CONTENTS: I. "TILL DEATH DO US PART" Planning for the unexpected. II. A transcript of a divorce case involving patent assets. III. Wills and Stuff. Types of legal instruments to pass your treasures to your heirs or anyone else. IV. Misc methods (some are very "iffy") This document is distilled from various antidotal and published sources. It is NOT to be considered to be "legal advice" for any purpose. Competent authority should be consulted. Revised April 20, 1999 ======================================================================== ----- I. ---- TILL DEATH DO US PART By ALBERT B. MAGGIO JR. Owners of start-up companies should be prepared if tragedy strikes For the high-tech entrepreneur, as well as for her company, advance planning is critical to ensure that the "family jewels"--patents, copyrights and trademarks--are protected in the event of divorce or an untimely death. This can be especially critical for young wizards who have neither obtained formal protection for their intellectual property rights nor assigned these rights to a corporate entity. If the holder of such rights divorces or dies, in the absence of a formal agreement to the contrary, the intellectual property may be subject to division by the court and distribution to the executive's spouse and heirs, possibly in a manner that is inconsistent with the holder's intent. Only advance planning and execution of critical documents will ensure the ongoing commercial viability of the technology consonant with the entrepreneur's vision. WHEN THE ROAD FORKS You are no doubt aware of the personal effects of a divorce. However, there are also concurrent effects on the businesses run by divorcing spouses. Protracted divorce litigation has affected many chief executive officers and their businesses. Although they were beyond the startup phase, lessons may be learned from the battles for control of such businesses as Maglite, Esprit de Corp. and Data General--which have been waged in court by the spouses or significant others who staked a claim to certain assets. Mondavi Vineyards and Gallo Winery are familiar and comparatively large corporate entities. They have also been involved in litigation among their respective controlling family members. The Maglite saga was recently highlighted in a Dateline NBC broadcast. Tony Magliata, who invented the ubiquitous Maglite flashlight, was defending himself in a palimony/contract suit filed by his companion. She sought to void his transfer of Maglite stock to his children. The jury awarded her $83 million, or about a quarter of the value of his company. He has appealed the judgment. When the wife-and-husband team of Susie and Doug Tompkins, founders of the clothing company Esprit de Corp., obtained a divorce, a major issue was ownership of the company. Since they had not executed an agreement providing for a division of shares in the event of divorce, the issue was settled as part of the dissolution proceedings. Sometimes even a written agreement will not prevent litigation. In April, a California appeals court held that a former wife of late Star Trek creator Gene Roddenberry was not entitled to a share of profits from his post-divorce Trek-related projects. The wife argued that a term in their 1969 divorce decree granted her half of all earnings from future Star Trek-related projects (including Star Trek: The Next Generation, Star Trek: Deep Space Nine, animation, motion pictures and merchandising ventures). However, an appeals court limited her share to earnings from the original Star Trek series only. Because the decree also gave Roddenberry undivided ownership of the company that owned the relevant intellectual property, the court held that he didn't have to share the company's income generated by post-divorce exploitation of the Star Trek trademark. And although his wife had not played an active role in the management of Data General Corp., founder Edson de Castro was ordered by a Massachusetts court to transfer 50 percent of his stock to his wife as part of their divorce judgment. The Supreme Judicial Court ignored de Castro's argument that his "genius" and standing in the computer industry were primarily responsible for the appreciation of the stock, which formed the major component of the marital estate. While these examples are primarily stockholder control disputes, the start-up company's concerns are more basic. The issues are whether the company will survive, and whether it can acquire or maintain ownership of the intellectual property essential to its viability. SUCCESSFUL SUCCESSION PLANNING Civil litigation in a divorce or probate proceeding may ultimately determine the disposition of the company's most important asset - its intellectual property. Thus, it will dominate the attention of the start- up's chief executive. But these are small companies, and there are few, if any, managers to take responsibility for day-to-day operations. How then, can the start-up entrepreneur guard against unintended consequences and ensure the continued viability of his vision for the business in the event of divorce or death? All too often, entrepreneurs play catch-up with legal formalities only after they have created or acquired the intellectual