Estate Planning Issues and Intellectual Property


"Intellectual property" is the broad term for the area of law that protects patents, trademarks, copyrights, trade secrets and other forms of intangible property. This area of the law is the primary method to protect against the theft of intangible rights and technology.

If you own a closely-held business, or if you are an inventor, author or artist, intellectual property rights in your works may be among your most important assets. The value of your intellectual property should be protected in two ways. First, you should file applications to register your copyrights and trademarks, and to seek patents on your works. Second, you should plan the transfer of these assets during your lifetime or through your estate plan.

If, on the other hand, you are not the creator of the intellectual property, but have acquired it through gift or inheritance, you must address the same or similar issues.

Methods of Transfer

Intellectual property may be transferred without a will through intestate succession laws, by your will or trust agreement, or by a written document during your lifetime. Intestate succession may produce results that you do not expect or intend. For example, in many states, if you die without a will and there is a surviving spouse and surviving parents or children, your surviving spouse does not automatically inherit all of your assets. Generally the spouse receives a portion of the estate and the children or parents get the rest.

The important point is that if you do not have a will, the courts in your state will decide for you how to divide your assets according to a plan drafted by the state legislature. If you do have a will, your assets will be divided according to your plan.

If you choose to transfer rights through your estate planning documents, it is critical that you draft your bequests correctly. Most wills contain bequests of "tangible personal property" as the common means of transferring assets, but that language may not transfer your intellectual property rights. The result is that your works and other intellectual property assets may end up in your "residuary estate" to be divided among your beneficiaries according to the general instructions for asset distribution in your estate planning documents rather than being transferred to specific persons as you intended.

Testamentary Bequests and Lifetime Transfers

It may be difficult to choose between transferring your works while alive or bequeathing them in your will. You should carefully review the practical considerations and the tax consequences.

There are many factors favoring transferring your intellectual property through your will. You may wish to retain these assets for your use during your lifetime. Or you may want to avoid the payment of the gift tax that a lifetime gift couldtrigger. If you do not expect that your gross estate will exceed the amount shielded from federal estate tax by the unified credit, then you may choose to transfer your works and the intellectual property rights in them by your will.

On the other hand, there are many factors favoring lifetime gifts of intellectual property. For example, gifts that qualify for the annual gift tax exclusion (currently $10,000 per year per recipient) will not be subject to estate or gift tax. In addition, any post-gift appreciation of intellectual property assets will generally escape estate taxation in your estate.

Intellectual property law changes from one form of intellectual property to another. What follows is a brief discussion of three areas of intellectual property law and how each relates to estate planning issues.

Copyrights

Copyright law does not protect ideas. It protects expressions of ideas such as literary works, computer programs, musical works, dramatic works, works of fine art, audiovisual works, and architectural works. Copyright law only protects the way your idea is expressed, which means that anyone looking at what you create can create a new expression of your idea without infringing on your copyright. Under recent legislation, copyrights last longer than ever. For works created in or after 1978, the rules are relatively simple. For individual authors, the copyright lasts for the life of the author plus 70 years. For "works made for hire" (works created by employees within the scope of their employment, and certain types of works created by independent contractors pursuant to a written agreement), the copyright expires the sooner of 95 years from first publication or 120 years from creation. For works created prior to 1978, there is a complex set of rules. For example, works created but not published prior to 1978 are protected until either 2002 (if never published) or 2047 (if published after 1978). If copyrights are potentially a substantial part of your estate, you need to plan for the disposition and control of the copyright rights as they may continue to be valuable long after you have died.

Except for transfers by will, most types of copyright licenses and transfers executed after January 1, 1978 may be terminated by the author, or by the author's surviving spouse, children, grandchildren or personal representative (in that order) during a five-year period that begins 35 years after the license, transfer or date of first publication of those works. Accordingly, copyright transfers by your will are not subject to later attack by your immediate relatives while other copyright transfers (including non-testamentary trust documents) are subject to later attack.

It is important to remember that the transfer of a physical object (for example, a painting) does not transfer any rights to the copyright unless there is a writing making the transfer of the copyright explicit. A lifetime gift or a testamentary bequest of a copyright must be carefully drafted in order to fulfill your intentions.

The gift or bequest should provide explicit instructions to your estate's executor or trustee with respect to your copyrights. Some authors appoint a "literary executor" to administer the work and the intellectual property rights, while another executor administers the rest of the estate. Upon your death, your executor(s) should consider recording that fact in the Copyright Office in Washington, DC. This will cause the copyright to extend 70 years after the date of death. In the absence of such recording, the work will be presumed to be in the public domain upon the earlier of 95 years from the date of first publication or 120 years from the creation of the work.

Trademarks

Trademark law protects distinctive and non-functional terms, designs and other ways of distinguishing your goods and services from those of your competitors. It does not protect underlying goods or ideas themselves. The strength of a trademark is connected to its distinctiveness: the more distinctive the mark, the greater the protection it receives compared to other marks for similar goods or services.

There are three levels of United States trademark law: common law, state law and federal law. Common law protection is established simply by placing "TM" next to a mark for goods or "SM" next to a mark for services, which notifies others that you claim the mark as yours. State trademark registrations provide notice throughout the state of registration. A federal registration provides notice throughout the United States and gives you the right to use the . symbol which you do not otherwise have a right to use.

For example, you might own the trademark of your company or the mark might be the name or a reference to an identifiable individual (in which case special rules apply). In either situation, particular attention, in the drafting of an estate plan, must be paid to the disposition of marks licensed by you to the business and any use of a person's name, likeness and right of publicity in connection with the business.

As part of the administration of an estate containing state or federal trademark registrations, your executor or trustee must file documents with the appropriate agency to record the transfer of the registration in order to allow the new owner to administer the registration of the marks. In addition, the fiduciary and/or the new owner should be instructed to monitor for potential infringement and to ensure continued use of the mark in order to properly protect it.

Patents

Patent law does not protect raw ideas. Rather, it protects "inventions," which are defined as any new and useful process, machine, manufacture or composition of matter, or an improvement to those listed. The invention need not be built, constructed or proven to work. Merely filing an application containing a complete disclosure is the legal equivalent of a "reduction to practice." In order to be patentable, the invention must be non-obvious to a person who has ordinary skill in the "art" or area of invention.

A patent application should be filed with the United States Patent and Trademark Office prior to any public use or showing of the invention or sale of the invention. Patents must be transferred in writing. Your will should clearly state who owns the patent, who has the right to license it and who has responsibility for making maintenance payments. In addition, the estate's fiduciary must file appropriate documents with the United States Patent and Trademark Office to record the transfer of the patent in order to allow the new owner to administer the patent registration.

If you die before filing a patent application or during the application review process, your executor or personal representative may apply for the patent and/or be issued the patent if "proper intervention" is performed. It is, therefore, critical that your fiduciaries are aware of their obligations with respect to your inventions and patents.

General Recommendations

If you have not taken the proper steps to protect your copyrights, trademarks, patents, or other intellectual property, we recommend that you do so. If you have a will or trust, review the provisions with a lawyer who has experience planning for intellectual property assets. If you own intellectual property but do not have a will, develop a plan for transfer of those assets during your lifetime or upon your death. In addition, we recommend that you identify estate fiduciaries who will be prepared to protect your intellectual property assets.

This Review was prepared by Beth Silver, Esq., an attorney in Saul Ewing's Business and Estates Departments in its Wilmington office. If you should have any questions, please contact Beth at (302) 421-6860 or by e-mail at bsilver@saul.com. or Sherry H. Flax, Esq. at (410) 332-8784 or sflax@saul.com