By: Randall A. Denha, J.D., LL.M.
If you are an inventor, author, artist, or owner of a closely held business, you may have already taken steps to ensure the protection of your intellectual property rights. Business ideas, visual art, published or unpublished literary and musical works, inventions, computer programs, and designs of clothing and architecture can be protected by law through copyrights, patents, and trademarks. These valuable assets also need to be carefully considered when planning your estate, so that they are transferred to your heirs according to your wishes upon your death. Patents, copyrights, and trademarks can be highly valuable forms of intellectual property, which means these assets must be properly accounted for in your estate plan.
Intellectual property is a unique asset in that it is an expression of an individual’s knowledge and ideas. While not simply a thought itself, intellectual property is an intangible asset that is the direct result of work or trade. Just as no two individuals think alike, each estate owning intellectual property must be handled differently. This area of estate planning is continually evolving, particularly as intellectual “capital” continues to become a greater factor throughout commerce in general.
To begin, it is important to determine if the intellectual property can be passed down to heirs. Certain types of intellectual property may have inherent renewal or termination rights through copyrights, patents, and trademarks. This can create additional questions as to when intellectual property rights become part of the public domain. To address these concerns, some owners of intellectual property choose a specific executor to handle intellectual property issues in their estates. For example, an author may appoint a family member to oversee the general administration of his or her estate and a second fiduciary just to handle the posthumous publication of additional literary works.
Patents protect inventions and are most commonly classified as either utility patents or design patents. Utility patents protect inventions for 20 years from the application filing date, while design patents last 15 years from the patent issue date.
Copyrights protect written works, photographs, paintings, sculptures, films, computer software, and other forms of original expression. Copyrights are different from patents because they protect the owner as soon as the work is fixed in a tangible medium. If the work was created in 1978 or later, author-owned copyright lasts for the author’s lifetime plus 70 years.
Trademarks are recognizable designs or expressions that identify products or services. Trademarks have no expiration date as long as they continue to be used and renewed.
To include these forms of intellectual property in your estate plan, you’ll need to obtain a professional appraisal of the value of your patent, copyright, or trademark. Then, you must decide whether your intellectual property should be transferred through lifetime gifts or through a bequest after your death. This decision should take into account your own income needs, as well as who is best equipped to monitor your intellectual property rights and maximize the income potential of the asset. If intellectual property makes up a significant portion of your estate, you may wish to appoint a trustee, with special training and expertise in handling intellectual property, solely responsible for handling these complex issues.
The intellectual property may turn out being worth far more than originally anticipated. So, the client may want to give a percentage of the entire estate to each heir. This would include the intellectual property. In that manner, the value of the intellectual property may be of less importance to the relative disposition to the beneficiaries. If the intellectual property is specifically bequeathed to one beneficiary, the value of that bequest may be far greater than originally contemplated.
In addition to consideration of disposition and management at death, one should also consider management during life. The power of attorney might specifically grant authority to deal with the intellectual property. In fact, the client may want to include specific instructions regarding any intellectual property. For example, some clients may not want their intellectual property sold during their lifetime.
Even though it’s not a tangible asset, intellectual property can be subject to estate taxes. If you feel strongly about keeping your intellectual property in the family, you may want to consider purchasing a life insurance policy owned by an irrevocable life insurance trust (ILIT) to provide cash upon your death that can be used to fulfill any estate tax obligations. This will ensure the long-term financial security of your heirs by preventing them from being forced to sell the rights to your intellectual property to pay the necessary estate taxes.
Also, the charitable giving of intellectual property may mitigate the effects of estate taxes. For gifts of intellectual property during the donor’s lifetime, the charitable income tax deduction is generally insignificant, because such a deduction is based on cost basis rather than fair market value (FMV) at the time of the gift. However, the charitable bequest of intellectual property through a will or trust may yield a better result. In this case, the estate of the decedent would receive a charitable contribution deduction against estate taxes based on the fair market value of the gift at death.
Estate planning for intangible assets such as intellectual property involves an array of complicated considerations. A basic understanding of the issues involved merely underscores the need for appropriate planning to help ensure the ultimate distribution of your assets according to your desired wishes.