If you’ve purchased or are planning to buy an NFT, you may be wondering how best to protect your investment for the next generation.
An NFT (non-fungible token) is an electronic asset. It’s digital, not physical, and is completely unique. No two NFTs are the same. NFTs are the digital counterparts of more traditional investments and keepsakes, like stamps, baseball cards, or pieces of art. It can represent music, photos, videos, social media messaging, or other types of digital files. Other than collectibles, a person could use an NFT to secure or authenticate other physical assets; it may soon be used to transfer title to personal or real property.
As NFTs are unique and cannot be copied, some people create them solely for profit. (Like a painter creating one piece of artwork). The process of creating an NFT is called minting, and it’s similar to the way that cryptocurrency is created. The person minting the NFT links the digital token to the digital property that it represents. NFT creators sell their tokens on a global scale. Many receive royalties each time the NFT is re-sold.
The value of an NFT, just like other personal property or real estate, depends on the market. If the NFT is scarce or highly sought after, it will likely have a higher value. Some examples of high-value NFTs include Jack Dorsey’s (the founder of Twitter) first tweet, the digital copy of Yankees Hall of Famer Lou Gehrig’s “Luckiest Man” speech, and a digital image of NBA great Lebron James.
Storing Your NFTs
NFTs are stored on a blockchain, which is like a digital database or ledger. Storing the token on the blockchain helps ensure that the NFT is unique and not interchangeable. The blockchain also keeps transaction records (ex: owner(s), transaction day, transaction time). Blockchains continuously update and can be synced to multiple devices.
When someone purchases an NFT, the token is stored in a digital wallet. This wallet can be accessed via a computer, flash drive, tablet, smartphone, or over the Internet. In order to recover the wallet, the owner must use a seed phrase – this is a list of 12 to 24 random words tied to a private key. If the digital wallet is on a commercial platform, the user will need to supply their name, password, and the answers to several security questions.
NFTs and Estate Planning
If a person owns, or is planning to own, an NFT, there are several things to consider when including the NFTs in their estate plan:
- Holding NFTs in an LLC: The owner of the NFT may want to hold the token(s) in a limited liability company. Using an LLC can help protect the assets, make it easier to sell or transfer the them, or offer some tax discounts.
- Capital Gains: The NFT owner should keep careful records of the price they paid for the tokens as well as the selling price (if applicable). You’ll need the exact amount of capital loss/gains for tax purposes.
- Access: The seed phrase for the digital wallet should be securely stored during the owner’s lifetime and then transferred to the beneficiary of the NFT. Without that seed phrase or other access information, the NFT will be lost forever. The NFT owner should have a safe, designated place to keep the information. They should also let the beneficiary know where the information is kept and how to access it. Note: The seed phrase should not be included in the owner’s will, because the document will become public when probated – and then anyone could be able to access the NFT.
- Including in Your Will: The person who owns the NFT(s) can make a general gift, or they can gift specific tokens to specific individuals. If the owner has a large collection of NFTs, they may want to appoint a “digital” executor who is responsible for dealing with all of the estate’s digital assets. If the owner does not mention the NFTs in their will, the tokens will pass to the beneficiary under the will’s residuary clause.
Have Additional Questions? Contact our Estate Planning Team
While NFTs are a new and evolving technology, it’s always a good idea to be planning ahead when it comes to your assets and investments. If you have questions about NFTs and how best to include them in your estate plan, please reach out to our team of experienced estate planning attorneys. You can call (770) 933-9009 or use our online contact form. We’re always happy to help.