When You Pass On, Don’t Leave the Passwords Behind

Digital assets and passwords - RIPIsn’t it fun keeping track of all the different user names and passwords required in a digital world?  I updated my own list a week ago and I had 52 of them, 3 with Apple alone.  If you think it is tough getting into some websites now, can you imagine what happens when someone dies and their digital information needs to be accessed?  It can be a mess.  Leonard Bernstein died in 1990. His password protected memoir Blue Ink has not been broken into yet.

Online accounts have expanded exponentially.  Digital accounts and property may greatly exceed an individual’s paper records and lists of those records.  We are now at the beginning stages of how to include digital assets in estate planning.

On April 19th, Robert W. “Bobby” Pearce, Jr. of Smith Moore Leatherwood LLP presented “Digital Estate Planning” to the Estate Planning Council of Charleston.  My take away from his excellent presentation is that with the explosion of digital assets, all of us must rethink our estate planning.  Who owns the digital assets? Who can access the assets? In short, Bobby suggested that currently, the “rights of representatives, executors, beneficiaries and others are as clear as mud.”

Digital assets are any online property you own including any file, email, documents, photos, videos and images stored on digital devices including desktops, laptops, tablets, smart phones and other storage devices.  Digital accounts are email accounts, software licenses, bank accounts, social networking accounts, domain names, professional accounts, personal accounts and other online accounts.

Mr. Pearce indicated that the current legal status of online property records is largely dealt with by each online website’s Terms of Service (“TOS”). And TOS’ differ greatly.   For example, for yahoo, the account is nontransferable and will be deleted after 90 days.  Google requires a cumbersome process to obtain access to an account. Ultimately, court orders may be needed in both situations.  Only one state, Oklahoma has passed legislation dealing with digital property.  The question is, does the statute trump the TOS contract?  And what happens in the other 49 states?

There are other issues.  What is the value of your digital property?  Domain names and copyrighted work online may have commercial value.  And what about the personal and emotional value of photos and videos on Flickr, You Tube and other sites?  Who should be in charge of your online accounts, user names and passwords when you die?  What will be your instructions to the person?

At a minimum, you should get the following done now:

  1. Inventory your digital assets of all types and locations
  2. Identify the person to handle them
  3. Provide a list of accounts, user names, passwords, PINs and answers to security questions
  4. Instruct your designated person with how you want these to be managed
  5. Provide authority through a digital asset POA or other means

In short, it’s time to put your digital asset affairs in order.

Simplifying the Tax Code

 

Simplifying the income tax codeMillions of Americans participated this week in the annual ritual of filing income taxes-probably cursing this confusing, complicated process. While many politicians rail about the complexity of the tax system, few are actually willing to support meaningful simplification efforts. The chart above demonstrates the problem.

 

Current individual income tax breaks exceed $1 trillion per year. It may come as a surprise that the largest is the exclusion for employer-provided health insurance coverage. If taxed, Uncle Sam would get an extra $164 billion in annual revenue but employers might drop coverage and get out of the health insurance business for their employees. The mortgage interest deduction costs U.S. coffers $100 billion annually. But repealing that deduction would raise the cost of housing for homeowners and likely cause a further drop in home prices. Eliminating deductions for charitable donations would certainly hurt not-for-profits at a time when many are already struggling from reduced state and federal support.

 

Two years ago, Alan Simpson and Erskine Bowles, co-chairmen of the National Commission on Fiscal Responsibility and Reform put forward a plan to wipe the slate clean and start from scratch. They proposed eliminating all deductions, exclusions and credit and provide three tax brackets; 8%, 14% and 23%. The Simpson-Bowles proposal, which also included huge budget cuts, was finally brought to a vote in the house on March 28. It received only 38 votes. The fact is that the majority of the “tax breaks” are immensely popular and have become imbedded in our economy and society. Americans are not prepared to live without them.