property. This is dangerous, considering that it is typically the largest or only asset of the start-up venture. It is therefore critical to document the ownership of intellectual property from the moment it is created. A paper trail will enable the owner to transfer title consistent with her business requirements and avoid expensive litigation. The individual who has created the intellectual property must reduce it to a tangible form of expression that permits protection through federal copyright, trademark or patent registration. Once legal protection is in place, the entrepreneur is faced with the choice of whether the rights to the intellectual property should be assigned to the company or retained by the individual. A couple of factors may influence this decision. -- California property. California [ and Washington, ed ] is a "community property" jurisdiction. Thus, all property acquired by the labor of either spouse--including intellectual property--during the course of a marriage is presumed to be community property and subject to equal division between the spouses upon divorce. Each spouse also has the ability to bequeath (exercise testamentary power over) one-half of the community property. If one spouse dies without a will, the surviving spouse may exercise a "widow's election" and thus the decedent will be deemed to have made a testamentary transfer of one-half of the community property. -- Management of the business. Under California law, the general rule is that each spouse has co-equal powers over community property. Thus, each spouse has the power to act alone in the management of that property. However, there are a few exceptions to this rule. The most relevant exceptions are (1) that the worker spouse is entitled to exercise primary management of a business enterprise, and (2) both spouses must join in the conveyance of real property. The business owner spouse can therefore manage his company, without deferring any control to his spouse, so long as he does not attempt to transfer real estate held in both spouses' names or acquired with community property. As a general rule, it should also be noted that venture capital firms are generally reluctant to invest in high-technology companies that are owned and managed by a husband-and-wife team. This aversion is based in part upon the uncertainty of property distribution upon death or divorce and its consequent effects on the venture capital firm's ability to recoup its investment and receive a return. STAYING ALIVE The viability of a start-up company depends upon its ability to leverage its resources and vigorously exercise its intellectual property rights. The start-up's survival beyond the death or divorce of the principal who developed or owns the intellectual property is dependent upon the company's ability to acquire or maintain rights in the intellectual property. The first step in protecting intellectual property is to apply for registration. Although copyrights are protected in the absence of registration, the formality and documentation that are by-products of the registration process memorialize the ownership interests in the intellectual property. Corporate names, logos and slogans are all subjects of copyright and trademark protection. Patent and copyright registration affords legal protection for software. If copyright, trademark and patent registration is obtained in the entrepreneur's individual capacity, there is a risk that such property will be subject to the claims of spouses and surviving heirs in the event of the entrepreneur's death or divorce. To avoid the loss of intellectual property rights, the entrepreneur should consider assigning these rights to a business entity. Such assignment will not completely prevent claims to such property by spouses and heirs, but the corporate ownership of such assets will require challengers to first establish a valid claim to the business entity. While most businesses have developed strategic plans for their future, the entrepreneur must also document the development of intellectual property so that others will be able to trace the creation and ownership of the company's assets. For the entrepreneur contemplating marriage, a carefully drawn pre-nuptial agreement may insulate intellectual property from community property claims. If the entrepreneur's company has developed beyond the sole proprietor stage, she should consider assigning her intellectual property rights to a corporate entity. This will provide a degree of certainty, because the corporation does not die or dissolve upon the divorce or death of an owner. If the intellectual property was jointly developed or is subject to a partnership contract, a buy-sell agreement should be executed to ensure that property rights vest in the desired individuals or entities. If one of the partners dies, or a major disagreement arises between them, the terms of a buy-sell agreement may provide for an orderly change of control of the company and its assets. Such agreements may be funded by life insurance or annuity contracts. In addition, licensing agreements can be used to ensure that an individual or entity retains ownership of the intellectual property, and at the same