Estate Planning for Intellectual Property

by Delton R Henderson Esq. / Mar 25, 2020

Intellectual Property is not only a familiar form of personal expression it is fast becoming a popular way to create income. The World Intellectual Property Organization recognizes brand images as a key asset for creating value for a business. Developing this type of intellectual property requires time, effort and commitment, and certainly some financial resources. For this reason, estate planning for intellectual property continues to be a source of complex considerations.

For purposes of this article, the term “intellectual property” is used to refer to business ideas, visual art, published or unpublished literary and musical works, inventions, computer programs, designs of clothing, architecture and similar expressions of an individual’s knowledge and ideas. Expressions of this kind can be protected by law through copyrights, patents, and trademarks. This is what makes them assets that may be used to create value for a business or individual owner. But careful consideration must be given to determine whether a particular asset can be passed down to your heirs. It is equally important to identify the appropriate method for determining the asset’s value. For instance, the Internal Revenue Service guidelines for valuating a literary work is based on the future earnings potential of the copyright minus its present value. In theory, this same valuation approach could also be used for copyrights in photographs, films, and computer software, however this asset valuation method may not be appropriate for a design patent because the legal protection for design patents lasts for only 15 years from the patent issue date.

The inherent renewal and termination provisions under certain statutes also bears consideration. As you may recall, when Prince passed away in 2016, he left no will, and so his heirs were left to battle over the ownership of his works — his published and unpublished music compositions and recordings. Copyright law will have a significant impact on who has what rights, and for how long. Three particular areas affecting their rights are the termination of transfer (17 U.S.C. § 203), the term of copyright for published and unpublished works (17 U.S.C. § 302), and the contracts already in place. Thus, drafting of a will for an artist who owns intellectual property and the administration of their estate should include considerable attention to copyright due diligence.

In contrast, when an asset becomes part of the public domain it will likely be excluded from the owner’s estate. This is why some owner’s take to using lifetime gifts as a means of transferring their rights prior to death. A decision of this kind warrants consideration for the potential income to be derived from an asset now and in the future. For example, assume you own a lucrative copyright in a music video for a popular song. You have three heirs and want to give a percentage of the entire asset to each of them. But even though this asset is considered an intangible asset, it may still be subject to estate taxes. Assume further that you feel strongly about keeping this asset in the family. In this case, you might consider buying a life insurance policy owned by an irrevocable life insurance trust (ILIT) and fund its monthly premiums with the income earned from exploiting the copyright during your lifetime. The cash benefit from your policy can be used to pay any taxes due and provide for the long-term financial security you desire for your heirs.

As this article points out, estate planning for intellectual property can give rise to several complex considerations. Because intellectual property is a unique asset, it is essential to work with estate planners who understand the issues involved and can help endure the ultimate distribution of your assets is in accordance with your wishes.

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IMPORTANT NOTICE: This content is developed from sources believed to be providing accurate information. The information in this material arises from a general question presented to the authoring attorney for general information and educational purposes. It is not intended as tax or legal advice. The attorney providing the answer is not serving as the attorney for the person who submitted the question or in any attorney-client relationship with such person as it pertains to matters discussed herein. Laws may vary from state to state, and sometimes change. Even a small variation in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney’s conclusion. Unlike the information in the discussion above, upon which you should NOT rely, you are strongly recommended to retain an attorney to represent you for personal advice you can rely upon.