 

Recently, Professor Michael Graetz of Columbia Law School came up with another possible solution. He would abolish the income tax for most Americans and replace the revenue with a 12.5% value-added-tax. Prof. Graetz would give each family a $100,000 tax exemption, which would eliminate income tax for 90% of those currently filing. For those with income above $100,000, top tax rates would be 20-25% on taxable income. Mr. Graetz outlined the details in his 2007 book “100 Million Unnecessary Returns.” His basic concept is that if the current tax breaks are so much a fabric of our society that their elimination is unlikely, then make them irrelevant to most Americans by instilling a large exemption and a new VAT tax.

Very interesting.

Gentlemen Prefer Bunds (German Bonds)

On March 10th, U.S. stocks declined for a fifth day.  The reason most often given was concern over Europe. Bond prices on most European bonds have declined, producing higher yields. Investors have flocked to safe havens, such as U.S. and German bonds, pushing those prices up and those yields sharply lower.

Spain’s ten year bonds are now yielding 5.8%. Spain is entering its second recession in three years, unemployment is at 23% and the government expects the economy to contract about 1.7% in 2012. The Spanish stock market is the lowest since March 2009. The concern is that austerity measures could have the effect of further depressing growth and creating a vicious cycle in which more budget cuts are needed to balance the books. Italy’s ten year bonds are not far behind, yielding 5.5%.

French business confidence has stagnated and factory output has dropped. Manufacturing production fell 1.2% in February and the Bank of France said its surveys suggest that GDP didn’t expand in the first quarter. On March 31st the Economist characterized France, Europe’s second largest economy, as “A Country in Denial.” Comparing them with Greece, the Economist indicated that “the Greeks know that free-spending and tax-dodging are over. But (France) has yet to face up to its changed circumstances.” Upcoming French elections demonstrate the reluctance to change. Front-runner Socialist Francois Hollande has promised to rollback most of the recent pension-age reforms and install a 75% tax rate on the wealthy. None of the candidates are offering radical reforms or austerity programs seen in other European elections recently. Yields on France ten-year bonds are currently 2.93%. But that could move up quickly and significantly right after the elections.

Germany is the one major bright spot. German ten year bonds are yielding 1.8% (as compared to ten year US treasuries yielding 2.04%.) Germany’s exports are up and its trade surplus surged in February. The above chart tells it all. German productivity has far outpaced the rest of Europe in the last eight years. Nominal unit labor costs have stayed almost level in Germany, while growing in Italy, Ireland, Spain, Greece and France. During this period, only Ireland has seen their costs drop, starting in 2008, as their labor accepted pay cuts and productivity increased. To get on par with Germany, all five countries would need a 30% pay cut to become competitive. It’s unlikely we can expect that to happen any time soon.

Preventing the Next Financial Overdose

Financial overdoseNew drugs are vetted by the Food and Drug Administration before they reach market. Should the same process be considered for new financial instruments?

Two professors at the University of Chicago, Eric Posner and E. Glen Weyl, think so. In February they published a paper arguing that regulators should approach financial products the way the FDA approaches new drugs. They suggest that the potential dangers of financial instruments “seem at least as extreme as the dangers of medicines.”

Their idea is that there would be a federal agency, designed along the lines of the FDA, which would test new financial products for social utility. In their analysis, products that serve only to increase speculation would be rejected. Products that help people hedge risks would be approved. The goal would be to deter financial speculation, or gambling, which contributes to systemic risk.

Certainly, their proposal has gotten pushback from those who believe that financial innovation is always good and regulation is always bad. Yet, given the fact that exotic instruments contributed to the credit crisis, it is valuable to review their proposal in a more detail.

Professors Posner and Weyl would distinguish between financial markets-where institutions lend money, trade securities and make investments and the real economy, where people trade goods and services. They believe that the real economy should be largely unregulated but the financial markets need regulation.

Furthermore, they don’t believe that disclosure alone is enough for financial instruments. “In pharmaceuticals, we could allow a company to sell whatever it wants as long as it tells the people the product might work but also might cause your head to fall off,” said Professor Posner. But, “we don’t do that because people will ignore the information, so we draw the line and say, ‘You can’t buy the product’.“ The same logic, they say, should be applied to financial instruments that could be harmful.

It’s unlikely that their proposals will become reality anytime soon. However, their comments may someday help to limit financial overdoses in the future.