California’s estate planning laws have only recently begun to accommodate the realities of today’s ever-changing world. In the past decade, hundreds of thousands of Americans have made veritable fortunes from digital investments. While the media has given a lot of attention to cryptocurrencies such as Bitcoin, virtual wallets are far from the only digital asset worth protecting. Nonfungible tokens (NFTs) are a lesser-known but critically important component of many digital estates.
Understanding Nonfungible Tokens
An NFT is a unique, cryptographic asset on a blockchain. In general, nonfungible tokens have unique identification codes that distinguish them from other tokens. Nonfungible tokens are often used to evidence ownership of, or an ownership interest in, particular digital assets. Ordinarily, NFTs are purchased to support independent musicians and artists. However, nonfungible tokens could also be used to virtually indicate possession of physical assets, including real estate and collectibles.
Nonfungible tokens differ from conventional cryptocurrencies, as they cannot be sold or traded for an equivalent economic value.
Estate Planning Tips for NFT Owners
The Golden State’s probate code was not written to protect digital assets. Nonfungible tokens, along with some other digital assets, cannot currently be retitled to a revocable living trust or another conventional legal arrangement.
However, nonfungible token owners can still consider the following strategies to ensure that their digital possessions become an integral part of their legacy:
Treat Your NFT as an Ordinary Estate Asset
Since many nonfungible tokens connote ownership of valuable assets, you should treat your NFT as a potentially inheritable possession. While you cannot easily retitle a nonfungible token to a revocable living trust, you should list it as an asset in your estate plan. When you pass away, your attorney or successor trustee can locate the token and manage its use.
Monitor Your NFT’s Value
Nonfungible tokens do not have the same inherent value as cryptocurrencies, but they are still assets that can—in many cases—accrue capital gains and losses. Depending on the nature of your NFT, you may need to pay taxes on any revenue it generates.
Nominate a Successor Trustee
Your estate plan should include detailed instructions for your successor trustee. For example, you should list all of your nonfungible tokens, and indicate how they can be accessed after your death.
Incorporating Nonfungible Tokens Into a Trust-Based Estate Plan
Trusts have a variety of uses. However, most Californians establish trusts to ensure that their families are not subjected to the rigors of probate—the process of formally dissolving and distributing an estate. Since trusts are legal entities rather than living persons, the assets held or managed by a trust are not customarily subjected to probate.
While you cannot retitle nonfungible tokens to a revocable living trust, you could still incorporate them into a trust-based estate plan. For example, your trust documents could include specific instructions allowing your successor trustee the authority to access your digital assets after your death.
Once your successor trustee gains possession of the nonfungible tokens, they can manage your digital assets in accordance with your last wishes.
The Importance of Regularly Revising Your Estate Plan
Even if you already have a California estate plan, the Golden State’s probate code is constantly changing. In the past several years, the state legislature has made significant progress in recognizing the prevalence of digital assets in everyday life.
Since California’s laws can change quickly and with little notice, your estate plan may need to be revised to account for recent developments. Absent any adjustments, an outdated estate plan could jeopardize your legacy, leaving prized digital assets without any protection.
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