Estate Planning for Intellectual Property

Individuals who create or own valuable intellectual property face unique challenges in estate planning that traditional strategies may not adequately address. For authors, artists, musicians, entrepreneurs, inventors, software developers and other creators, intellectual property could represent a substantial portion of their net worth, and these assets may include complex ownership structures, valuation considerations, tax implications and succession requirements that demand careful attention.

Understanding Intellectual Property Assets

The first step in effective estate planning for intellectual property involves taking comprehensive inventory of intellectual property rights that are owned, how they are used, associated registrations and any agreements to which such rights may be subject. The following categories of intellectual property should be considered:

1. Trademarks include words, symbols, logos and other elements that identify the source of goods or services (brands). A trademark’s value is tied to its use and so is transferrable only in connection with the goodwill of the business with which the mark is associated. Trademarks may be registered with the United States Patent and Trademark Office and/or individual states.
2. Copyrights protect original works of human creation fixed in a tangible medium, such as literary works, music, films, works of art, photographs and computer software. Copyrights exist automatically upon creation, but federal registration provides additional enforcement rights.
3. Trade secrets include non-public information that has value because it offers some advantage by not being known to others, such as a chemical formula, recipe or process. Trade secrets are not registered but protected by maintaining confidentiality.
4. Patents are a grant of rights to an inventor obtained through registration with the United States Patent & Trademark Office that prevent others from making, using, selling, offering for sale, or importing the patented invention for a fixed period of time.

Many works cover multiple types of intellectual property – computer programs, for example, may include trademark protection for the program’s name and other branding elements (such as a logo or slogan), copyright protection for the code expression, and patent protection for inventive methods used to execute the software or improve the program’s functionality.

Critical Planning Distinctions

Intellectual property has value as a means of generating revenue through:

• Direct use (using a trademark to identify and distinguish goods or services from competitive offerings),
• Defensive use (preventing others from practicing patented technology or copying and distributing copyrighted material), or
• Licensing (receiving payment for allowing others to manufacture goods using patented technology or use a photographic image for a book cover).

Importantly, this revenue could continue after the intellectual property owner’s death.

One of the most common misunderstandings involves the difference between owning a physical work and owning the copyright in the work. For example, when you purchase an original painting, you acquire ownership of that specific physical item without any copyright interests unless expressly transferred by the copyright owner under a written agreement. In other words, you can sell or transfer the painting, but have no right to exercise or transfer rights to reproduce, distribute, create derivative works or otherwise exploit rights retained by the copyright owner. Where copyright interests are owned, estate plans should clearly specify whether the disposition of the physical work includes copyright interests or if the copyright interests are transferred separately.

Copyright owners hold five key rights:

1. Reproducing the work,
2. Creating derivative works,
3. Distributing copies,
4. Publicly displaying or performing the work, and
5. Licensing the works to others to exercise these rights.

Each right can be transferred separately, potentially creating complex ownership structures that require careful documentation.

Community Property and Co-Ownership Considerations

In community property states – such as California, Texas and Washington – intellectual property created or acquired during marriage generally is classified as community property, entitling both spouses to equal ownership of its value regardless of which spouse created the intellectual property. Intellectual property owned before marriage or acquired by gift or inheritance generally is classified as separate property. While one spouse can have the sole right to manage intellectual property that is classified as community property, the income or proceeds from any sale or license typically must be shared equally as community property.

Co-ownership issues also can arise when multiple people contribute to a single work or through traditional property transfers, such as gifts or inheritance. These arrangements require clear agreements about how decisions will be made and how income will be shared.

Navigating Termination Rights (Copyright)

Federal copyright law provides certain termination rights that cannot be disposed of through normal property transfers. These codified rights allow creators of copyrighted material or their statutory heirs to reclaim previously transferred copyright interests during specific time windows, typically 35 to 40 years after the original grant. The exercise of termination rights is fixed by statute for two successive generations. When the creator dies, termination interests pass to the surviving spouse (entirely, if no surviving children or grandchildren; otherwise, one-half), then to surviving children and grandchildren, and finally to the creator’s estate representative.

