Cryptocurrencies and other digital assets offer unique security and traceability features, but these attributes could make passing them down to your heirs more complicated. Nicole Ewing, Director, Tax and Estate Planning at TD Wealth, joins Kim Parlee to discuss some key things to consider when including digital assets in your Will or estate plan.
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KIM PARLEE [00:00:03] Making a will, writing a will, planning your estate, it's hard enough, but when you throw in something called digital assets into the mix, it can get a whole lot more complicated. What happens to your media collection, your PayPal account or cryptocurrency when you die? And can you pass them on to your loved ones? Nicole Ewing is a director of tax and estate planning at TD Wealth. She joins me now with her take on this. Nicole, great to have you back. Thrilled that you're back on the show. Can you just set the stage for us and just say, at a high level to start things off, how are managing digital assets different from things like conventional assets, like your home or your money in your bank account?
NICOLE EWING [00:00:45] In a lot of ways they're similar. We're thinking of financial value and sentimental value and we want to ensure that we're passing that on to our loved ones. But in some key ways they're different. And the one that pops to mind immediately is accessibility. And so, frankly, even knowing that the assets exist and then when we do, we have pins and keys and passwords. And if the individual that has those maybe not have the legal authority to access those accounts, the person who does have the legal authority may not have those pins and keys and passwords. So that's certainly a level of complexity. We add on to that the lack of familiarity with the obligations that we have to the various levels of government. And here I'm thinking of tax. So CRA certainly has an interest in these assets. And yet many people haven't really prepared themselves to be able to account properly or to allow their executors to account properly to the CRA. We also have probate tax that might be relevant in certain provinces and some planning that can be done there. Is it a traditional planning or do we need to be doing something a little bit differently? And then it's not only our own province that we're living in or our own country that we're living in, but where are our assets located. Where are these digital assets located? Is this in California where the tech company is resident and we've signed the terms of use with them? Are we then subject to their rules as well? And so taking all of that into consideration is the individual or company that we've made to act as our executor and to help guide our estate through all of this. Are they armed properly to deal with these type of assets in the same way they might be some of our conventional assets?
KIM PARLEE [00:02:42] OK, there's a lot to unpack there, but let's take a few of them, give people some ideas of how they need to start thinking about this. And the first one that you said that caught my attention is that let's talk about crypto currencies. For those who who use them or have them, there's passwords associated with crypto currencies. And, you know, if you give away your password to somebody, they could just take them away from you. So how do you manage that? Because cryptocurrency is inherently secretive. How do you pass on the assets while still keeping them secure?
NICOLE EWING [00:03:16] And this is where the friction comes between the security and yet being transparent enough and open enough to share the information with folks who need it. So there's a few different approaches that people take to this. And it really depends on your level of comfort, the type of asset that you have and the professional advice that you're getting. But password managers is one way of doing that. So we remember one password that then can help generate others and store and keep those secure if we give those passwords to our executor or write those down, are we staying current with those? Are they able to access it? So there's some question of comfort with people there. There's other things that are really creative. We think about the Deadman's Switch and lots of talk about that these days. But if, for example, I don't access a network or an account within a certain period of time, something gets triggered and the assets are either transferred or an email is sent or something happens just by my lack of doing that. Now, I think here what can be used as a shield can also be used as a sword. So if I have set up something that happens no matter what, if this occurs, then even if I don't want it to happen or somebody is preventing me from accessing my sites, that might be not the result that I'm really looking for. And so some people are simply resorting to traditional pen and paper, writing things down, keeping them in lock boxes or fireproof vaults. An interesting one I heard was keeping your key in a number of different components. So maybe having two safety deposit boxes and writing down half the key in one and the half key in the other and giving that information. So a lot of interesting and unique ways of dealing with this. I think that the best tip is to work with an adviser who has experience in this area and who can advise you with respect to your particular assets what the best strategy is.
KIM PARLEE [00:05:24] Yeah, you know, and that's really the key. You need to talk to somebody who understands what your intent is so they can make sure that they're executing with that, which we've always talked about. I know we're not going to get through everything, but I want to touch on this. And this is important. It's about capital gains because an asset is an asset, is an asset. And whether it's a digital asset or a physical asset or if it has a capital gain, I'm assuming that's something you're still going to have to pay tax on.
NICOLE EWING [00:05:50] There's tax associated with certain digital assets and they may be business income, depending on how you're working with that asset during your life. There may be capital gains associated with it. And the key here is, of course, we only want to pay the amount of tax that we're liable for. And the way that we demonstrate what we're liable for is by paying the difference between the fair market value and our cost. If we can't document our cost or our executor, doesn't know where to find that information, we may end up paying much more in tax than we needed to simply because we weren't in a position to be able to defend our position. So keeping accurate documents of your expenses and your costs is a critically important step with digital assets, as with any of your other assets.