time protect the interests of the surviving business and its customers. For example, the entrepreneur can transfer his entire interest in the intellectual property to the corporate entity, which can then grant licenses to each of its customers. The uncertainty surrounding the ownership and use rights for the corporation and its customers is removed, because the company--rather than the entrepreneur--exercises control over the intellectual property. Death or divorce can result in undesirable consequences for the entrepreneur's personal and professional life. The excitement of developing a new technology may distract the entrepreneur from creating the necessary paper trail to ensure its continuing commercial viability. Careful advance planning for these contingencies should be part of every entrepreneur's business plan. [ and estate planning. Be sure to account for your current and future intellectual property in your community property agreement, wills, etc. Also do not forget your "living will" instructions to physicians if such is within your ethical persona. The 911 good-guys will automatically put a comatose person on life support as part of their regular emergency treatment. It may be near impossible to remove life support once initiated. ed] ------------------------------------------------------------------------ Albert B. Maggio Jr., a solo practitioner in Boxborough, Mass., represents emerging technology companies and their principals. He is admitted to the bar in both California and Massachusetts and has held sales, management and in-house counsel positions with computer hardware and software companies in both states. He is a former vice chairman of the Computers and Computer Law Committee of the American Bar Association's Young Lawyers Division. c 1996 The Recorder [ ed ] are added notes. ---- end --- oops.txt ======================================================================== ============== a case study of a divorce involving patents ============= ---- II. --- [ sorry about the legal mumbo-jumbo, but this is the way it was written by the court] [converted from html language] Janet A. McDougal v Mary Ann McDougal the Court as to the fault that was considered by the Court in the breakdown of this marriage. To supplement the record only briefly, if---it also has to be taken into consideration that while there was some expenses here, significant expenses to the 3.4 million dollars plus monies, the gross proceeds that were received from the patents and between the infringement lawsuits and the licensing agreements, it was Mr. McDougal who chose to conduct his finances in secret. It is also noted by this Court that the Plaintiff Janet McDougal never benefitted from any of this income during the course of the marriage. In fact, there was testimony at trial that the first time that she knew that he had this kind of money and that they could of had a different lifestyle was after the divorce was filed and discovery showed how much and what the assets were of this marriage. It could have been that she could have helped avoid taxes or expenses. Also, it is not as askewed [sic] a division as Defendant would state. Certainly her 1.7 million dollars is at least the rough estimate at this point. The 3 million plus is significantly---well, not significantly but maybe 80 percent of the proceeds that are left, the 2.4. But also the Defendant received all of his assets that he brought into the marriage; that is, close to $300,000 or if not a little bit more than $300-- $300,000. He also leaves this marriage with at least 1 million dollars and two-thirds ownership right and his patents and royalties and licensing agreements from those patents. I think in view of all of that, that the judgment should reflect that it is one-half of the gross proceeds. [Counsel for Mr. McDougal]: Your Honor, just a point of clarification, if I might. The Court stated just at the tail end of its supplemental opinion here that the Defendant also leaves the marriage with a million dollars plus this . . . The Court: Between the half of the proceeds as well as the $300, 000 of assets that he was awarded that he brought into the marriage. [Counsel for Mr. McDougal]: Okay. I'm just indicating to the Court --I don't want to issue a surprise that those numbers don't add up. There is only 2.5 million in evidence at the time of trial. If she takes 1.7, he ends up with a little over $800,000. The Court: Plus $300,000. [Counsel for Mr. McDougal]: No, that's part of the 2.5. The Court: All right. I'm sorry, if that's a mistake. At any rate, it doesn't change the opinion of the Court. Counsel also sought clarification whether the court intended to award Ms. McDougal a continuing interest in the patents themselves. The court responded that such an award was its intention. Mr. McDougal appealed,4 but the Court of Appeals affirmed.5 On further appeal, this Court initially denied leave to appeal. 445 Mich 919 (1994). However, we later granted leave to appeal "limited to the issue whether the trial court erred in its division of marital assets, including patent rights and patent royalties." 