Estate planning is widely recognized as a means of transferring wealth from one generation to the next while minimizing both taxes and the risk of loss to creditors. A comprehensive estate plan not only transfers cash, investments, real estate, and vehicles, but also less commonly considered assets, such as intellectual property. While clients in certain professions—for example, authors, artists, small business owners, and inventors—often recognize the need to protect their valuable intellectual property, every client potentially has intellectual property that could provide a stream of income for family members or loved ones after the client passes away.
Intellectual property refers to works or inventions that are the result of human creativity and intellect and can be legally protected, e.g., by copyrights, patents, trademarks, or trade secrets. Such works and inventions are protected by federal (and sometimes state) law and can have great commercial value. Accordingly, clients should include intellectual property among the assets they share with their estate planning attorney at the outset of an engagement. In addition to the intellectual property itself, clients should disclose any related agreements, assignments, or licenses. Varying steps are necessary to legally protect different types of intellectual property, and the estate planning considerations for each can also vary in some respects. The four primary types of intellectual property are discussed below, along with key planning considerations for each.
Protection is available for “original works of authorship”1 such as books, movies, songs, computer software, photographs, and architectural works. These works do not have to be published to be protected, but they generally have more commercial value after publication. A copyright exists from the moment an original work is created and “fixed in any tangible medium of expression,”2 but in order to enforce it in a lawsuit for infringement, it must be registered with the United States Copyright Office. In addition, the copyright symbol (©) should be used to provide public notice that the copyright is protected. In general, copyright protection lasts for seventy years following the author's death. Works created by employees within the scope of their employment, known as works made for hire, expire the sooner of 95 years from first publication or 120 years from creation. Works published prior to 1978 are subject to more complex expiration terms.3
If a client owns a copyright, both the original work, i.e., the book, painting, etc., and the copyright should be included in the client's will or trust. If the copyright is not specifically mentioned in the will or trust, it will be transferred to the client's heirs by a residuary clause, which disposes of all property not specifically dealt with elsewhere in the will. As a result, one person could end up with the book or painting and another with the copyright. In addition, depending on how valuable the copyright is, the heirs who inherit it could unintentionally have a heavier tax burden than heirs receiving other property.
Because the future value of a copyright is impossible for the author of a work to know, copyright law gives the author the right to terminate most transfers or licenses of the copyright at a future date, providing the author with an opportunity to market the work once its fair value is known. This termination right, which passes to the author's surviving spouse and children when the author dies, cannot be waived or transferred to anyone else during the author's life. If the author were to transfer the copyright to a trust, for example, the statutory heirs could undo the author's intent. The only exception is a transfer of the copyright by will, which cannot be terminated by the statutory heirs. Although establishing a trust is preferable for many other types of property to avoid probate proceedings, a will should typically be used to transfer copyrights to the beneficiaries to avoid possible termination of the transfer by the statutory heirs.
In addition to transferring a copyright by will or trust, a client should also consider transferring a copyright by lifetime gift. Although a transfer by lifetime gift is the simplest of the copyright transfer strategies, estate planners should caution clients that a lifetime gift may fail to exclude substantial appreciation in the value of the copyright from the author's taxable estate due to potential estate inclusion issues connected to the author's termination right. In addition, a copyright is not eligible for capital asset treatment when it is owned by a taxpayer whose basis is determined at least in part by the copyright author's basis. A gift of a copyright will therefore prevent the copyright from qualifying as a capital asset because the recipient adopts the transferor's basis for income tax purposes. On the other hand, if the author dies with the copyright in the author's taxable estate, the copyright receives a stepped-up basis equal to the fair market value at the author's death or alternate valuation date, and it automatically qualifies as a capital asset that has been held for over a year.
Any lifetime gift or bequest of a copyright should provide explicit instructions to the estate's executor or trustee. Authors may appoint a special literary executor to properly administer the intellectual property rights associated with their works. Estate executors should consider recording an author's death in the United States Copyright Office to cause the copyright to extend for 70 years; otherwise, the work will be presumed to be in the public domain upon the earlier of 95 years from the date of first publication or 120 years from the creation of the work.
Protection is available to any person who invents or discovers “any new and useful process, machine, manufacture, or composition of matter”4 or makes any improvement of them. There are three types of patents available for different types of inventions: utility patents, design patents, and plant patents. A utility patent protects a new and useful process, machine, manufactured item, composition of matter, or an improvement to any of them. A design patent protects a new, original, and ornamental design of a manufactured item. A plant patent protects a distinct and new variety of plant. To be eligible for patent protection, an invention must not have been previously publicly disclosed. Before filing an application for a patent, a comprehensive patent search should be done. Performing a patent search can be an involved process, and it is advisable to obtain the help of a patent attorney or agent to conduct the search. An attorney can also help with the preparation and filing of a patent application with the United States Patent and Trademark Office to ensure that the patent obtained will provide sufficient protection for the invention. Once the patent is granted, it lasts fourteen to twenty years (depending on the type of patent) from the date the application is filed. Periodic fees are required to maintain it.
