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Estate Planning for Creators of Intellectual Property TUESDAY, JULY 26, 2016

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Today’s faculty features: Scott K. Tippett, Attorney, The Tippett Law Firm, Oak Ridge, N.C. Christi Rodriguez Cottrell, J.D., MFA, New York Life Insurance Company, Hoboken, N.J. Megan Low, Esq., Director of Services, Arts & Business Council of Boston, Boston

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Estate Planning for Creators of IP An Introduction Christi Rodriguez Cottrell, JD, MFA christi.cottrell.esq@gmail.com July 26, 2016

Disclaimer This material is for informational purposes only and includes a discussion of one or more tax-related topics prepared to assist in the promotion or marketing of the transactions or matters addressed. It represents New York Life’s understanding of generally applicable rules. It is not intended (and cannot be used by any taxpayer) for the purpose of avoiding any IRS penalties that may

be imposed upon the taxpayer. Taxpayers should always seek and rely on the advice of their own independent tax professionals.

New York Life Insurance Company, its agents and employees may not provide legal, tax or accounting advice. and none is intended nor should be implied from the following comments and observations. Everyone should consult their own professionals before implementing any planning strategies. © 2016 New York Life Insurance Company. All rights reserved. SMRU # 1702155 (exp. 7.18.2018)

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Estate Planning for Creators is Different Estate Planning = Epilogue to a Life’s Story All Good Stories Include: • Who– Players • What– Intangible Assets • When– Timing is Everything • Where– Global & Digital • Why– Importance of Planning • How– Estate Planning Tools & Structures

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WHY: ThePRINCElyCautionary Tale...

“Sometimes I wish that life was never ending But all good things, they say, never last.”

PRINCE Rogers Nelson died on April 21, 2016 at the age of 57.

WHY DOES IT MATTER? 8

WHY: The PRINCEly Cautionary Tale...

The Man, The Artist, The Legend: #27 on Rolling Stone’s “The Most Influential Artists of the Rock & Roll Era“ ♪ Single, No Surviving Children ♪ Control = Primary ♪ Religious & Philanthropic ♪ Sold 100 Million Records Worldwide Prince’s Estate at Death – Approx. $250M Estimated Federal & State Estate Tax = $120M Estimated Probate, Litigation & Legal Costs = ???

Estimated Length of Time to Settle Estate = ???

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Explosive FMV Increase at Death = Approx. $300M

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WHY:Framing the Issue • Creatives can be complicated • Family Dynamics • Control • Significant financials at issue.

• Creative Industry = 3.9% of business in the US employing 1.9% of all employees.

• Dispelling the myth of the “poor struggling artist”.

• $704B Industry • 4.2% of U.S. GDP • Larger share of GDP than Agriculture & Transportation See American for the Arts Business & Employment in the Arts: Measuring the Scope of the Nation’s -Related Arts Industries Report (2015) Provided

by AmericansForTheArts.org

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WHO: Creators of Intellectual Property (“Creative Class”) = Inventors & Innovators

Science, Tech & Engineering Creators

Written & Visual Creators

Craft & Small Business Creators

Entertainment Creators

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WHO: Players in the Creative’s Estate Plan • BENEFICIARIES • Individuals • Entities • Trusts • ADMINISTRATORS • Executors/Personal Representatives • Trustees • Executive Directors • ARTISTIC ADVISORS/CREATIVE COUNCIL • • • • •

Agents and Publicists Curators Business Managers Licensing Managers Valuation Experts

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WHAT: Assets in the Creative’s Estate Plan • Industry Specific • Intangibility • Ownership vs. Possession vs. Control • Asset Layering • Copyrights • Trademarks • Domain Names • Patents • Licensing Rights • Contractual Obligations - Limits and Rights • Digital Assets • Websites • Social Media • Data 14

WHEN: Timing is Everything • NOW – Before it’s too late!