448 Mich 852 (1995). II The standard of review has been stated in Sands v Sands, 442 Mich 30, 34; 497 NW2d 493 (1993): In deciding a divorce action, the circuit court must make findings of fact and dispositional rulings. On appeal, the factual findings are to be upheld unless they are clearly erroneous. Beason v Beason, 435 Mich 791; 460 NW2d 207 (1990). A dispositional ruling, however, "should be affirmed unless the appellate court is left with the firm conviction that [it] was inequitable." Sparks v Sparks, 440 Mich 141, 152; 485 NW2d 893 (1992).[6] We leave undisturbed the factual findings of the circuit court. The only question before us is whether the court erred in its dispositional ruling with regard to the patents, and the related rights and income. As stated in Sands, we will affirm unless we are left with the firm conviction that the circuit court's dispositive ruling was inequitable. As indicated, the circuit court's disposition ruling was based largely on its determination that Mr. McDougal was at fault for the breakdown of the marriage. With regard to the role that is properly played by "fault" in the formulation of a dispositional ruling, we explained in Sparks: While the Court of Appeals has invariably held that fault remains a factor, none of the cases has held that it is the only factor. We recognize that the conduct of the parties during the marriage may be relevant to the distribution of property, but the trial court must consider all the relevant factors and not assign disproportionate weight to any one circumstance. [440 Mich 158 (emphasis in original).] regard to the patents and the patent-related income. The new judgment of the circuit court should reflect a division of income from licensing agreements that were formulated during the marriage, as well as from any renewals of such agreements. New agreements executed after the end of the marriage should result in no income to Ms. McDougal.10 In light of Ms. McDougal's pending receipt of a very substantial cash award, we see no need to grant Ms. McDougal any future rights in the patents themselves.11 The new judgment on remand shall provide that the patents and licensing agreements are the property of the defendant, subject to the defendant's obligation to share the funds generated from those assets, as provided in the new judgment on remand. We do not retain jurisdiction. Charles L. Levin James H. Brickley Michael F. Cavanagh Patricia J. Boyle Dorothy Comstock Riley Conrad L. Mallett, Jr. 1 The life of a patent is seventeen years. 35 USC 154. A related patent can be issued as a "division," 35 USC 121, or as a "continuation," Sarkisian v Winn-Proof Corp, 697 F2d 1313, 1323, n 23 (CA 9, 1983). However, it has often been said that "any attempted reservation or continuation in the patentee or those claiming under him of the patent monopoly, after the patent expires, whatever the legal device employed, runs counter to the policy and purpose of the patent laws." Scott Paper Co v Marcalus Mfg Co, 326 US 249, 256; 66 S Ct 101; 90 L Ed 47 (1945). Several related patents were issued during the marriage. In total, Mr. McDougal held seventeen patents, though only six concerned the spark advance control system. The other eleven produced no revenue before or during the marriage. 2 Four witnesses testified---the parties and two patent experts. 3 A later paragraph in the divorce judgment listed seventeen patents, one patent application, and various licensing agreements. 4 Mr. McDougal learned before the trial that he was dying of lung cancer. His death came during the pendency of his appeal to the Court of Appeals. On order of this Court, his daughter has been substituted as the defendant. 5 Memorandum opinion, issued August 11, 1993, reh den October 25, 1993 (Docket No. 141878). 6 The standard of Sparks, 151-152, was also noted in Fletcher v Fletcher, 447 Mich 871, 881, n 4; 526 NW2d 889 (1994). 7 While not minimizing the fault of Mr. McDougal, we note that some elements of his behavior were unfortunate, but not outrageous. For example, a decision to file separate tax returns, while a path commonly avoided by married couples, is not wrongdoing per se. We agree with the circuit court that Mr. McDougal's change of heart concerning children (and his withholding of physical affection) was quite unfair. Yet it is not shockingly unforeseeable that a retiree in his mid-60s, unhappily married for the third time, but with adult children from an earlier marriage, might have second thoughts about becoming a father again. 8 Again, Ms. McDougal's significant contribution lies neither in the invention nor in securing the principal patents. Rather, she assisted Mr. McDougal's later efforts to convert these potentially valuable assets into a substantial income source. 