Unlike copyrights, there is no termination right for patents, which can be freely transferred by a will or to a trust for the benefit of selected loved ones. Transferring ownership to a trust is often a good choice to avoid the expense, time, and lack of privacy of the probate proceedings required for transfers via a will. Patents should be clearly identified in estate planning documents, which should state the owner of the patent, the patent number, those who have the right to license the patent, and the parties who are responsible for paying the fees required to maintain the patent. In addition, the transfer to the new owner should be recorded with the United States Patent and Trademark Office. If an inventor dies before filing a patent application or during the application review process, the executor may apply for the patent and be issued the patent if "proper intervention" is performed. Executors should be aware of their obligations with respect to inventions and patents as early as possible, and ideally, during the inventor's lifetime.
Due to the short lifespan of patents, estate planners may want to help their clients weigh the option of a lifetime transfer of a patent to reduce the client's potential estate tax liability on the patent's appreciated value against the income tax benefit of keeping the patent as part of the client's taxable estate, thereby receiving a step up in basis at the client's death.
Protection is available for brand names and logos used to identify and distinguish the goods and services of one source from those of another. Although merely using a trademark (without obtaining a trademark registration) protects it under common law, this legal protection only extends to the geographic region in which the trademark is used. A state trademark registration provides protection throughout the state of registration. However, if the trademark holder eventually wants to expand its business beyond that state, it is important to register the trademark with the United States Patent and Trademark Office to obtain the benefit of nationwide protection. Before registering the trademark, it is best practice to perform a comprehensive trademark search to ensure that the desired trademark—or one that could be confusingly similar—is not already in use. Using the trademark symbol (®) puts the public on notice that a brand name or logo is federally registered and protected. The initial term of a federal trademark registration is ten years; a registration can be renewed indefinitely for additional ten-year terms for a fee, provided that the trademark owner can prove continued use of the trademark in the United States. A federally registered trademark is enforceable as long as the trademark is used in commerce and defended against infringement.
Similar to a patent, a registered trademark can be transferred by either a will or by establishing a trust to benefit selected beneficiaries. As is the case with patents, a trust is often the better choice. Documentation should be filed with the United States Patent and Trademark Office to record the assignment of the trademark registration to the new owner. In order to maintain the legal protection provided under trademark law, it is important that the executor, the trustee, or any individual who inherits a registered trademark continue to use the trademark and defend it against infringement. In addition, the executor, trustee, or new owner should continue to renew the trademark registration and pay the required fees.
A trade secret is information that is (a) not generally known outside of the owner's organization and control, (b) has independent economic value as a result of not being generally known, and (c) is subject to reasonable measures to maintain its secrecy. Trade secrets are often comprised of formulas, compilations, programs, patterns, devices, methods, techniques, or processes. The recipe for Coca-Cola is one of the most well-known examples, but businesses of any size can own valuable trade secrets. Trade secret protection aims to prevent wrongful access to confidential information. It is available under both state and federal law, and it generally continues until the information becomes publicly available or the owner no longer derives economic value from its secrecy. Since the value of a trade secret lies in its confidentiality, and trade secrets are associated with businesses, individual estate plans are not typically used to transfer trade secrets. Moreover, the risk of a trade secret being exposed through such a transfer is often not worth the potential tax benefits.
A Note about Royalties
Intellectual property that has been transferred or licensed to another party often generates royalties or other income that becomes part of a decedent's estate. Alternatively, those payments could be directed to a living trust or a trust established at the decedent's death. At the time of the decedent's death, any publishers or other agencies should be notified to direct the payments to the trust or to the loved ones who have inherited the right to receive those royalties. It may also be helpful to name an executor or trustee with expertise in managing intellectual property and the income it generates to ensure its value is maximized.
The transfer and continued protection of intellectual property requires careful consideration of transfer requirements, fees, and ongoing use or filing obligations. Clients and estate planning counsel should discuss whether the intended recipient of a transfer of intellectual property has the necessary funds—and desire—to maintain the asset, as intellectual property can diminish in value if the owner is unable to maintain the asset. If intellectual property is generating a royalty stream, those funds may be sufficient to pay the continued costs of ownership or insurance premiums for insurance coverage on the intellectual property. Finally, a client should consider additional planning to provide the intellectual property recipient with the necessary funds to properly maintain the asset.
You have invested a lot of time in making your business a success, and it is difficult to think about relinquishing ownership or control of it. Nevertheless, planning is critical in creating a lasting legacy for your family. We can help you put a plan in place that helps you successfully pass your business on to the next generation and ensures that you have a financially secure retirement. Contact our office today at (972) 712-1515 to set up a meeting to discuss this timely topic.