For Estate Planning, Don’t Forget the Patent Estate (Part 2)

In my last blog we discussed the good news as to how a patent estate can be a real boon to estate planning.

To recap, patents are usually unvalued and hence a real challenge in family offices for estate planning. But used properly, patents and other IP assets can provide value for intergenerational changes in control and/or minimizing estate taxes. Here is a second case where Carthage Intellectual Capital Management (‘Carthage’) has proprietary processes to help family businesses and their tax and estate planning professionals.

Case 2- A family business with IP does not intend to transfer the business from a parent generation to successor generations. We will assume there are intellectual property (IP) assets (patents, trademarks, and copyrights are preferred) that confer substantial economic value to the business. An IP holding enterprise is formed to receive the IP and the license-back is created with the principal business. The IP holding enterprise may then be gifted to a family trust whose principal purpose is to maintain the IP assets, and receive and distribute back royalties to family members participating in the trust (other entities may be equally suitable but we call them a ‘trust’ as a generic description). In this case, the license back will depend on future occurrences as to when or how much royalty is paid as an annual rate for the license back itself. This in effect defers the need to value the IP assets at anything above the tax free gift basis at the time of gifting as there is not a fully defined income stream upon which to base an asset value.

If in the future the business is sold to a third party, a more substantial license royalty can be triggered as a consequence of the sale. The necessary use of the IP becomes a warranty obligation of the purchaser as the transferee of the license back. The sale price of the business may then consider the present value of the license back royalties payable to the trust. The selling family business can accept a lower effective sale price from  purchaser because the seller will be required to pick up the license back and make royalty payments triggered by the sale event. For the purchaser, the deductibility of the royalties is generally less that the borrowed capital and associated costs to acquire all assets in a fee simple transaction which can tolerate some purchase premium in a competitive bid situation.

The trust receives and distributes royalty income on a current basis and does not require a change in basis in the IP assets. The certainty of future royalty payments rests on the degree of risk of warranty default. If this is a low risk, it can allow the trust to borrow a principal sum based on the pledge of the continuing royalty income. This principal can be distributed to the trust beneficiaries tax free as an advance on future income. Running interest payments together with amortization of the IP transfer basis will offset future income taxes as a deductible trust expense. Alternately, the trust can sell off the IP assets and realize capital gains at that time for a distribution and liquidation of the trust itself.

Once again, Carthage has extensive experience and the patented processes that can guide family businesses through evaluation of their IP assets and the transactions that can satisfy their estate planning needs. Because these are sophisticated transactions, you will want to consult legal and accounting professionals to determine the suitability of IP for tax and estate planning purpose. But the good news is that Carthage will be there to help you when the time is right to unleash another hidden value of your IP. For another example, check my previous blog at

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