Leaving an NFT in a Will. What to do with the Password. Sample Will Provisions. Tax Implications.

NFTs are valuable assets, and it is wise to include them in your estate planning documents such as a will or trust. The last thing you want is for ownership of your NFT to disappear with your death. You want your loved ones or a charity to enjoy the NFT after your death or to be able to sell it and keep the proceeds or buy something else they like.

Not a good idea to write your NFT passwords in the will itself

NFTs can only be accessed by a passkey. If you die without anyone knowing how to access your NFTs with a passkey, your NFT will be lost forever. But putting the password in the will itself is a bad idea. Your will, once probated, becomes a public record. As a public record, anyone can have access and read it. If you write your passwords in the will, anyone can access your account and steal your NFT. For this reason, most estate planning attorneys advise to simply list your digital assets, i.e., NFTs, in your will, but to store the memorandum containing all the passwords to your digital assets in a separate private file.

If you do not mention your NFT in the will, the NFT will be part of your remainder assets which will be given to the remainder beneficiary/ies. However, if your executor or these beneficiaries do not even know of the existence of your crypto or NFT, there is little chance for them to access these accounts and your digital assets may be lost forever.

Storing your passwords can be as simple as storing them in a password-protected file in your Dropbox or other cloud storage or in a password storage program. Alternatively, you can write a memorandum as part of your estate planning documents which would include a list of your digital assets, i.e., cryptocurrencies, NFTs, etc., and how to access it and store in a bank safety deposit box. You can then state in your will that a particular bank safety deposit box contains the information required to access your digital assets, such as NFTs, and leave the contents of the bank safety deposit box to a particular beneficiary.

Sample NFT provision in a will

An estate planning attorney may include a provision in your will that disposes of your NFT. A sample provision may look like this:

I leave and bequeath my (cryptocurrency, NFT, digital asset or anything found in my cryptocurrency wallets) to (insert name of beneficiary).

My digital assets are stored in (insert name of cryptocurrency wallets). These items are to be distributed to (beneficiary name).

I have created a separate memorandum from this will that explains how to access my cryptocurrency wallets and online cryptocurrency accounts. This memorandum contains passwords, PINs, and private keys needed to access my cryptocurrency accounts and is safely stored in (bank safety deposit box or other location).

Estate tax liability for NFTs you leave in a will

When you leave NFTs and other digital assets in your will, this will be included as part of your gross estate in determining the computation and payment of estate taxes. When leaving NFTs in a will, it’s a good idea to include your acquisition cost in the crypto memorandum that you plan to leave to your designated executor and/or beneficiary so that the cost basis is recorded and income can easily be determined.

NFTs in estate planning are a relatively new and emerging area of law, since NFTs only became popular sometime in 2021. If you would like to leave NFTs in your will or in a trust, it is important to consult with a technologically savvy lawyer who can understand your needs. Should you need assistance, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York City, Brooklyn, NY and Queens, NY. You can call us at 212-233-1233 or send us an email at [email protected].

Understanding NFT Ownership

Before estate planning for NFTs, it's important to understand what NFT ownership actually involves:

• An NFT is a unique token recorded on a blockchain (Ethereum, Solana, Polygon, etc.).
• Ownership is established by control of the private key that authorizes transfers from the wallet holding the NFT.
• The token may represent ownership of digital art, collectibles, music, in-game items, or other content.
• The underlying content may or may not include intellectual property rights.
• The market for NFTs can be highly volatile.
• Storage typically involves wallet software (MetaMask, Trust Wallet, Ledger) and the private keys that control access.

Without the private key, the NFT cannot be transferred. Loss of the key effectively destroys the value of the NFT for the holder.

Types of NFT Storage

NFTs can be stored in different types of wallets, each with different estate planning implications:

• Custodial wallets (exchanges). The exchange holds the keys; access requires the exchange's cooperation. Estate planning involves giving the executor access to the exchange account.
• Hot wallets (software wallets on phones or computers). Convenient but vulnerable to malware. Estate planning involves communicating wallet access information.
• Cold wallets (hardware wallets). Physical devices that store keys offline. Estate planning involves locating the device and the device PIN.
• Multi-signature wallets. Require multiple signatures for transfers. Estate planning involves communicating all required information.
• Smart contract wallets. Programmable wallets with various access rules. Estate planning involves understanding the specific access controls.

The Password and Key Management Challenge

The fundamental estate planning challenge for NFTs is securely conveying access credentials to the executor:

• The credentials must be kept secret during life.
• The credentials must be retrievable at death.
• The retrievability must be limited to authorized people.
• The arrangement must survive technical changes (password expiration, security upgrades).

Various approaches address this challenge:

• Sealed envelopes in attorney custody, opened upon death.
• Encrypted files with the decryption key separately stored.
• Password managers with emergency access provisions.
• Bank safe deposit boxes containing credential information.
• Digital asset trustee services offered by specialized providers.
• Multi-signature arrangements requiring family member participation.

Tax Considerations for NFTs

NFT estate planning involves several tax considerations:

• Estate tax valuation. NFTs must be valued at death for estate tax purposes. Valuation can be challenging given market volatility.
• Step-up in basis. Heirs inherit NFTs with a basis equal to fair market value at death (or alternate valuation date).
• Capital gains on later sales. If heirs sell the NFTs, capital gains are calculated from the stepped-up basis.
• Income tax issues during life. If the deceased was a creator or trader of NFTs, ongoing income tax matters may exist.
• Cryptocurrency tax matters. Many NFT transactions involve cryptocurrency, with their own tax implications.

Valuation Methodology

Valuing NFTs for estate tax purposes is challenging:

• Recent sales of the same NFT. Provide direct evidence of value but may not be available.
• Floor prices of the collection. The lowest current asking price for any NFT in the same collection provides a baseline.
• Average sale prices. Recent sales of similar NFTs in the collection.
• Comparable sales. Sales of comparable NFTs in similar collections.
• Professional appraisals. Specialized appraisers in the NFT space can provide formal valuations.

The valuation should be documented thoroughly to support estate tax filings.

Heir Considerations

Before leaving NFTs to specific heirs, consider:

• Technical sophistication. Can the heir actually manage the NFTs after death? If not, conversion to cash or assignment to a more sophisticated heir may be preferable.
• Interest in the NFTs. Does the heir care about the specific items, or would they just sell immediately?
• Tax considerations. Multiple heirs sharing a single high-value NFT creates complications.
• Storage capability. Does the heir have or can they develop appropriate storage solutions?
• Risk tolerance. NFT values are volatile; can the heir handle that?

Comprehensive Digital Asset Inventory

NFT planning is part of broader digital asset planning. A comprehensive inventory should include:

• Cryptocurrency holdings and the wallets containing them.
• NFTs and the wallets containing them.
• Online accounts (email, social media, financial accounts).
• Domain names and websites.
• Cloud storage accounts.
• Digital media subscriptions.
• Online business interests.
• Loyalty programs with significant value.
• Photo and document archives.

The inventory provides a roadmap for the executor to identify and address all the deceased's digital assets.

The Revised Uniform Fiduciary Access to Digital Assets Act

New York has adopted RUFADAA (Revised Uniform Fiduciary Access to Digital Assets Act), which provides a framework for fiduciary access to digital assets:

• Service providers must give fiduciaries access if the user authorized it through an online tool or in the will.
• Default rules apply if the user did not specifically address digital assets.
• Specific procedures govern access requests.
• Privacy protections balance against fiduciary needs.

RUFADAA does not solve all problems — service providers can still impose practical obstacles — but it provides legal authority for fiduciaries to seek access.