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 web site, 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, which are payments for the right to use IP assets, are 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—i.e., cataloging and inventorying 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 this is an issue limited to famous celebrities. If you have a web site or post on social media, you to have IP assets. Unless your estate planner knows about and plans for the transfer of those assets, you too may be handing them a mess.
Matthew Erskine is managing partner of Erskine & Erskine, which provides legal and fiduciary services for unique assets.