Intellectual Property Rights in Estate Planning – A bit more complicated than you think

Take-Away: Trademarks, copyrights and other intellectual property right interest may become more prevalent assets held in an estate  as we fast-forward into the digital age. A surprise to many is that this is an area where Congress has created specific property rights that preempt state property and probate rules when it comes to the transfer of intellectual property rights on the owner’s death, specifically the statutory right to terminate the copyright.

Background: The federal Copyright Act of 1976 was enacted to protect artists and their families. This Act was created “because of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work’s value until it has been exploited.” Under the Act a copyright for work created on or after January 1, 1978 lasts for the creator’s life plus 70 years. The Act provides that any copyrights created after that date for the original creator who had transferred any rights to the copyright, to have a non-assignable, non-waivable right to terminate such transfers 35 years after the right had been granted. If the copyright creator dies before exercising this statutory termination right of termination, a class of statutory heirs that consists of the creator’s surviving spouse, children and grandchildren may exercise that statutory right to terminate the assigned copyright.

Right to Terminate: But now the rub. While a copyright can be bequeathed by the creator’s will, the statutory right to terminate the copyright/ license passes only to the creator’s heirs as defined by the statute. US Code Section 203 (1976). The right to terminate the copyright cannot be bequeathed to third-parties.  This statutory termination right can frustrate the testamentary wishes of the copyright creator. For example, many musicians who retain their copyright interests in their music may want to pass those rights to a charity by their will. In these cases, the musician assigns their copyright interest to the music to the music publisher or record company, and bequeaths the royalties to a charity. But the musician’s heirs retain the right to terminate the assignment and thus thwart the musician’s charitable intention to have the charity receive the royalties produced from the copyright property.

Ugly Example: James Brown, while alive known as the Godfather of Soul, died in 2006. His estate was estimated to be, on the high side, at about $100 million. His estate plan provided that his tangible personal property was to pass to his six adult children. He set aside $2 million in trust to educate his grandchildren. The residue of his estate was supposed to fund the I Feel Good charitable trust,  which was created to provide scholarships for financially needy and deserving students in South Carolina and Georgia. Mr. Brown’s trust contained a ‘poison-pill’ clause that caused an individual to be disinherited if he/she challenged the trust.

Now the facts start to get messy, real messy. The estate planning documents were signed in 2000 while Mr. Brown was unmarried. The trust contained a provision that ‘spouses, past, current, or future, are disinherited.’  After executing the estate planning documents Mr. Brown signed a prenuptial agreement with Tommie Rae Hynie, and they then married. 10 months later Tommie gave birth to a child. Three years later Mr. Brown sought an annulment of his  marriage to Tommie, citing bigamy on Tommie’s part. In the consent decree annulling the marriage Tommie  waived any claims she might have had under common law marriage (yes, it still exists in about a dozen states.) After Mr. Brown’s death, Tommie contested his will and trust, despite her prior waiver of rights in both the prenuptial agreement and the consent decree annulling the marriage. 5 of the 6 adult children challenged their father’s will and trust on the grounds of undue influence. The adult children also claimed their rights to terminate the copyrights held by their late father, which would greatly disrupt the anticipated royalty revenue stream that was supposed to fund the I Feel Good  charitable trust. The South Carolina Attorney General Charitable Trust Division  then jumped into the hydra-headed probate litigation. After 90 lawyers, millions in legal fees,  and the consolidation of several different lawsuits, a Settlement Agreement was entered into by all the litigants, in which a Settlement Entity was created over the residue of Mr. Brown’s estate. Tommie was to receive 23.7% of the Entity (including her young son’s share) and each of the six adult Brown children were to receive 4.79% of the Entity. The remaining 47.5% of the Entity was to become the corpus of the I Feel Good trust, dedicated to its charitable purposes. After all this,  the South Carolina Supreme Court then ruled that the Settlement Agreement (and Entity) were invalid on the grounds that it the agreement was not just and reasonable. And it is back in the trial court, with yet more lawsuits being filed.

The point is that as part of their negotiating leverage in leading to the compromise settlement of the probate litigation, Mr. Brown’s adult children asserted their federal statutory rights to terminate their late father’s copyright interests which he had intended to be used to fund a testamentary charitable trust and to provide the scholarships for needy students. Their non-waivable statutory right to terminate copyrights was effectively used as a weapon to disrupt their father’s estate plan.

Thoughtful Example (?): Yet another well-known artist anticipated the implications of the federal Copyright Act’s statutory termination right held by his heirs when he planned his estate. In 2002 Ray Charles gathered 10 of his 12 adult children. He proposed to offer each of them $500,000 placed  in trust for their benefit. In exchange for their funded trust, each child acknowledged that the transfer by their father to the trust would be the entirety of their share of their father’s estate, and they waived any claims against his estate. Ray Charles died 2 years later. The sole beneficiary of Mr. Charles’s estate was the Robinson Foundation for Hearing Disorders, Inc. [While Ray was blind, he placed great emphasis on his hearing, once saying “No ears, no music, no Ray.”] The Foundation held about $46 million in assets, and it received about $2.6 million a year form Ray’s copyright interests in his music. Six years after Ray’s death, 7 of his children filed federal copyright termination notices for 51 songs that their father had authored. This case is still pending in the federal courts. The Robinson Foundation was found to have standing to challenge the alleged copyright termination notices given by the Charles’ children on the basis that they should be precluded from exercising those rights, either because they ‘sold’ them in exchange for the trust their father funded for their benefit, or they had released their termination right in exchange for the funded trust. It will be interesting to see if the court finds that the ‘sale’ of their right to terminate the copyrights is something different from an ‘assignment’ of the termination right which the statute says cannot be assigned.

Conclusion: Admittedly intellectual property assets are infrequently encountered in administering an estate. Yet they are one of the few assets where the federal government has created statutory rights that override the normal rules of free transferability of wealth on death. Copyrights and other intellectual property interests normally pass via the owner’s Will. But then there is the statutory right held by intellectual property owner’s heirs to terminate those rights which must be separately addressed if the copyright or its royalties are intended as the source the deceased owner’s estate plan. This might be the case where a conditional bequest is used, where an inheritance is held in trust and the spouse or child possesses certain rights in the trust, but only so long as the spouse or child does not exercise their federal right to terminate the decedent’s copyrights.