Publishing agreements commonly are governed by these rules, with termination rights becoming exercisable 35 years after the grant of rights or 35 years after publication, whichever comes first. Proper termination often requires that written notice be served on the grantee and recorded with the U.S. Copyright Office within specific timeframes.

Following successful termination of copyright, the rights return to the creator or the creator’s heirs, allowing for the renegotiation of terms or new agreements. However, derivative works created before termination can continue to be used, and only U.S. rights revert – foreign rights in the work(s) would remain with the grantee.

Name, Image, Likeness Valuation Challenges and Tax Implications

Estate planning for name, image and likeness (NIL) rights is important for celebrities and other individuals with significant public recognition to protect their brand, manage income and control publicity rights posthumously. NIL rights depend on state law, which determines the duration of these rights post-mortem.

Some states – including California, Illinois and New York – have enacted comprehensive statutes in recent years to protect against the commercial misappropriation or unauthorized use of a deceased performer’s name, voice and likeness. These rights can have substantial value, especially for famed individuals, but require careful planning to ensure the proper permissions and guidelines around use are established and enforced after death.

Additionally, the valuation of an individual’s name and likeness, as well as the associated intellectual property, can become complex for tax planning purposes, as it is often difficult for an estate to pinpoint the exact worth of an individual’s commercial value and earnings or profitability at the time of death. Considering the subjective nature of such valuation, there is arguably some latitude in assigning a specific dollar amount. However, it is important to be as accurate as possible; substantial undervaluation, for example, may be closely scrutinized by the Internal Revenue Service, which could lead to tax disputes in court or serious penalties against the estate. Realistic valuation would be easier to navigate for an individual’s estate with proper documentation of intellectual property assets and any circumstances affecting their current or intended use(s) and value(s).

Administrative and Fiduciary Considerations

Managing intellectual property assets often requires decades of active stewardship. Copyright protection lasts for the author’s lifetime plus 70 years, meaning beneficiaries may need to manage licensing, enforcement, and renewal obligations for generations if they wish to maintain the rights. Trademark and trade secret rights exist so long as they are appropriately maintained and protected. This suggests appointing specialized fiduciaries with relevant experience or creating separate entities dedicated to intellectual property management.

Individuals who own intellectual property could consider establishing a separate corporation, partnership, limited liability company or nonprofit entity to own and manage significant intellectual property portfolios. These structures also can provide tax benefits while ensuring professional management and preservation of creative legacies.

General Checklist and Next Steps

1. Document ownership thoroughly — Confirm who owns what rights in each intellectual property right. Review:
   1. Existing contracts, licenses and assignments to understand current obligations and future opportunities;
   2. Applicable registrations;
   3. Gaps in the continuous use of trademarks or maintenance of procedures protecting the confidentiality of trade secrets;
   4. Failure to enforce rights against infringers or unauthorized users; and
   5. Expiration of patent registrations.
2. Plan for specialized administration — Consider appointing fiduciaries with intellectual property experience or creating dedicated entities for long-term management of intellectual property rights and related assets.
3. Coordinate with tax planning — Work with valuation professionals to establish realistic values for gift and estate tax planning purposes, and explore charitable giving strategies that can provide benefits while preserving the estate’s rights in the intellectual property.
4. Review portfolios regularly — Intellectual property values and legal frameworks change over time. Regular reviews ensure estate plans and intellectual property portfolios remain aligned with current law and the estate’s objectives.
5. Engage specialized counsel early — Estate planning for intellectual property rights often requires coordination between estate planning attorneys, intellectual property attorneys and nonprofit attorneys to address the full range of legal and tax issues involved.

For questions about estate planning strategies around intellectual property, please contact any of the authors or one of our Private Client Services attorneys.