Intellectual Property and Your Estate

Among the many considerations to ponder when forming your estate strategy, intellectual property (IP) is among the more important and misunderstood. The phrase itself may be somewhat confusing, as people may not know whether it applies to them or their assets. To clear things up, let's start by defining what exactly is meant by intellectual property.

IP embraces four distinct areas of consideration: patents, trademarks, copyrights, and trade secrets. Let's look at each of these in a little more detail:

• Patents are any property rights registered through the U.S. Patent and Trademark Office for an original invention, such as a process or machine. When the office deems an invention to be patentable, inventors are awarded a patent that helps to protect their investment. These include design patents (think of the distinct shape of a sports car or Coca-Cola bottle), utility patents (for things such as software, applications, and pharmaceuticals), and patents for new varieties of plants (e.g., a new variety of rose or a fruit tree with unique properties).¹
  
  
• Trademarks cover many of the items used to identify a product or service, including service marks and trade dress. Trademark owners may assign their ownership or bequeath the rights. What counts as a trademark? Think of McDonald's Golden Arches or the symbols associated with Amazon, Netflix, Disney, and other media companies. Trademarks can also extend to colors, fonts, and even specific words associated with a product or service.¹(Companies are mentioned for illustrative purposes only and not as a solicitation for the purchase or sale of their securities. Any investment should be consistent with your objectives, time frame, and risk tolerance.)
  
  
• Copyrights as defined by copyright law protect and guard the rights of creators of original works. This does not cover your idea for a mystery novel, but, if you write that novel, you automatically have copyright to your work. A copyright extends to poetry, works of fiction and nonfiction, music, the visual arts, podcasts, and most tangible works of expression. Creators hold what is called the original work of authorship, which entitles them to the copyright, and they have the option to register it with the U.S. Copyright Office. While registration is not required, it can strengthen the author's rights. Copyright assets can be transferred under an estate strategy, but the protection doesn't last forever (see below).^1,2
  
  
• Trade secrets belong to a company and may be defined as confidential business information that provides a competitive edge; this nonpublic knowledge has monetary value and provides information. You can probably think of a few famous trade secrets, such as the formula for Coca-Cola or Colonel Sanders' eleven herbs and spices for KFC. The company that owns a trade secret must take steps to maintain it, because it's no longer protected once it becomes publicly known. Unlike copyrights, trade secrets can be tangible or intangible. For programmers, for instance, the biggest secret in the tech business is probably Google's search algorithm. If you own a company, your trade secrets will need to be factored into your estate strategy. You can require beneficiaries to sign confidentiality agreements and make provisions for the continued preservation of trade secrets.¹(It bears repeating that the mention of any company is for illustrative purposes only. It should not be considered a solicitation for the purchase or sale of its securities.)

With all that in mind, it's clear that IP represents a considerable amount of work on the part of you or the company that you run. For that reason, it's important to incorporate it into your estate strategy in a way that continues to create value and meet your personal expectations.

IP can be one of the more valuable assets in an estate, but it can also be difficult to value and manage. Your estate professionals should take an inventory of IP assets and consider having IP counsel assess their scope. It's also important to consider creators' personal preferences for the ongoing treatment of their IP to ensure it's managed according to their wishes. For instance, they might not want a song they wrote to be used to sell products.

Before including IP in an estate strategy, it's important to confirm ownership, as the original inventor or creator may not be the sole owner of the rights to the invention or creative work. Joint inventors or creators may have agreed on various percentages of ownership. Additionally, the IP may have been assigned to another person or entity, transferring some or all rights. Employment agreements should also be reviewed to determine which rights can be passed on to beneficiaries.³

The value of IP also depends on the remaining life of the asset. Patents have a fixed term of either twenty years (for utility patents) or fourteen to fifteen years (for design patents). Copyright protection lasts for the author's lifetime plus seventy years, but, for older copyrights, there is a different cutoff. In 2024, all works from 1928 and earlier entered the public domain. Trademarks and trade secrets can last indefinitely if they continue to be used or have commercial value.³ Keep in mind that IP rules change constantly, and there is no guarantee that they will remain the same in the years ahead.

While the value of IP may be in flux, certain benchmarks can be considered. Past licensing agreements can provide insight into the value of the IP as well as whether the rights granted were exclusive or nonexclusive. Non-exclusive rights allow for potential expansion of licensing opportunities, whereas exclusive rights have a fixed value and timeline. Other valuations for IP assets, such as for sale, taxes, or business transactions, should also be reviewed. The absence of a valuation can negatively impact the value of the IP assets.³

Certain types of IP, such as copyrights, are valued based on potential future revenue. Hiring a professional expert or appraiser in the specific field of the IP can determine present and future value. Descendants of copyright owners can terminate assignments of copyrights to regain bargaining power for creative works. Also, court decisions can render patents invalid, making them financially worthless. It's important for your estate professionals to consult with IP counsel to assess the risk of invalidation for patent assets.³

Overall, protecting creators' personal legacies requires careful consideration of their wishes for their IP rights. By including specific instructions in the estate strategy, you can ensure that their work is handled in a way that aligns with their personal preferences and helps preserve their legacy.

When factoring your IP into your estate strategy, you must carefully consider a number of factors to pass this legacy on to your heirs. Working with your financial team, you'll be able to determine how best to incorporate your IP into that strategy so as to continue providing for your beneficiaries.

1. StFrancisLaw.com, August 22, 2023
2. Copyright.gov, August 22, 2023
3. AmericanBar.org, August 22, 2023

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG, LLC, is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.