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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 Business ideas, visual art, published or unpublished literary and musical works, inventions, computer programs, and designs of clothing and architecture can be protected by law through copyrights, patents, and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.
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.
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 apply to other types of intellectual property, as well. However, the question may remain as to how far into the future the potential for earnings may exist. It may be possible to engage the services of a professional appraiser to help determine the current value of intellectual property and how future trends may affect this value. In this case, it is important to choose someone with special training and expertise in handling intellectual property.
The issue of estate taxation is one that affects anyone 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 hard-pressed to sell a family vacation retreat solely for the purpose of raising cash for estate taxes, a best-selling author may be uncomfortable with the thought that after his or her death, the future publication rights to an unpublished work will be sold for a similar purpose. This feeling can be further multiplied if a large portion of an individual’s assets is “intellectual” in nature.
Life insurance can play a pivotal role in keeping intellectual property in a decedent’s family. A life insurance policy purchased and owned by an irrevocable life insurance trust (ILIT) (created for the benefit of the decedent’s family) can provide cash at death to satisfy any estate tax obligations. This use of life insurance can help solidify the estate plan and secure the future rights and ownership of intellectual property in accordance with the wishes of the decedent.
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 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. Be sure to consult your estate planning team, including financial, legal, and tax professionals.