How Intellectual Property Assets Affect Estate Taxes
Society is currently moving through a transition from a community whose wealth is based in tangible goods, such as the means of production, to a community whose true wealth lies in intangible forms of property. We are moving toward a period where knowledge and ideas are more valuable than physical objects. Intellectual property, such as patents, copyright, trademarks and even trade secrets are what drive many of this country’s booming sectors. With widespread internet access, the creation of intellectual property is no longer restricted to large corporations or wealthy people who can afford to develop such property. Any person can develop value through a copyright, a patentable invention or a trademark. As intellectual property continues to grow as a wealth creation tool, individuals will be faced with the challenge of determining the value of the property, and the effect that such property will have on estate taxes.Estate taxes on intellectual property, especially those based on copyrights, can have a substantial effect. When determining a person’s estate for purposes of estate taxes, it is first necessary to determine one’s gross estate. A person’s gross estate includes probate property and other tangible and intangible assets, such as retirement accounts or joint property. The current exemption for estate taxes is $2 million and will remain at this level through 2008. The estate tax exemption amount will then increase to $3.5 million in 2009, and is currently scheduled to be repealed in 2010.
When valuing intellectual property for estate tax purposes, the taxable amount is generally accepted to be the fair market value of the intellectual property on the date of the creator’s death. For example, the fair market value of copyrights will generally be considered their income producing potential, discounted for net present value. A common method for determining a copyright’s fair market value is to determine the likely annual earnings for the intellectual property for a future period, often between 5 and 7 years. A multiple, often between 3 and 7 is then applied to that number for the current valuation. Much of the valuation analysis is largely subjective, so determining the accepted method with the lowest valuation is usually the best choice, at least in terms of estate tax purposes.
Often, the taxes on a valuable piece of intellectual property in a decedent’s estate will be more than the available liquid assets or cash on hand to pay the estate tax. This often results in the estate being forced to sell some of the property in the estate to pay for the estate tax. Alternatively, the Internal Revenue Code does allow for tax payment deferment. Internal Revenue Code § 6161 allows for the deferment of estate taxes for up to ten years with a reasonable cause showing. Reasonable cause has often been interpreted as being met with a showing that the estate is comprised of illiquid intellectual property. This deferment period can allow an estate to take its time in determining how to pay the estate taxes, without being forced to make a hasty decision to sell estate property. However, keep in mind that the estate does have to pay interest on the deferment amount, which is generally the short term federal rate, plus 3%. See, IRC § 6621(a)(2).
Much of society’s wealth lies in intangible intellectual property. When determining the amount of a decedent’s gross estate for tax purposes, it is necessary for the zealous advocate to choose the generally accepted valuation method that is most advantageous to the client. Valuation methods will vary by industry and type of intellectual property, be it copyright, trademark or patent. If you or your client’s estate is comprised largely of intellectual property, it may be necessary to contact an attorney experienced in intellectual property valuation and tax planning. Contacting the property advocate may save the estate a substantial amount in the form of taxes, allowing it to dispose of the rest of the property in accordance with the decedent’s wishes.
This article was written by Nick Delaunt for the law firm of Goldstein and Clegg, LLC.
Turning Legalese Into LegalEASE
Comes now, the author of this article who, pursuant to said article, for the reasons set forth herein, prays inter alia, for relief from the antiquated expressions, needless Latinisms, and convoluted legalese that plagues most legal writing. Stubbornly clinging to language that they would never use in any other context, many legal writers have an irrational aversion to expressing themselves in plain English. But is it really necessary to "pray" for relief rather than ask for it? Is it more convincing to argue that the client is entitled to relief "pursuant" to Section 4.16 rather than merely "under" Section 4.16? And, is the Plaintiff really coming now? The general consensus is that the answer to all three questions is a resounding "no," and that legal writing is, in fact, much more effective without the legalese.
The Plain-English Movement
Over the past two decades, the movement away from legalese and toward legalEASE has been palpable and heartening. In his book, "the Winning Brief,"
legal writing guru Bryan Garner includes chapters on such tips as "eliminate the jargon known as legalese," "strike pursuant to from your vocabulary," and "don't use such as a pronoun." The University of Virginia School of Law alumni page touts its legal research and writing program as helping students "win the battle against legalese." A UCLA professor publishes an online page entitled "eschew, evade, and/or eradicate legalease." We are bombarded by advertisements for CLE writing seminars that promise to teach us to how to write clearly, in plain English. Yet, many attorneys continue to cling to their legalese.
