By: Megan A. Moghtaderi, Esq.
No, it is not a “New Funding Technique” but it is something you need to know for your estate plan. 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.
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.
For purposes of explaining its relevance to estate planning we will address NFTs as though they are pieces of art in an art collection. In terms of physical art collecting, anyone can buy a Picasso print, but there is only one person who owns the original. Others compare such a ownership of an NFT as owning an autographed piece.
If you have an art collection, then it is a part of your total estate’s value. The way your art collection is managed in your estate plan could impact the value of your gross estate in regards to the federal estate tax. When it comes to the goal of minimizing such taxes, it is imperative to consider the implications because the capital gains tax on art and collectibles is 28% opposed to 20% of capital gains on other assets. If you have an NFT, there is speculation that it may be considered a collectible by the IRS and taxed at the higher rate, though the IRS has not yet ruled what NFTs are considered for tax purposes yet.
Further, individual collectors value their art very differently than the IRS. This has caused ongoing battles when there is a death and the art is the subject for capital gains and estate tax purposes.
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.
However, NFTs can be broader than the verifying of digital art and can relate to articles posted, tweets made, or any other digital file access. Moreover, there can be a feature utilized so that the creator of the NFT receives a percentage every time the NFT is sold or exchanges hands,. This makes it a profitable asset to keep track of for your lifetime and estate even if you are the creator and not the owner of the NFT.
I’m hoping now you can see the importance and parallels of an NFT to an art piece, and can realize the importance of proper planning. Naturally, you will want your estate to be well-managed following your passing, as well as retain its value. If you have a NFT collection, you will need to protect it just like you would any other asset you own.
NFTs are complex and it is advisable to consult with an attorney well-versed in the management of digital assets (such as myself) to discuss an estate plan tailored to fit your particular needs just as you would with your art collection.