Estate PlanninG

What You Should Know About NFTS and Estate Planning

Nonfungible tokens (NFTs) are growing in popularity, and while strictly virtual, can make you very real money.

What is an NFT?

An NFT is a unique digital code that represents a digital item, such as art or music, as well as a growing number of physical items, that run on the blockchain (a secure, decentralized, and cryptography-backed online ledger) and provides proof of ownership of virtual collectibles. As the name indicates, the token is nonfungible. That means it’s unique and cannot be directly replaced by, or exchanged one-for-one for, another token.

Fungible assets, on the other hand, are mutually interchangeable. They include things such as the US dollar and Bitcoin. One dollar bill can be exchanged for another dollar bill, and one Bitcoin is equal to another Bitcoin. But no two NFTs are the same.

But here’s where things get tricky: NFTs don’t necessarily derive their worth from their uniqueness, even though that’s part of their value. Typically, an NFT is linked to a specific digital item and serves as a sort of certificate of authenticity for that item. Tokenizing assets and putting them on the blockchain makes buying, selling, and trading the assets safer and more efficient.

If that sounds confusing, that’s because it is.

NFTs represent and are used to sell the following types of digital collectibles and assets, among others:

  • collectible sports cards (e.g., NBA Top Shot)

  • digital art, such as music, videos, and images

  • tokenized version of tweets and GIFs

  • trading games (e.g., CryptoKitties)

  • in-game items

  • rarities and collectibles

  • virtual real estate (e.g., Decentraland)

NFTs can also represent unique real-world items that require provable ownership, such as event tickets, unique fashion items, and legal documents such as property deeds and car titles. However, the tokenization of physical items is not yet as developed as the tokenization of digital items.

In the past year, certain NFTs have sold for millions of dollars. NFTs can generate new streams of income for creators and hold great value for collectors. If you own NFTs or plan to invest in them, you should update your estate plan accordingly. Handing down an NFT is more complicated than passing down a physical item or other traditional assets. But with so much buzz around NFTs, they could end up being extremely valuable items in your estate.

How Do I Buy an NFT?

Most NFTs are sold in online marketplaces. Some of the more popular NFT marketplaces include OpenSea, Mintable, Nifty Gateway, Rarible, and Zora.

NFTs must be purchased with cryptocurrency (crypto). The most popular crypto for buying NFTs is Ethereum. To get started, you will need a cryptocurrency wallet, which is an application that allows you to send and receive cryptos and make purchases. Once you are on an NFT marketplace site, connect your wallet, and then search for and buy NFTs. You will be bidding against other buyers like an auction.

What Do I Do With an NFT?

Congrats, you bought an NFT. Now what?

Unlike a physical item, you’ll never be able to hold an NFT in your hand or hang it on your wall. Your options for what to do with an NFT depend on what it is. If it’s digital artwork, you can display it on a monitor or inside a metaverse such as Decentraland. With NFTs, you can also own virtual real estate and other unique items in the metaverse. In fact, the full potential of NFTs seems inextricably tied to the development of the metaverse’s 3D digital environment.

You might want to just hold on to your NFT as an investment. If its value goes up over time, you can sell an NFT for a profit. It’s not unheard of for collectors to sell NFTs for more than a hundred times the amount they paid.

So while you won’t be able to physically possess an NFT, it can be worth very real money. That NFT you buy today could end up being worth more than any of your traditional accounts and property.

NFTs and Estate Planning

NFTs can only have one owner at a time. NFTs are stored in a wallet, similar to a crypto wallet. Although the NFT is stored on the decentralized blockchain, not an actual wallet, the wallet has digital keys that give you access to your NFT. The wallet must be compatible with the type of blockchain on which the NFT is built (usually Ethereum).

Transferring an NFT can be done in a matter of minutes. You select the NFT you want to transfer from your wallet, enter the recipient’s wallet address, and send the token.

Access to your digital wallets should absolutely be part of your estate plan. Without a detailed plan that ensures access to your cryptocurrency, NFTs, and other digital assets, they could be lost forever once you are no longer around to personally transfer them to someone else. In your estate plan, you can include instructions about whom the assets should pass to, when they should be transferred, and how to log into your digital wallets (i.e., your wallet ID, password, and any two-factor authentication you have enabled).

If you need help setting up an estate plan that covers nontraditional digital assets like NFTs, or if you have questions about your digital legacy, reach out to our office today. Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840.

Read more about digital assets and estate planning:

What Happens to Our Social Media Accounts When We Die?