If you are an inventor, author, artist, or owner of a closely held business, you may have already taken steps to help protect your intellectual property rights. Certain types of intellectual property, such as business ideas, visual art, published or unpublished literary and musical works, inventions, computer programs, and designs of clothing and architecture, may be protected by law through copyrights, patents, and trademarks. When planning your estate, carefully consider these valuable assets to help ensure that they are transferred to your heirs according to your wishes upon your death.
Intellectual property is a unique asset, as 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 that owns intellectual property must be handled differently. This area of estate planning is continually evolving, particularly as intellectual capital continues to gain significance throughout commerce in general.
Initially, 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 questions as to when intellectual property rights become transferrable. To address these concerns, some intellectual property owners choose a second 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, as well as a second person or entity with experience in intellectual property to handle posthumous publications.
The valuation of intellectual property also poses a challenge to estate planning. The Internal Revenue Service (IRS) offers guidelines for some, but not all, types of intellectual property. For instance, the valuation of literary work is based on the copyright’s future earnings potential reduced to its present value. Theoretically, this valuation methodology may also apply to other types of intellectual property. However, the question may remain as to how far into the future the potential for earnings exists. It may be possible to hire a professional appraiser to help determine the current value of intellectual property and how future trends may affect this value. But, it is also important to choose someone with expertise in the area of intellectual property.
Estate taxation affects individuals with substantial assets, regardless of the type of property that is included in his or her estate. However, intellectual property sometimes creates additional concerns. Just as an executor might be forced to sell a family vacation home solely to pay for estate taxes, a best-selling author may fear that, after his or her death, the future publication rights to an unpublished work will need to be sold for the same reason. If a large portion of an individual’s assets is “intellectual” in nature, this can be a major concern.
Proper estate planning is pivotal in helping to make sure the decedent’s wishes are able to be carried out. A life insurance policy purchased and owned by an irrevocable life insurance trust (ILIT), if correctly structured and administered, can provide cash at death to help satisfy estate tax obligations. This use of life insurance can provide flexibility in an estate with only a small amount of liquid assets.
Also, if the intellectual property is of significant size, gifting some or all of the property to a recognized charitable organization at death can help to lower estate taxes. 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.
One Step at a Time
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 wishes. If you own intellectual property, be sure to consult with your estate planning team, including financial, legal, and tax professionals.