• Determining the Creative’s Need: • • • •

Interested Parties Prolific Production Financial Success Public Recognition

• Protection • Registration • Renewals

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WHERE: It’s a Small World Global • US & Other Countries • World Intellectual Property Organization (“WIPO”) • Treaties • Collective Management Organizations • Resolving Disputes Digital • • • • •

Websites Blogs Social Media Data Digital Asset Management Organizations 16

HOW: Tools & Structures • Three Legs of Estate Planning • Documents • Entities

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HOW: Tools & Structures – The 3 Legs Plan

• Vision & Goals

Documents

• Wills • Trusts • Creative Legacy Statement (Ethical Will) • Creative Inventory

Liquidity

• Estate tax liability • Minimizing Exposure • Illiquidity issues

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HOW: Tools & Structures – Documents • Will • Trusts • Revocable • Irrevocable • Legacy Statement (Ethical Will) • Creative’s Inventory • Contracts

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HOW: Tools & Structures – Entities • Trusts • Revocable – Priorities for Creatives • Avoiding Probate • Maintaining Privacy • Irrevocable • Use of Intentional Defective Grantor Trusts (“IDGT”)

SALES vs. GIFTING

• Business Entities • Family Limited Partnerships/LLCs • IP Licensing Holding & Management • Asset Protection • Endowments - Coordinating with Organization • Private Foundations

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Estate Planning for Creators of IP

GOING DEEPER...

Estate Planning for IP Scott K. Tippett The Tippett Law Firm, PLLC www.tippettawfirm.com T: (336) 643-0044 E: skt@sktlaw.com 21

PATENTS

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Patents • Grant of a property right to the inventor • Issued by the Patent and Trademark Office • Term of a new patent is 20 years from the date on which the application for the patent was filed in the United States • US patent grants are effective only within the US, US territories, and US possessions.

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Patents • The right to exclude others from making, using, offering for sale, or selling” the invention in the United States or “importing” the invention into the United States • Not the right to make, use, offer for sale, sell or import, but the right to exclude others from making, using, offering for sale, selling or importing the invention

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Requirements for a Patent •

To obtain a patent, the new invention must be: – Novel – not known or used in this country and not published anywhere.

– Nonobvious – cannot be an obvious way to do something.

– Useful – must have some application, even if not commercially practical.

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Patent Application & Issuance •

• •

Priority Between Two Inventors – generally, the person first to invent and use the product is given the patent, even over an earlier filer.

Prior Sale –must apply for a patent within one year of selling the product.

Provisional Patent Application – a shorter, cheaper way to file for a patent temporarily, to determine if the invention is commercially practical.

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Life & Duration • Life of utility patent - 17 years from date of issue of Patent if application filed before June 95 or 20 years from date of filing application after June 95 • Effective only in the U.S. (foreign patent applications filed separately based on U.S. application are available).

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Foreign Rights • PCT Filing within year Acquiring foreign rights from inventor Making the Choice • National Filings • Cost If you have to ask - you can’t afford it

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Licenses • A contract between licensor and licensee.

• Licensor grants to licensee the right to practice the technology claimed in the licensed patent • Licensor agrees not to sue licensee for infringing licensor’s patent 29

TRADEMARKS & SERVICEMARKS

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Marks • Trademarks® , ™ – A trademark identifies tangible good or product of a company or individual.

• Servicemarks

® SM

,

– A service mark identifies the service s of a provider. Marks used

by a company can function as both.

• Trade names – Once a trade name was used to denote any mark descriptive of a

good or service.

– Today, it is a company business name.

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Trademarks / Servicemarks • Word, name, symbol or device which is used in trade with goods to indicate the source of the goods and to distinguish them from the goods of others • Servicemark is the same as a trademark except that it identifies and distinguishes the source of a service rather than a product

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Trademarks • Used to prevent others from using a confusingly similar mark • Not to prevent others from making the same goods or from selling the same goods or services under a clearly different mark • May be registered with the Patent and Trademark Office

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Trade Names • Identifies a company, partnerships or business.

• Cannot be registered under federal law unless they are also used as trademarks or service marks (used to identify services).

• Common law protection.

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Service Mark • Any word, name, symbol, device, or any combination, used, or intended to be used, in commerce, to identify and distinguish the services of one provider from services provided by others, and to indicate the source of the services.

Trademark • What can be trademarked 35

– Words that are used as part of a design or device or words that are uncommon or fanciful may be trademarked.

• What cannot be trademarked – Personal names, descriptive or generic words, or place names

• • • •

Books Pencils Carper Hawaii

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Trademark Registration • Trademark rights established by: – First to use the "mark" – First to file application with PTO

• Federal registration not required but has advantages – Registered owner can use mark nationwide

• Registration granted for 10 years – renewable for another 10 37

Trademark Registration • PTO is responsible for the federal registration of trademarks • PTO assigns it a serial number and sends the applicant a receipt about two months after filing • Examining attorney at the PTO reviews the application and determines whether the mark may be registered 38

"TM", "SM", "®" • Use of TM (trademark) or SM (service mark) designation with the mark to alert the public to the claim • Prior registration with PTO not required • Registration symbol, ®, may only be used when the mark is registered in the PTO

Requirement of Enforcement 39

• An alleged infringer may claim that the Plaintiff's

mark was abandoned and thus the protection lost.

