Estate planning isn’t just about divvying up your stuff – it’s about ensuring everything you’ve built gets passed on fairly. That means taking stock of not just your house and car but also the ideas and creations that make you, well, you. These intellectual assets, from secret recipes to brand logos, can be worth a surprising amount and can have a big impact on the overall value of your estate.

This post dives into why it’s important to identify, protect, and properly account for these hidden treasures during estate planning, so your legacy is valued accurately.

What is Intellectual Property (IP)?

Intellectual property (IP) encompasses intangible creations of the human mind. These creations can be protected by law, granting the owner exclusive rights to their use and commercialization. Common types of IP assets include:

Patents: Grants exclusive rights to an invention for a limited period.

• Patents: A notable example is the patent held by Alexander Graham Bell for the invention of the telephone, which revolutionized communication globally. This patent granted exclusive rights to Bell for his invention for a limited period, allowing him to control its commercial use. A patent will give you the right to prevent others from making, using, or selling your invention.

Examples:

• Utility patents: for tangible inventions, such as products, machines, devices, and composite materials, as well as new and useful processes
• Design patents: the ornamental designs on manufactured products
• Plant patents: new varieties of plants

Trademarks: Distinctive symbols or phrases that identify a source of goods or services.

• Trademarks may be registered with the federal government or your state government. Federally registered trademarks protect your rights throughout the U.S., while state-registered trademarks protect your rights only within the state’s territory. The United States Patent and Trademark Office (USPTO) provides information on registering your trademarks at the state or national level.
• An illustrative case is the trademark of Coca-Cola’s distinctive logo and brand name. This trademark serves as a recognizable symbol that identifies the source of their products, distinguishing them from competitors in the beverage industry

Copyrights: Protects original works of authorship like literary works, music, and software.

• Copyrights safeguard your original creations, granting you exclusive control over their use. This includes the right to copy, distribute, reproduce, display, and license your work.

The examples below showcase the wide range of materials protected by copyrights:

• Software
• Architectural designs
• Graphic arts
• Video and sound recordings
• Books and blog articles
• Databases

• Like trademarks, registering your copyright strengthens your legal position in potential infringement cases. While unregistered copyrights offer some basic protections, registration provides significant advantages. For example, it establishes a public record of your ownership and allows you to collect statutory damages and attorney’s fees if your copyright is infringed.
• Copyright empowers you to profit from your creative assets. You can sell your copyrighted assets and lease them in exchange for license fees and royalties.
• A new copyright owned by an individual typically lasts 70 years after the death of the copyright owner. A copyright owned by a limited liability company (LLC) or other legal entity will last 95 years from the first date the work was used with the public. You can file to register a copyright with the United States Copyright Office. The online application fee for basic registrations is $45 to $65.
• A practical example of a copyright is the protection granted to J.K. Rowling for her Harry Potter book series. This copyright safeguards her original literary works from being reproduced or distributed without authorization, ensuring she has exclusive rights to her creative content.

Trade secrets: Confidential information that gives a business a competitive edge.

• Unlike patents or copyrights, trade secrets are confidential business assets that provide a competitive edge by remaining hidden from public knowledge.

Examples:

• Formulas
• Patterns
• Methods, techniques, and processes

• These valuable formulas, patterns, methods, or processes aren’t registered but can be protected through various measures. Businesses often implement internal policies restricting access and utilize employment or non-disclosure agreements (NDAs) to maintain secrecy. In the unfortunate event of misappropriation, legal action can be taken to safeguard these valuable assets.

Consider a renowned chef whose signature dish is a closely guarded secret recipe. This recipe, a trade secret, holds significant value within their estate. Similarly, a fashion designer’s brand logo (trademark) can symbolize prestige and attract a premium price – a value that needs to be factored into the estate’s overall worth.

The Impact of IP on Estate Value:

The value of IP can significantly influence the overall worth of an estate. A strong patent on a revolutionary invention can translate to substantial royalties for years. A well-established trademark associated with a popular product line can command a premium licensing fee. IP valuation considers these future income possibilities to determine the present value of the IP asset.

1. Remaining Lifespan of the IP:

• Patents: Patents typically grant exclusive rights for a limited period, often 20 years from the filing date. The closer a patent is to expiring, the less valuable it becomes. Imagine a revolutionary drug patent nearing its expiration date. While it might have generated significant revenue in the past, future income potential diminishes considerably post-expiration, as competitors can freely manufacture the drug.
• Copyrights: Copyrights generally last for the author’s life plus an additional 70 years. However, the value of copyrighted material can vary depending on its ongoing marketability. A classic novel with timeless appeal will likely hold value for many years, while a trendy song tied to a specific cultural moment might see its value decline over time.
• Trademarks: Unlike patents and copyrights, trademarks can be renewed indefinitely as long as they are in use. However, brand recognition and market relevance play a significant role. A well-established brand with a loyal customer base will hold more value than a less recognized trademark.

2. Market Demand:

• Industry Trends: The overall health and demand within a specific industry can significantly impact IP valuation. For example, a patent for a new type of battery technology would hold much more value in a market actively pursuing renewable energy solutions compared to a stagnant market.
• Market Saturation: The level of competition for similar IP assets also influences valuation. A unique software program in a niche market might command a higher price than one with numerous competing options.
• Geographic Scope: The potential market reach of the IP also plays a role. A trademark associated with a popular children’s book series might hold more value if it has translation rights and global market potential.

3. Potential for Future Income Generation:

• Royalty Streams: This includes royalties earned from licensing patents, copyrights, or trademarks. A strong patent on a widely used technology can generate significant royalties for years..
• Licensing Fees: The potential for future licensing agreements involving the IP asset should be considered. A brand name associated with a popular fashion line could be licensed to generate revenue through product collaborations.
• Product Sales: For IP directly tied to product sales (e.g., a copyrighted design for a piece of furniture), projected future sales figures can influence valuation.

By carefully analyzing these factors, business appraisers can more accurately determine the IP valuation within an estate. This ensures a more comprehensive assessment of the estate’s true worth and facilitates a fair distribution of assets to beneficiaries.

Strategies for Valuing Intellectual Property in Estates:

Given the complexities involved, IP valuation in estates often necessitates the expertise of qualified professionals. Business appraisers with a strong understanding of IP valuation methods can provide an accurate assessment. Here’s a glimpse into some common valuation methodologies used for IP:

• Income Approach: This method helps us determine the future value of an IP asset by considering the income it’s expected to produce.
• Market Approach: This approach compares the IP to similar assets that have been recently sold or licensed.
• Cost Approach: This method estimates the cost of recreating or replacing the IP asset.

Consulting with an intellectual property lawyer can also be crucial. They can ensure proper documentation of the IP assets within the estate and navigate any legal complexities surrounding ownership and valuation.

Conclusion:

In today’s world, intellectual property can be a hidden treasure trove within an estate. IP valuation plays a critical role in unveiling the true worth of these intangible assets. By identifying, protecting, and accurately valuing IP, business appraisers and estate planners can ensure a more comprehensive and accurate assessment of an estate, safeguarding the financial security of beneficiaries.

Furthermore, a thorough IP valuation can help minimize potential tax liabilities associated with the transfer of intellectual property within an estate. Don’t let the “invisible” assets go unseen – IP valuation is essential for a holistic approach to estate planning.

Find a BCA

Ready to harness the power of accurate appraisals in estate planning? The International Society of Business Appraisers (ISBA) is a premier Business Valuation Membership Association where you may Search for a BCA® professional in your area today.