Resistance to Abandoning Legalese
It seems evident that confusing jargon is the enemy of clarity and persuasiveness, but the fact that we need to attend seminars or read books to teach us how to write in simple English is a testament to how deeply engrained this strange lawyerly language has become. Why the resistance? One explanation may be that aspiring attorneys spend three years in law school reading cases--decisions that are often centuries old--and assume that 21st century lawyers should write like 19th century judges. They continue to write in this style out of habit, or a misguided sense of tradition. Other lawyers are convinced that legalese is more precise. However in most cases the opposite is true: legalese is less precise, redundant ("cease and desist," "by and through counsel"), and unwieldy reinafter, "unwieldy").Underlying the resistance may be a vague, insecure sense that lawyers need to write in legalease in order to sound lawyerly and separate themselves from the rest of the population. After all, can't any person of average intelligence draft a contract or an appellate brief in plain
English? The answer, of course, is no. Replacing the "parties hereto" with "Jones and Smith" devalues the importance of attorneys no more than calling a megapixel a "millionth of a screen" would render computer technicians obsolete. Lawyers aren't paid for their ability to wield incomprehensible jargon. Rather a unique ability to reason like a lawyer, to weave persuasive arguments from facts and precedent, and to pay exacting attention to detail, separates legal writers from the rest of the population. Of course, there will always be a unique legal lexicon, filled with such terms of art as "fee simple," and "res judicata." Every profession has its jargon. But the legal profession is the only one that has felt the need to have its own pronouns, unique to the English language, and to use same to alter said language.
In Conclusion
WHEREFORE, for the reasons set forth herein, we respectfully request that this honorable reader abandon legalese and start
making clear arguments in plain English.
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Doug Groene, Esq., Staff Attorney of legalEase Solutions LLC
New York City Bar Weighs in On Overseas Legal Outsourcing
The exponential growth of overseas legal outsourcing in recent years has benefited the legal profession in many ways, not the least of which is to level the playing field, allowing smaller firms or sole practitioners affordable access to the type of resources previously enjoyed only by large firms with the capacity to throw an army of lawyers, paralegals, and legal assistants at a given project. But the practice has also raised ethical considerations, as attorneys struggle to apply traditional rules of professional responsibility to an increasingly global legal industry.
Last summer, the Association of the Bar of the City of New York Committee on Professional and Judicial Ethics weighed in on the ethics of overseas outsourcing in a formal opinion, published online at
http://www.nycbar.org/.
Attorney Supervision is Key
Like almost every other ethics opinion from various jurisdictions that have considered the issue, the New York City Bar Association affirmed that there is nothing inherently unethical about outsourcing legal support services to overseas attorneys or laypersons. Lawyers within firms have routinely delegated tasks to clerks, secretaries, and other laypersons, and delegating research, brief writing, or similar tasks to overseas firms is analytically no different. In both cases the key is supervision over the non-lawyer.
The outsourcing attorney must, at all times, shoulder complete responsibility for the work. This entails setting the appropriate scope for the project, and vetting the non-lawyer’s work to ensure its quality. The opinion suggests that, in order to ensure proper supervision, the hiring attorney should obtain background information on the overseas firm and the non-lawyer working on the project, conduct reference checks, interview the non-lawyer in advance, and maintain communication during the project.
Client Consent May Be Necessary
The opinion also considers the thorny issue of protecting client confidences. It is often necessary to reveal confidences to the overseas lawyers in order for them to properly complete a project. But many overseas jurisdictions have less stringent rules of confidentiality. The ethical solution, according to the opinion, is for the hiring attorney to obtain the client's informed consent in advance. The client should be told which confidences will be shared, and the extent to which the rules of confidentiality in the foreign jurisdiction may offer less protection.
Like the New York State Bar Association, the New York City Bar concluded that attorneys do not need to reflexively inform clients every time work is to be outsourced overseas to a non-lawyer. However, the hiring attorney does have a duty to disclose the outsourcing when non-lawyers will play a significant role in the matter, when client confidences are to be shared, when the client expects that only the law firm and its personnel will be working on the matter, or when non-lawyers are to be billed to clients on a basis other than cost. In fact, absent a specific agreement with the client, a New York attorney should charge no more than the direct cost of the outsourcing and a reasonable allocation of direct overhead expenses from the outsourcing.
The New York City Bar opinion concluded that a lawyer may ethically outsource legal support work overseas provided the hiring attorney rigorously supervises the non-lawyers, takes measures to protect client confidences and avoid conflicts of interest, obtains client consent when necessary, and bills appropriately.
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Doug Groene, Esq., Staff Attorney of legalEase Solutions LLC