– Non use of the mark in question.

– Intent to discontinue the use of the mark.

– Presumptive abandonment occurs after two consecutive years of non use.

•

May be rebutted by proof of intent to resume use.

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Requirement of Enforcement – Legal Abandonment occurs when a trademark owner fails to protect a TM. • ESCALATOR, THERMOS, ASPIRIN, CELLOPHANE • Use term as an adjective not a noun Kodak Camera – not Kodak

Domain Names •

Internet addresses, (domain names), were originally assigned with no cost.

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•

•

Now, domain names are bought and sold – sometimes for enormous amounts of money, and sometimes sold by people who originally registered those names for free.

If a domain name infringes on a registered trademark, the domain name will be suspended immediately if the trademark owner challenges it.

International Protections • Registration in each foreign countries • Use of as variety of treaties 42

• CTM – Community Trade Mark Registration for all countries which are part of the European Union

Trade Secrets •

•

A trade secret is a formula, device, process, method, or compilation of information that, when used in business, gives the owner an advantage over competitors who do not know it.

The Economic Espionage Act of 1996.

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III. AREASOF AN AUTHOR’S PRACTICETHAT MUST BE COVERED BY THE ESTATE PLAN Megan Low, Esq. Director, Volunteer Lawyers for the Arts Arts & Business Council of Greater Boston megan@artsandbusinesscouncil.org

– T h i s s t a t

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u t e p r o h i b

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i t s a n y a t t

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e m p t t o s t e

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a l t r a d e s e

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c r e t s f o r t

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h e b e n e f i t

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o f s o m e o n e

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o t h e r t h a n

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t h e o w n e r ,

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i n c l u d i n g

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f o r t h e b e n

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e f i t o f a n y

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f o r e i g n g o

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v e r n m e n t .

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Overview I. II. III. IV.

The Artist Client Copyright Considerations in Estate Planning Other Art-Specific Considerations Literary Trustee/Cultural Executor

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Who is the Client?

• Understanding their artistic practice • The more you know about their work, and their history, the more effective the estate plan can be

• • • •

Sources of IP Property issues Relationships – personal & professional Legacy Goals

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© - The Bundle of Rights • • • •

Right to make copies Right to distribute (or not) Right to display/perform Right to make derivative works • E.g. sequels, adaptations, merchandise

• License: granting rights for a limited time, place, or purpose -exclusive • May be exclusive or non • © holder retains ownership

• Assignment: granting rights on a permanent basis 62

COPYRIGHT OWNERSHIP IS SEPARATE FROM OWNERSHIP OF THE PHYSICAL OBJECT

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• Copyright does not follow the object in which the IP is embodied • Books, DVDs • Storage– computer hard drives • Paintings, manuscripts, and other original, singular objects

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Copyright & Estate Planning • • •

Copyright is a property right

•

Failure to address copyright ownership in an estate plan can lead to unintended results

•

May fall into residuary of an estate plan and distributed in ways that are not beneficial or intended

•

Copyright subject to state intestacy laws

Transfer of exclusive copyrights only valid in writing Cultural Executor/Literary Trustee

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Duration • 1978 - present: life of the author + 70 years • 1922 and earlier: public domain • 1923-1977: depends

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Duration Works created on or after 1/1/1978

Start

Term

Fixation

Individuals

Life + 70 yrs

WFH, anonymous, pseudo Works created but not published before 1/1/78 Works published between 1964 – 1977 Works published between 1923 – 1963 Works published before 1923

Jan. 1. 1978 Publication Publication

95 yrs from publication or 120 from fixation, whichever is shorter Life + 70, but © lasts at least until 12/31/2002. If published before 12/31/2002, then not until 12/31/2047 28 yr initial term 67 yr automatic renewal term 28 yr initial term 67 yr renewal term, but only if it was properly renewed No © protection as of 2007 – in the public domain

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Termination • 17 USC§203 • Copyright assignments made after 1/1/1978 may be terminated and rights restored to the original author/heirs • Creators can “undo” bad deals

• Possibility for the estate to regain very valuable properties • Requires ATTENTION • Specific timeline and notice procedures

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Moral Rights USC • Visual Artists Rights Act of 1990 (VARA)(17§106A)

• Rights of Attribution  Artist may have name attached to, or removed from, a work • Integrity  Works may not be intentionally distorted in a manner prejudicial to artist’s reputation  Works of “recognized stature” may not be destroyed, intentionally or through gross negligence • Duration:  Works prior to enactment: term of copyright  Works post enactment: expires upon the artist’s death

• Many states have their own Moral Rights laws • Incl. NY, CA, and MA 70

What IP Does the Client Own? • What has the client created during his or her life?