KIM PARLEE [00:06:41] Well, you touched on jurisdictions, which just sounds complicated to me as soon as you said that, but tell me just what you meant by that in terms of if the company is based in a different place. How could that affect your assets?
NICOLE EWING [00:06:56] Well, we're used to dealing with assets in our own jurisdiction. So I'm used to dealing with the Ontario government or the Canadian government. But much in the same way, if I owned a property in Florida, for example, I owned real property in another country. If I have an attorney dealing with that property for me, that jurisdiction may not recognize the authority of my Ontario created document. So best advice in those situations has always been to ensure that the documents that you have are valid documents in each jurisdiction in which you have assets. Now, when we think about digital assets, sometimes it's difficult to even know where they're located. But if we do, so I use California as a tech place as a great example, we're dealing not only with privacy law, contract law, state law, and there might be pushes and pulls between what we're used to from our Ontario or B.C. or Alberta rules are saying, and the rules of the jurisdiction in which our assets are located. So we want to be mindful that we have contemplated the different rules of the jurisdictions where our assets are located, not only where we are located ourselves. And there's things that we can do. Perhaps we want to have a separate will to deal with those assets. That might make sense for ease of access for your executor to be able to have a will to deal with assets in a particular location. It may also help reduce probate fees in the provinces where that may be an issue. So if we have significant wealth held up in our digital assets, we might want to be doing secondary or tertiary wills that allow us to reduce the taxes that we would owe on that, but also maybe keep some privacy. And, key point here, when I say privacy, any of the documents that we're creating, if we're documenting things in a will and that's submitted to the courts for probate, that becomes a public document. So we certainly don't want to have any of those keys or coins or other identifying information that would allow somebody to access to become a public document. So we would want to seek appropriate advice about where to do that. That might be in a memorandum. Again, it might be a document that you keep outside of your will, which is making sure that you've thought through doing your inventory so that you have the opportunity to really think through the different types of assets you hold. If it's websites, if it's cryptocurrency, you may have domains, you may have Facebook or other social media accounts that you want to think through. But each one of those is going to require a look from that holistic perspective. What are we trying to achieve? What's the legacy that we're trying to leave? Who are the beneficiaries? What are their particular circumstances? And making sure that we're really looking at this from a broad perspective to make sure that we're reaching our goals.
KIM PARLEE [00:10:03] Amazing information, Nicole. As always, just great to hear from you. Thanks so much for joining us. We'll have you on again soon.
NICOLE EWING [00:10:11] My pleasure, Kim. Thanks.
NICOLE EWING [00:00:45] In a lot of ways they're similar. We're thinking of financial value and sentimental value and we want to ensure that we're passing that on to our loved ones. But in some key ways they're different. And the one that pops to mind immediately is accessibility. And so, frankly, even knowing that the assets exist and then when we do, we have pins and keys and passwords. And if the individual that has those maybe not have the legal authority to access those accounts, the person who does have the legal authority may not have those pins and keys and passwords. So that's certainly a level of complexity. We add on to that the lack of familiarity with the obligations that we have to the various levels of government. And here I'm thinking of tax. So CRA certainly has an interest in these assets. And yet many people haven't really prepared themselves to be able to account properly or to allow their executors to account properly to the CRA. We also have probate tax that might be relevant in certain provinces and some planning that can be done there. Is it a traditional planning or do we need to be doing something a little bit differently? And then it's not only our own province that we're living in or our own country that we're living in, but where are our assets located. Where are these digital assets located? Is this in California where the tech company is resident and we've signed the terms of use with them? Are we then subject to their rules as well? And so taking all of that into consideration is the individual or company that we've made to act as our executor and to help guide our estate through all of this. Are they armed properly to deal with these type of assets in the same way they might be some of our conventional assets?
KIM PARLEE [00:02:42] OK, there's a lot to unpack there, but let's take a few of them, give people some ideas of how they need to start thinking about this. And the first one that you said that caught my attention is that let's talk about crypto currencies. For those who who use them or have them, there's passwords associated with crypto currencies. And, you know, if you give away your password to somebody, they could just take them away from you. So how do you manage that? Because cryptocurrency is inherently secretive. How do you pass on the assets while still keeping them secure?