9 Every divorce case must be evaluated on its own merits. However, it would be a rare divorcing couple who would benefit from a judgment that requires them to maintain an ongoing business relationship. ------------------------------------------------------------------------ III. BASIC INFORMATION ON PASSING YOUR ASSETS TO YOUR HEIRS THE ENEMY IS THE TAX MAN, PROBATE LAWYERS, DAWDLING COURTS (THIS DOCUMENT IS A DISTILLATION OF SEVERAL BOOKS ON THE SUBJECT, IT IS NOT TO BE CONSTRUED AS "LEGAL ADVICE", AND YOU ARE URGED TO SEEK COMPETENT FINANCIAL AND LEGAL COUNCIL.) WHEN a person with assets dies, transferring these assets to his survivors unleashes two vicious processes -- death taxation and probate. Estate taxes are levied against the deceased for having the audacity to die while owning anything, not against the heirs for whom the inheritance is "untaxed" (more precisely already taxed) income. The rate is graduated and levied against ALL the deceased's net worth. There is a deductible of $600,000. Estates of this size are common even among people of modest means. When a small business in involved, the IRS has unrealistic method of appraising the business even though it is value and functioning was totally dependent on the talent of the now-absent owner. The Clinton administration has openly talked about lowering the deductible to $200,000. This is not new, the Democrats in congress have been whispering the idea for years and you can expect it to be proposed at some time. There is no assurance that an income tax will not also be levied directly against inherited income. Probate is the court process that clears debts and passes clear title to the heirs. The process is a kind of bankruptcy proceeding where the heirs are in the position of lower echelon creditors. Probate is the lawyer's playground and welfare program. If the estate has property in more than one state, the property must be probated in EACH state. The lawyer's fee is usually 6-10% of the estate BEFORE TAXES, there is no consideration of how much or how little work is required. In addition there are the court fees, advertising, lost heir search, Xerox copying, etc, etc, ad nauseam. The process usually takes 1 to 3 years and nothing can be sold, used, or properly managed without court permission. In the meantime, pray that there is no need for cash to run a business, house repairs, pay the death taxes (in cash), medical, college, etc. There are several instruments for passing assets to the survivors. These are often collectively called "Wills", but a Will is a particular class of documents. The instruments of inheritance are: 1. No written will The State will step in and in effect impose or equivalent. a will according to State Law. Court administers the estate without direction from the decedent. 2. Joint tenancy. Common ownership between two or more persons. 3. Community property Common ownership between husband and wife. 4. Holographic Will. Handwritten, no witnesses. 5. Attested Will. Sometimes called a "Loving Will" as it is written in a spirit of love and concern, often expressed in the preamble. This is the document attorneys usually write and is what people think of when considering a "Will". It is witnessed. 6. Testamentary Will. A trust set up upon the death of the estator. 7. Living Trust. A trust set up prior to the death of the estator. 8. Gifting. $10,000/year can be given tax free to each or any person(s), heir or not. 9. "Living Will", or "Directive to Physicians" This is not a "will" but is so greatly affects assets that I include it for consideration. These can be concurrent and in effect overlap. Joint tenancy supersedes any other instrument and is no longer recommended for most common situations. Community property is valid in only 8 states. Washington and California being among them. JOINT TENANCY is the simplest and most direct method of preparing for the passing of assets. There are several variants within Joint Tenancy and the most common is Joint Tenancy With Right of Survivorship (JTWROS). This is the one usually used in stocks, bonds, and joint bank accounts. It simply requested when the asset is purchased, and shows up on the owner(s) lines of the asset documentation. Any asset can be held in Joint Tenancy. Transfer is instant, no fuss. The deceased's name should be removed from the account, but does not have to be until the asset is sold. there are structural problems with common ownership, but in the context of this report, the problem is the tax treatment. Inherited property gets a treatment called "Stepped-up" basis for setting the "original cost". Under this concept, the property is assigned the current value as the "acquisition cost" for computing the taxes against the new owner's profit when he sells the property. The problem with JT is that ONLY the deceased's portion is so adjusted. The new owner's portion still bears the original first cost for a base value. COMMUNITY PROPERTY is a special kind of JT available to only husbands and wives. It may be possible to assert community property simply it was commonly acquired, but a community property agreement is recommended because it is a specific notification of intention. This is especially true when there is property acquired before marriage or by inheritance to one spouse. The agreement need not be asserted (filed) until needed. Thus, may be modified or rescinded by simply re-working or destroying the document. Probate is not required. Tax treatment is very favorable. The entire asset is given the stepped-up base. It is recommended that JT property be changed to community property when possible. WILL and TESTAMENT can contain almost anything desired except that JT supersedes it. Portions not covered by JT or Community