• Is that IP otherwise encumbered?

• • • • •

Joint authorship Work for hire License Assignment Contracts

• What has the client acquired during his or her life?

• IP acquired from other sources

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Document Review • Representation agreements • Contracts with galleries, agents, representatives, publishers, etc. pertaining to artists’ work

• Copyrights licenses, transfers, or assignments • Copyright registrations • Important works, older works, renewals

• • • •

Appraisals Sales records Donation agreements CV 72

Physical Creative Product • In Possession • Home • Studio • Ownership?

• Out of Possession • Loans • Exhibitions • Consignment

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Studio • Additional physical space in the client’s control or use • Studio, office, gallery, theater

• Ownership • Own– coop? Shared/group?

• Rental– term?

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Inventory • Title, date, dimensions, image, medium, series • Sales/donation records • Exhibition history • Relevant agreements • IP license or transfer • Location (last known) • Finished/Unfinished • Legacy 75

Plan for Physical Property • Property • Artwork/creative product • Equipment

• • • •

Time & personnel Insurance Storage, conservation Rent/moving costs

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Donation Plans/Agreements • Donate artwork, funds, equipment  **tax deduction for artwork in gift by artist limited to material costs • Valuable way to enact a legacy plan • During life, artist can enjoy the gift and see legacy taking shape • Never assume the recipient can, will, or should have everything • Work out terms and conditions in advance • Dedicated funding

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IV. LITERARY TRUSTEE/CULTURAL EXECUTOR DUTIES

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Literary Trustee/Cultural Executor • Person(s) charged with maintaining, safeguarding, and utilizing the body of an artist’s work and managing the artist’s legacy • Appointed by and powers enumerated in the decedent’s will

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General Duties • Manage intellectual property assets •

Licenses and assignments

• Manage physical assets related to artistic practice •

Gifts, donations, and sales

• Proactive Management • Responsive Management •

Inquiries to use rights

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Legacy • Artist should envision and articulate aspects of his or her legacy that are of the utmost importance • Capture in a document (Creative legacy statement/”ethical will”) • Trusts • Discuss with cultural executors, family, and other interested parties

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Possible Powers - active/exclusive, or advisory to • Scope of power heirs/executor • Payment or commission?

• Access to funds for maintenance or for payment to third parties • IP enforcement rights (exclusive?)

• IP termination rights (exclusive?)

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Possible Powers • • • • • •

Exploitation powers Physical possession Responsibility for physical property Duty to destroy, complete, or alter works Right to destroy, complete, or alter works Criteria for selection of successor

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Case Study • Vladimir Nabokov died in 1977, leaving unfinished manuscript on 138 index cards. He had asked that any unfinished work be destroyed upon his death.

• In 2009, Nabokov’s son published “The Original of Laura,” based off the cards, to poor critical reception.

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Who? • • • • • •

Family member(s) Agent, manager, representative Scholar Dealer Friend Foundation

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Advisory Council?

• Assembling a small group of individuals with experience and/or knowledge of the artist’s wishes to advise on management of the artistic estate • But . . . lack of clear authority or legal standing and disagreement can create issues

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Concerns • Divergence from the author’s vision • Releases, uses, and completions the author would not have authorized • Subsequent disputes among heirs, management, and/or executors • Flooding the market (blockage discounts) • Insufficient capital to fund legacy projects

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Estate Planning Workbook for Visual Artists • Collaboration between Arts & Business Council and the Joan Mitchell Foundation • Available free at • Copyright Questionnaire • Companion workbook for attorneys currently in development 88

Estate Planning for IP Scott K. Tippett The Tippett Law Firm, PLLC www.tippettawfirm.com T: (336) 643-0044 E: skt@sktlaw.com

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Types of Intellectual Property 90

• Patents • Trademarks • Copyrights • Unfair Competition • Trade Secrets

Taxation of Patents • Is it a sale or exchange?

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• It is a sale IF the owner relinquishes “legal title and all substantial rights” to the IP for a fixed price.

• Many licenses may be/are characterized as sales.

Taxation of Patents – A Sale • If the transaction is characterized as a sale, the transferor offsets amount realized against its adjusted basis.