NICOLE EWING [00:03:16] And this is where the friction comes between the security and yet being transparent enough and open enough to share the information with folks who need it. So there's a few different approaches that people take to this. And it really depends on your level of comfort, the type of asset that you have and the professional advice that you're getting. But password managers is one way of doing that. So we remember one password that then can help generate others and store and keep those secure if we give those passwords to our executor or write those down, are we staying current with those? Are they able to access it? So there's some question of comfort with people there. There's other things that are really creative. We think about the Deadman's Switch and lots of talk about that these days. But if, for example, I don't access a network or an account within a certain period of time, something gets triggered and the assets are either transferred or an email is sent or something happens just by my lack of doing that. Now, I think here what can be used as a shield can also be used as a sword. So if I have set up something that happens no matter what, if this occurs, then even if I don't want it to happen or somebody is preventing me from accessing my sites, that might be not the result that I'm really looking for. And so some people are simply resorting to traditional pen and paper, writing things down, keeping them in lock boxes or fireproof vaults. An interesting one I heard was keeping your key in a number of different components. So maybe having two safety deposit boxes and writing down half the key in one and the half key in the other and giving that information. So a lot of interesting and unique ways of dealing with this. I think that the best tip is to work with an adviser who has experience in this area and who can advise you with respect to your particular assets what the best strategy is.
KIM PARLEE [00:05:24] Yeah, you know, and that's really the key. You need to talk to somebody who understands what your intent is so they can make sure that they're executing with that, which we've always talked about. I know we're not going to get through everything, but I want to touch on this. And this is important. It's about capital gains because an asset is an asset, is an asset. And whether it's a digital asset or a physical asset or if it has a capital gain, I'm assuming that's something you're still going to have to pay tax on.
NICOLE EWING [00:05:50] There's tax associated with certain digital assets and they may be business income, depending on how you're working with that asset during your life. There may be capital gains associated with it. And the key here is, of course, we only want to pay the amount of tax that we're liable for. And the way that we demonstrate what we're liable for is by paying the difference between the fair market value and our cost. If we can't document our cost or our executor, doesn't know where to find that information, we may end up paying much more in tax than we needed to simply because we weren't in a position to be able to defend our position. So keeping accurate documents of your expenses and your costs is a critically important step with digital assets, as with any of your other assets.
KIM PARLEE [00:06:41] Well, you touched on jurisdictions, which just sounds complicated to me as soon as you said that, but tell me just what you meant by that in terms of if the company is based in a different place. How could that affect your assets?
NICOLE EWING [00:06:56] Well, we're used to dealing with assets in our own jurisdiction. So I'm used to dealing with the Ontario government or the Canadian government. But much in the same way, if I owned a property in Florida, for example, I owned real property in another country. If I have an attorney dealing with that property for me, that jurisdiction may not recognize the authority of my Ontario created document. So best advice in those situations has always been to ensure that the documents that you have are valid documents in each jurisdiction in which you have assets. Now, when we think about digital assets, sometimes it's difficult to even know where they're located. But if we do, so I use California as a tech place as a great example, we're dealing not only with privacy law, contract law, state law, and there might be pushes and pulls between what we're used to from our Ontario or B.C. or Alberta rules are saying, and the rules of the jurisdiction in which our assets are located. So we want to be mindful that we have contemplated the different rules of the jurisdictions where our assets are located, not only where we are located ourselves. And there's things that we can do. Perhaps we want to have a separate will to deal with those assets. That might make sense for ease of access for your executor to be able to have a will to deal with assets in a particular location. It may also help reduce probate fees in the provinces where that may be an issue. So if we have significant wealth held up in our digital assets, we might want to be doing secondary or tertiary wills that allow us to reduce the taxes that we would owe on that, but also maybe keep some privacy. And, key point here, when I say privacy, any of the documents that we're creating, if we're documenting things in a will and that's submitted to the courts for probate, that becomes a public document. So we certainly don't want to have any of those keys or coins or other identifying information that would allow somebody to access to become a public document. So we would want to seek appropriate advice about where to do that. That might be in a memorandum. Again, it might be a document that you keep outside of your will, which is making sure that you've thought through doing your inventory so that you have the opportunity to really think through the different types of assets you hold. If it's websites, if it's cryptocurrency, you may have domains, you may have Facebook or other social media accounts that you want to think through. But each one of those is going to require a look from that holistic perspective. What are we trying to achieve? What's the legacy that we're trying to leave? Who are the beneficiaries? What are their particular circumstances? And making sure that we're really looking at this from a broad perspective to make sure that we're reaching our goals.
KIM PARLEE [00:10:03] Amazing information, Nicole. As always, just great to hear from you. Thanks so much for joining us. We'll have you on again soon.
NICOLE EWING [00:10:11] My pleasure, Kim. Thanks.