This article delves into the world of intellectual property rights and how these fit into areas such as estate planning, wealth transfer and arguments about such topics.

The way that people who are in the public eye, such as entertainers and sports figures, can trademark themselves and set a “brand” is an important issue for the wealth industry professionals who advise them. Beyond that, one can argue that at base, all property rights are “intellectual” because property is bound up with the creation of wealth, which requires thinking as much as brute labor. 

Grasping the details of how intellectual property works and forms a part of estate planning, asset transfer and potential litigation is important, and is still a rapidly changing area. (Of course, wealth management firms themselves spend resources and time on building their own brands, as well as patenting processes, and guard them closely.)

To discuss such issues is Matthew Erskine, of Erskine & Erskine, a venerable law firm specializing in areas such as estate planning, tax, family law and other matters. The editors of this news service are pleased to share these insights and welcome responses. The usual editorial disclaimers apply. To enter the conversation, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

The artist, formally known as Prince, is associated with creativity and the excellence of his music and performances. Now his name is associated with excess taxes and chaotic management of his estate. Prince died in 2017 without a will or even a list of his assets. Now the IRS is challenging the $82 million valuation of his estate, which includes the rights to his music and his recordings, claiming a value of $163 million, and asking for an additional $38.7 million in taxes, thank you very much. The estate is cash strapped, with two of the heirs actually selling their rights to Primary Wave, a music publisher (1). Who knows how or where they are going to get the money required to pay the additional taxes, plus penalties and interest?

Although Prince is an extreme example of not doing any estate planning, ignoring the decedent’s ownership of copyrights, patents, and other intellectual property is not uncommon. Many people think that this is only a concern of celebrities, but in this day and age, when a post to YouTube can go viral or a domain name can mean the difference between fame and obscurity, everyone has some intellectual property rights; and everyone should consider how those rights are managed during their lifetime and after their death. 

Intellectual property rights are divided into two types by the World Intellectual Property Organization - industrial property rights and copyrights. Industrial property rights include patents, trademarks and service marks, designs, and locations. Copyrights are, broadly, artistic works and the reproductions, broadcasts and recordings of those works. The two types blur together, as a person can have both a copyright and a patent on the same idea. Both are the intellectual creation of one or more individuals, in contrast with the physical or electronic object that this intellectual creation embodies. Copyrights, patents, trademarks and other Intellectual property laws protects the creator(s) value in their ideas by restricting and controlling who benefits from the control and reproduction of the physical or electronic object.  

Copyrights apply automatically to original works of authorship that are fixed in some medium where they can be reproduced or communicated either directly or via some device. Although automatic, copyrights can only be enforced after registration (the US Copyright Office for the US). The use of © as a copyright symbol or the words “all rights reserved” are no longer necessary to enforce a copyright. Once registered, copyrights are good for the lifetime of the author, plus 70 years (or the lifetime of the last surviving co-creators plus 70 years). Copyrights on works made for hire or published anonymously last for a term of 95 years from publication, or 120 years from creation.  

Copyrights, as the right to control and reproduce something, are separate from the physical object itself.  An artist or an author can sell a piece of art or a writer can gift a manuscript to another but retain the copyrights. Creators have, in the past, sold copyrights to others at a small fraction of the true value of the IP asset. Since 1976, the creator has the right to terminate the transfer of the copyright but that transfer must occur within 40 years of the transfer, or 35 years after the first publication. Because this right of termination is not transferrable except by a specific reference to the right in the creator’s will, if a creator dies before the termination time has expired, the right of termination goes to the creator’s intestate heirs, and not according to their will or trust.  

Industry IP is regulated under different rules, that of patents, trademarks, service marks and designs. Unlike copyrights, they are not automatic; you lose the right to the IP if you make and sell an object before filing for a patent, or if you wait so long that someone else files before you. Also, industry IP needs to be maintained, documents filed and fees paid to establish and maintain those rights.  
 

Estate planning for IP requires that those rights are properly transferred, either during life or (like the right of termination) at death. This involves cataloging and valuing the IP, and determining who has existing rights in the IP. This can vary depending on whether it is classified as a copyright or an industry right. IP rights cannot be transferred by a transfer of the physical object, such as a work of art. The result is that one person may own the right to the artwork but the remainder beneficiaries of the estate own the copyrights to reproduce the artwork.  

Valuation of IP assets also poses a challenge. Unlike investment assets or real estate, IP assets begin as valueless, since they are only an idea. It is what happens as a result of that idea that creates value. The value of the IP assets is based on the best guess as to what the cash flow will be from the licensing, assignment or use of the copyright or patent over time. I know of one case where copyrights were donated to a charity and valued at $X. Subsequently, the music that was the subject of the copyright was used in a movie, and suddenly became very popular, and the royalties were ten times the prior annual royalties. This required that the value of the charitable deduction had to be recalculated each year for filing the income tax returns. 

In this electronic age, there are new issues such as CGI representation of an individual long since dead. A decedent has no rights to control their image, but their heirs do, so long as the rights are properly transferred. Domain names are valued separately from the content in the website, and can be sold. With social media, there is more focus on the moral rights of creators to control their work not only by copyright and patent laws, but also based on privacy, defamation and publicity laws. For living artists, the Artists Rights Act of 1990, protects the artist’s rights both to have artwork properly attributed to them and also to have the artist remain anonymous, as they desire, but this right dies with the artist unless protected by copyrights.  

Finally, the income taxation of the financial rewards of your creativity needs to be considered. Royalties, that is payments for the right to use IP assets, is considered ordinary income and are not considered capital assets by those who create it. Holders of a copyright or patent from the creator, however, may be able to treat the sale or transfer of the asset as a long-term capital asset. 

With so many things to consider, you can see why Prince never did any planning for his estate. Had he even taken the first step in planning, that is cataloging and making an inventory of his IP assets, it would have been a huge step forward. Now, without any record of what he owned or how much it is worth, the heirs may be facing nearly $40 million in additional estate taxes. Do not assume that this is an issue limited to famous celebrities: if you have a website or post on social media, you have IP assets. Unless your estate planner knows, and plans for the transfer of those assets, you too may be handing them a mess.  

Footnote:

1, See “Prince’s Estate Sues IRS over Claimed $163 million Value”