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• The difference can be capital gain or loss if the property is a capital asset or if the property qualifies for special treatment under IRC § 1231.

Taxation of Patents – A License • If the transaction as characterized as a license, not a sale, then transferor must report amounts received as ordinary income, subject to depreciation or amortization of the 93

adjusted basis of the property, assuming the property qualifies.

Taxation of Patents – License or Sale • Test – whether the taxpayer disposed of “all substantial rights” in the underlying IP. • Pay attention to the word order: – ALL SUBSTANTIAL RIGHTS NOT – SUBSTANTIALLY ALL RIGHTS

• The more control the owner places on the recipient’s use of the IP, the greater the chance 94

the transaction will be characterized as a license, which means no capital gain/loss treatment.

Taxation of Patents • IRC § 1235 – A Safe Harbor for Transfers – Characterizes the transfer by a “holder” of a patent of all substantial rights as a sale or exchange of a capital asset held for more than a year.

– Characterization applies even if payments are payable periodically during transferee’s use or if payments are contingent on transferee’s productivity, use , or disposition of the transferred property.

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Taxation of IP • What is a “holder?”

– Under IRC § 1235 a holder must be an individual.

– Usually the holder is the person who created the IP. – Can include an individual who (1) acquired an interest in the invention for money or money’s worth; and (2) is neither the creator’s employer or a related person when rights acquired are determined and amount to be paid is fixed.

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Taxation of Patents • What is a transfer of “all substantial rights?”

• Under IRC § 1235 a holder must transfer all substantial rights or an undivided interest which includes a part of all such rights.

• Regs. Provide that “all substantial rights to a patent” means all rights that are of value at the time of the transfer.

• Facts and circumstances test.

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Taxation of Patents • An assignment of an exclusive right to exploit a patent in a single field of use or geographic area does not satisfy the “all substantial rights” test.

• Transfers can take place outside of § 1235 safe harbor and still qualify for capital gain treatment.

IRC § 1253 98

Trademarks & Tradenames • § 1253(a) – The General Rule - Transfers shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the transferred property.

• § 1253(b)(2) – Significant power, right, or continuing interest?

§ 1253 Trademarks and Tradenames 99

• § 1253(b)(2) – Significant power, right, or continuing interest includes (among other things), but is not limited to: – Right to disapprove any assignment of such interest, or part thereof; – Right to terminate at will; – Right to payment contingent on productivity, use, or disposition of subject matter of the interest transferred.

– A transfer includes a renewal of the name or mark.

IRC § 197 100

Taxation of Acquisitions of IP • Where § 197 applies, the taxpayer amortizes the cost of the asset over the 180 month period beginning with the month of acquisition.

• Patents & Copyrights – § 197 applies to patent and copyrights with two exceptions: (1) § 197 does not apply to development costs; and (2) does not apply to the purchase of a patent or copyright where the TP does not acquire the assets of a trade or business.

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§ 197 Trademarks & Tradenames • § 197 also applies to the acquisition of trademarks, servicemarks, and tradenames, regardless of whether such assets are acquired in connection with the purchase of a trade or business.

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IRC § 167 • If § 197 does not apply to the cost of acquiring IP, then look to IRC § 167, which applies to the cost of developing patents and copyrights as well as cost of purchased patents and copyrights not acquired in connection the with the purchase of a trade or business.

§ 167 • Self-Developed Patents & Copyrights 103

– Two methods:

•

(1) TP may depreciate the cost ratably over the legal life of the patent or copyright (straight-line method). If a patent or copyright becomes valueless in any year before its expiration, TP may deduct the unrecovered cost in that year.

•

(2) Income Forecast Method. Depreciation deduction is computed by multiplying the asset’s original basis by a fraction. Numerator is income earned that year, denominator is anticipated total income. NOTE: This requires periodic adjustment of estimated revenues.

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Taxation of Disposition of IP • Is disposition subject to special rules for capital assets?

• Can the holder treat the IP as a capital asset?

– Patents? – Yes. Holder of a patent treats the disposition as a capital asset held for more than a year, regardless of time actually held.

– Copyrights? – A copyright held by the person whose efforts created the work is not a capital asset. Under rules discussed above, if transferor retains any significant rights, it is not a sale. Payments contingent on productivity, use, or income from IP, are not longterm capital gain.

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How to Acquire Rights • Patents by Application, Examination and Grant • Trademarks & Service Marks by Use in Interstate Commerce, then registration • Copyright • by writing something -- perfected by declaration and registration 106