Massive multiplayer online role-playing games (“MMORPGs”) are estimated to generate $11 billion in annual revenues by the end of this year, representing roughly 21% of the worldwide digital games market. By 2017, this number is forecast to grow to $13 billion and their popularity only seems to continue to grow. For instance, World of Warcraft, a popular MMORPG, had over 10 million subscribers as of November 2014.
By way of background, many of these games implement a virtual economy. A player can earn or buy virtual items, property, or currency to be used in the game which can grow to have a significant economic value. As this Forbes article explains, in another popular MMORPG game, Entropia Universe, Jon Jacobs successfully sold a virtual space station he had created for $635,000. In order to make the initial purchase of the virtual asteroid which cost him $100,000, Jacobs took out a mortgage on his home. The investment clearly paid off, with his virtual property making him over half a million dollars in profit in just five short years.
Although most virtual world portfolios are not as impressive as Jacobs’, many gamers have accumulated significant assets by way of smaller purchases (including virtual real estate) that all together can make up a valuable virtual asset with real world economic value. The challenge that this creates is that these virtual economies exist solely at the discretion of the companies that run them. As this article points out, holding assets in virtual property, such as World of Warcraft gold or virtual real estate, is incredibly risky. There is simply no guarantee that the game will not be shut down or that the company will not debase the currency with an update or expansion.
These unusual assets raise unique issues for the estate practitioner. Primarily, how far do we need to go to ensure that all assets have been properly identified and valued in applying for probate? It is not difficult to imagine the repercussions of neglecting to include real property in a probate application. However, it is less clear when dealing with virtual real estate, despite the fact that it could potentially have significant value. In some cases, the deceased’s family may be unaware of the virtual holdings or of the fact that they have a real world value outside of the game. In other cases, there may be challenges with obtaining passwords to access the virtual assets.
We also need to be alert to potential liability issues. In including an asset such as a virtual financial portfolio that may contain virtual real estate, proper valuations may need to be obtained. This is not unlike many other unique real world assets, especially when the value is potentially significant or unclear. This may involve advising a client to seek the assistance of a professional valuation. Misstating the value of an asset, virtual or otherwise, can have significant tax implications.
As the notion of digital assets continues to expand, it is important to be aware of the different types of assets that a testator may hold upon death. Virtual real estate and other virtual financial holdings can have real world value and as such, should not be discounted as irrelevant.
Thank you for reading.
When we think of assets, items such as real property, investments, bank accounts, and even jewellery and vehicles are what typically come to mind. Aside from cases where a client has an obviously valuable collection or rare painting, we may not immediately think of art as an asset. However, this may be changing as studies show that investment art is quickly becoming one of the fastest growing and dynamic markets in North America.
According to The Capgemini World Wealth Report of 2013, fine art made up 16.9% of high net worth individuals’ investments of passion, not far behind jewellery and watches. It is no longer uncommon to hear of art being sold in Canada for hundreds of thousands or even millions of dollars at high-end auction houses such as Sotheby’s. More than ever, art is being seen as providing a good source of return by investors. As the report points out, a well chosen piece of art can not only act as a hedge against inflation, but it also has the potential to outperform over the long term.
As a result, when dealing with estate assets where art is involved, it is important that the Estate Trustee manage investment art with the same level of care and attention that they would any other traditional asset. This may involve ongoing maintenance or ensuring proper insurance coverage is in place to protect against theft or damage. Together with obtaining a formal appraisal, these steps can help protect the Estate Trustee against liability while realizing the best possible return on the investment for the beneficiaries.
Obtaining an appraisal when administering estate assets that include investment art and in estate planning where art is to make up a significant portion of the estate, can be invaluable. For a testator, the formal appraisal can be of great assistance in determining the true value of an art asset. This will allow them to make a more informed decision as to the division of their assets. Appraisals are also a useful means for the Estate Trustee to avoid unpleasant surprises where the fair market value is later discovered to be significantly higher than the sale price, resulting in unanticipated taxes.
Thank you for reading.
Listen to Determining Value
This week on Hull and Estate and Succession Planning, Ian and Suzana talk about values and appraisals. They specifically look at some of the issues related to assigning value to assets such as jewellery, automobiles, antiques and artwork.