Property will have to be PROBATED to pass title. TESTAMENTARY TRUST is essentially just naming an artificial person (the trust) as the heir. Advantage is not in the process of passing title or tax treatment, but in how and for whom the assets are managed collectively. In Joint Tenancy, Community Property, and Will, the deceased's $600,000 exemption is exhausted even though his portion is less than $600,000. The heir then has one more $600,000 which will be applied to the entire newly aggregated estate which is likely to exceed $600,000, especially if it grows through appreciation or earnings. There are methods to combine the two deductions of each spouse to make one $1.2 million deduction. LIVING TRUST. This device is a kind of one-person corporation or partnership with oneself. The trust holds (owns) the property for the benefit of the trustee, who is also the manager or president controlling the use and disposition of the assets. Upon death, the ownership of the assets does not change, thus no probate, but there is a new manager (trustee) and new beneficial owner(s). The transfer method is built into the trust document. The estate is not the trust as such, but the interest (ownership) of the trust. Estate taxes are due on the transfer of this ownership. One wrinkle called and A-B trust available to husband and wife which in effect defers death taxes until the surviving spouse dies. At that time, both $600,000 deductions are applied. This and gifting are the only practical way to significantly reduce death taxes. GIFTING in $10,000 increments works nicely and may be either direct or to a trust owned by the recipient. Gifting to a trust may be best for minor children or for groupings of recipients. Larger gifts are charged against the $600,000 deduction by a corresponding amount. Gifted assets do not get a step-up for original cost. Therefore, depending on the marginal tax rates, it may be better to gift cash or sell property assets, pay the tax and gift the cash, which has no "original cost base". A children's trust is often used for appreciating assets because direct ownership by children may be hit by the "Kiddie Tax" which is an irrational concept that taxes children's un-earned income (ie dividends, appreciation, etc) at the parents rate. The NO-WILL case can be a nightmare. It can tie up large chunks of assets in the name of the children under court supervision as long as they are minors, and leave the family, including the children, essentially impoverished. It also may open access to other more remote heirs. Of course, the lawyers work such a situation as a cash transfusion by direct hose between the estate and themselves, and the court seems to defend them. LIVING WILL: This is the instrument designed to control the level of care in the final days or weeks. Typically, 1/2 of a person's lifetime medical expenses occur in the last month of life. The directive usually directs "no heroic" measures to sustain "life" as defined by medical practice, with the attendant pain, suffering, and costs for essentially no positive affect on "quality of life" In most places, once hooked up to the tubes and machines, they cannot be removed until medically defined death. When the 911 medics arrive, they will, as a matter practice, hook the unfortunate to as much equipment as they determine appropriate to save a life. Emergency Room personnel may add to the contraptions. By then, heroics have commenced and the problems have started. The Directive to Physicians permits disconnect with more humane logic controlling. Forms can be obtained from most physicians, hospitals, and attorneys at no cost. The format is usually State mandated and is standardized. The Issues of inheritance are: 1. Who gets what, and how to ensure that they get it. 2. Avoiding or minimizing taxation 3. Avoiding or minimizing probate costs. 4. Expeditious transfer of assets. ---------------------------------------------------------------------- ---- IV. Misc Methods ---- Having major assets in corporate form, and there several, provides several advantages both for daily financial operations and for inheritance along with a few dissadvantages. As for inheritance matters: 1. It is the stock of the corporation is inherited, not the individual assets. 2. When the corporation is closely held, ie one person or family owns it all, the stock value can be manipulated to have a significant discount (as much as 75%) from the value of the underlying assets. This has to be done carefully by accountants and lawyers who actually know what they are doing and how to make it stick, (and very few do..!!!). The corporation should be a real business and be operating for some time before the discount feature is needed, otherwise, it might be deemed by the IRS as a "tax dodge" and nullified. Gold Coin: A wierd, untested idea: The United States Gold coins are legal tender. The face value of a 1 oz coin is $50. Would it be "legal" to inherit say $1000 face value gold coin at it face value instead of its "gold" value?. Note: Foreign coins would not fit into this scenario. ============================================================ File: oops.txt file: opinion7.htm, opinion7.asc --- end -- =========== oops.txt