For Estate Planning, Don’t Forget the Patent Estate (Part 1)

Lately, when I read about patents in the news, the focus is usually on mega companies and mega patent estates.  It’s true that about 80% of all US patents issue to large institutions and big businesses. But the 20% that’s left over still matters to the small businesses and inventors that own and use them. Taxes and estate planning are on the minds of many in this 20% category as the 2012 year winds down and the Bush tax cuts may be coming to an abrupt end. So it’s good news to know that a patent estate can be a real boon to estate planning.

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 both intergenerational changes in control and/or minimizing estate taxes. Here is the first of two cases where Carthage Intellectual Capital Management (‘Carthage’) has proprietary processes to help family businesses and their tax and estate planning professionals.

Case 1- Consider the family business where the next generation has taken management control of a business while the parent generation still owns a substantial portion of the business. If there are intellectual property (IP) assets (patents, trademarks, and copyrights are preferred), odds are good that they are unvalued even though they may confer substantial economic value to the business. If the IP assets are placed in a holding company, they can enter into a license back with the principal business for defined, time-based royalties to be paid back over the remaining economic life of the IP. This license-back allows for easy computation of a present value of the holding company. The stock of the IP holding company can then be exchanged with the business stock held by the parent generation in a tax free, ‘like kind’ exchange of property of equal value.

The royalties paid to the holding company can be distributed to provide an annuity income to the parent generation that now owns the IP holding company (and no longer owns the business). In turn the parent generation can, at its discretion, gift portions of the royalties to the next generation that may or may not be participants in the business. The royalty payments themselves are typically completely deductible to the back licensed business which lowers the total tax burden of the business. The back license itself is now an IP asset of a known transaction value that can be subsequently monetized by borrowings or subsequent sale and back-licensing. This latter option now increases the financial liquidity of the business by raising cash that reflects the IP asset value. Finally, the IP itself in the holding company is an amortizing asset, so over time, it dissipates to a zero or de minimis value for estate succession purposes. The amortization also acts to lower the net tax basis of the gross royalties.

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. To be sure these are sophisticated transactions and you will want to consult your professional service providers 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 next blog at