Addressing Intellectual Property

Copyrights, patents and other forms of intellectual property (IP) can have enormous value. But whether IP rights are a significant source of wealth or only a small fraction of your estate, it is critical to address them in your estate plan. These intangible assets behave differently than other types of property, so careful planning is required to be sure their value is preserved for your family.

What is IP?

IP generally falls into one of four categories: 1) copyrights, 2) patents, 3) trademarks and 4) trade secrets. This article focuses on copyrights and patents, but if you or your business owns any type of intellectual property, it is important to discuss its treatment with your estate planning advisors.

Patents and copyrights are creatures of federal law. They are intended to promote scientific and creative endeavors by providing inventors and artists with exclusive rights to exploit the economic benefits of their work for a predetermined time period.

Patents protect inventions. A utility patent may be granted to someone who “invents or discovers any new and useful process, machine, article of manufacture, or compositions of matters, or any new useful improvement thereof.” A design patent is available for a “new, original and ornamental design for an article of manufacture.” To obtain patent protection, inventions must be “nonobvious.”

Under current law, utility patents protect an invention for 20 years from the patent application filing date. Design patents last 14 years from the patent issue date. There is a difference between the filing date and issue date. For utility patents, it takes at least a year and a half from date of filing to date of issue, and for business patents, it takes at least three years before an examiner even looks at the application.

Copyrights protect the original expression of ideas in the form of written works, music, paintings, sculptures, photographs, sound recordings, films, computer software, architectural works and other creations. Unlike patents, which must be approved by the U.S. Patent and Trademark Office (USPTO), copyright protection kicks in as soon as a work is fixed in a tangible medium.

For works created in 1978 and later, an author-owned copyright lasts for the author’s lifetime plus 70 years. A “work-for-hire” copyright expires 95 years after the first publication date or 120 years after the date the work is created, whichever is earlier. More complex rules apply to works created before 1978.

What are the estate planning considerations?

For estate planning purposes, IP raises two important questions: 1) What is it worth? and 2) How should it be transferred?

Valuing IP is a complex process. (See “Intangible value”.) To make informed decisions about its disposition, you need to determine the value of IP and understand the gift and estate tax consequences of a transfer.

After you know the value of the IP, it is time to decide whether to transfer the property to family members, colleagues, charities or others through lifetime gifts or through bequests after your death. The gift and estate tax consequences will have an effect on your decision, but you should also consider your income needs as well as who is in the best position to monitor your IP rights and take advantage of their benefits.

If you will continue to depend on the property for your livelihood, for example, hold on to the property at least until you are ready to retire or you no longer need the income. If you feel that your children or other transferees lack the desire or wherewithal to exploit the IP’s economic potential, and to monitor and protect the IP against infringers, you might want to retain ownership of the property.

Another option is to appoint a scientific or artistic executor or trustee with the appropriate skills and experience to manage the property and maximize its value. An important benefit of this approach is that it helps avoid disputes among your heirs about how to exploit IP, which can impair the property’s value.

Whichever strategy you choose, it is important to plan the transaction carefully to ensure that your objectives are achieved. There is a common misconception that, when you transfer ownership of the tangible medium on which IP is recorded, you also transfer the IP rights. But IP rights are separate from the work itself and are retained by the creator — even if the work is sold or given away.

Suppose, for example, that you leave a painting, a written manuscript or a film to your child. Unless your estate plan specifically transfers the copyright to your child as well, the copyright may pass as part of your residuary estate and end up in the hands of someone else.

Have a plan

Whether artistic or scientific endeavors are the source of your wealth or simply meaningful diversions, it is likely that you care deeply about who ultimately possesses your works and enjoys their benefits. To ensure that your wishes are carried out, discuss IP with your advisors and be sure that it is addressed appropriately in your estate plan.

Sidebar: Intangible value

To plan for the disposition of intellectual property (IP) in your estate plan and understand the gift and estate tax implications, you need to know what it is worth. The value of patents, copyrights and other IP lies in the owner’s ability to commercialize IP rights by creating products or granting licenses to others.

So the valuator needs to understand the extent to which the IP in question is protected by applicable law. The appraiser should also consider the ability of competitors to achieve similar results or develop similar products without infringing, which can impair or even destroy the IP’s value.

It is also important for the valuator to understand the relevant market. The value of IP is typically based on the risk-adjusted present value of the future economic benefits the property is expected to generate. To calculate those benefits, the valuator must consider the market for products or licenses based on the IP, as well as potential economic, technological, competitive and regulatory factors that may affect the market or shorten the IP’s productive life.

The value of IP is based on a unique combination of legal rights, the perceived economic benefits available to a business owner or potential buyer, and practical business considerations. To ensure an accurate result, be sure to engage a valuation expert with experience valuing the specific type of IP involved. Your tax advisors can assist you with selecting a valuator and can work with the valuation expert in addressing the various issues.

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