, videos, audios, artwork, gaming tokens, or any other type of digital file. Now, how does an NFT get created or as they say, minted, or born? Well, first they are created on a blockchain. Ethereum is the most popular one. Then we have the creator, who will often be an artist of some sort, and will link the NFT to a specific item of intellectual property that it represents, links it to the photo, the video, whatever.

So, let’s start now by looking at some examples. The most valuable NFT ever was just sold by the auction house, Christie’s, on March 11th of 2021, and it was called EveryDays: the First 5000 Days by Beeple. It is a collage of 5,000 individual pieces that were created daily for over 13 years. And I hope you’re sitting down for this, because this NFT sold for over $69 million.

Now, there are other examples that aren’t nearly as expensive. For example, gaming tokens that are used in various online games. One of the ones that are very popular is called CryptoKitties. It’s an online trading card game that allows users to buy, sell, and breed unique NFT kittens. There was one recently called Dragon, that was sold for $172,000. But this is a game that kids and people play. So, the prices aren’t always high. The average price back in 2018 for a CrypoKitty was $60, with the median price just being $9. So, they can be bought and sold very economically.

In addition to NFTs being used for gaming items, the sports industry is also getting into the selling of NFTS, which makes sense because they already are familiar with selling baseball cards and other tradeable items. So, the NBA has actually set up a digital trading card platform, which is called Top Shot, and they recently sold an NFT entitled LeBron James, Dunk From the Top for $210,000.

The following are special considerations to keep in mind for NFTs In Estate Planning:

• Providing Access: In the overwhelming majority of instances, NFTs can only be accessed using a password or a personal key. In order to access your NFTs, this information must be passed on to future beneficiaries. Individuals seeking to pass on cryptocurrency, NFTs, and other online assets should consider creating a “digital legacy” to accurately describe important accounts and store information about how to access the assets within these accounts. Digital legacies can be created by backing up information securely using cloud data storage providers or by using apps created specifically for planning digital legacies. This information should be kept private, but your estate plan will need to clearly outline the particulars of your digital legacy in order to effectively transfer your digital assets, including NFTs.

• What Information and When: You should also consider what information you would like to make available, as a blanket authorization of access to your digital assets may not be suitable for your estate plan. It is recommended that you use careful consideration in deciding which digital assets you would like to make accessible to your fiduciaries. When adding NFTs to an estate plan, further protect your digital assets from being sold or liquidated by explicitly outlining how and when the NFT should be transferred to beneficiaries.

• Estate Planning Instruments: Although it is possible to plan for digital assets in a will, individuals who own NFTs should consider the benefits of planning for these assets in a trust. By transferring your NFTs into a trust rather than transferring them outright via a will, you can avoid the probate process. Your NFT assets will not be reachable by creditors or divorcing spouses of your beneficiaries, and the NFTs would not be included in the beneficiary’s taxable estate upon his or her death. Offshore trusts provide particularly strong asset protection in favorable legal jurisdictions that exist outside the United States. Offshore trusts provide significant tax advantages, including the benefit that trust income is treated as ordinary income for U.S. tax purposes.

• The Novelty of NFTs: Digital assets are still relatively new, and they are evolving rapidly. Blockchain technology is secure, but it is designed to prevent forgery, not necessarily theft. Applications built on or around blockchain technology are not as inherently secure as the blockchain technology itself. Recently, users of certain digital art marketplaces have reported that thousands of dollars of NFT art were stolen from their accounts. If a hacker steals an NFT and resells it, the blockchain will irreversibly record the sale. Other issues arising from NFTs include fraudulently created NFTs, false chains of ownership for NFTs, and URL issues tied to NFTs that make the NFTs vulnerable to vanishing unexpectedly. Laws surrounding NFTs and their transference will continue to fluctuate in the foreseeable future. Accounting for NFTs in an estate plan requires continued attention to the developments in NFT technology, NFT security, and the laws surrounding the transfer of digital assets.

Additionally, this is going to make a huge wave of importance in not only the planning of your estate, but when it comes time to administer it. If you have an amazing art collection and it is not held in your Trust, then your estate and art collection can be subject to probate depending on its value. Likewise, if you hold a valuable NFT collection, it is quite possible that your estate would have to be probated if not properly held.

Is there any estate planning advice to keep in mind? It’s important to ask your client if your client owns or intends to purchase NFTs. This is a question that should begin being asked because recognizing that the client’s ownership of just one NFT could actually equal a taxable estate in some circumstances.

Also, it’s imperative that the taxpayer tracks the price paid and the amount received when it’s sold because these types of things will accrue capital gains and capital losses, and that needs to be properly computed so the correct taxes can be paid.

Now, what about using NFTs as a trust investment? Well, think about the prudent investor standard. Investment decisions must be made in the context of the trust portfolio as a whole and as part of an overall investment strategy having risk and return objectives reasonably suited to the trust. Well, NFTs, I think, are way too risky. Their value is extremely volatile. Remember, you can kind of look at this as an analogy to cryptocurrency. And look at the huge price swings in Bitcoin and other cryptocurrencies.

So, a trustee should be extremely hesitant to invest in NFTs unless they have express permission from the settlor, a release by the beneficiaries, or an authorization in a court order. Before we finish, a few warnings are important. If your client has an NFT, they must protect and be sure to transfer the private key and any other information needed to access the NFTs. You have to be sure someone knows the client owns an NFT and that they can have access to the private keys and passwords to access the digital wallets where these things are stored. Otherwise, without that access information, an NFT, just like cryptocurrency, could be lost forever.

Portions of this Blog Article are taken from the ACTEC Trust and Estate Talk podcast/blog series, and speaker ACTEC Fellow Professor Gerry Beyer: see, https://actecfoundation.org/podcasts/non-fungible-tokens-estate-nft