The valuation of intellectual property assets also poses a challenge. Unlike investment assets or real estate, intellectual property begins as valueless since it represents only an idea or ideas. It’s what happens as a result of that idea that creates value. So intellectual property value ends up being 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 to music were donated to a charity and valued at a certain amount. Later, the music was used in a movie, which suddenly made it very popular, and the annual royalties rose to 10 times their previous amount. This required the value of the charitable deduction to be recalculated each year for income tax returns.
In this electronic age, there are also new issues such as the computer-generated representations of people long dead. People can’t control their image in death, but their heirs have the rights to control it, so long as those rights are properly transferred.
Domain names, meanwhile, are valued separately from the content on a 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 under the protection of privacy, defamation and publicity laws. For living artists, the Visual Artists Rights Act of 1990 protects the artist’s rights both to have artwork properly attributed to them and also to remain anonymous.
Finally, artists need to consider the income tax on the financial gain from their creativity. Royalties, which are payments for the right to use intellectual property assets, are considered ordinary income for the creators, not capital assets. But those who hold the copyright or patent of something created by someone else may be able to treat the sale or transfer of the property 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 intellectual property—it would have been a huge step forward. Now, without any record of what he owned or how much it is worth, his 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 website or post on social media, you have intellectual property. 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 in Worcester, Mass., which provides legal and fiduciary services for unique assets.