[Ed. Note: Law Law Land’s concludes its calendar-be-damned Oscar week with new contributor Stefanie Lipson, who takes on the plight of this year’s Lifetime Achievement Award winner and his progeny.]
There is perhaps no greater culmination to a Hollywood film career than being honored with the Lifetime Achievement Award at the Oscars (even if, these days, it doesn’t even come with a lousy on-air acceptance speech…maybe that Robert De Niro episode at the Golden Globes scared off the Academy once and for all). Just ask this year’s recipient, Francis Ford Coppola. But after all that hard work in Hollywood, all the false starts (One From the Heart, anyone?) as well as the successes (too many to name, but I’d have to go with Captain EO), the accolades and the press, and adaughter following in her father’s large footsteps, turns out Francis Ford Coppola might have been better off making his fortune another way — at least when it comes to paying estate taxes (good thing he has that winery).
As an estate planning lawyer, I can confirm that Benjamin Franklin was right about the only things certain in life being death and taxes. Inevitably, I must inform clients who start sentences with the phrase “if I die…” that it really ought to be “when I die.” (Apologies to those readers who are offended by my morbidity. You may replace the word “die” in the sentence above with the death-related euphemism of your choice. For celebrities, I suggest “go to that great Starwagon in the sky.”) And taxes are no less inevitable: as the law stands, even those lucky authors who come up with an immensely successful creative work (screenplay, television series, book, song, etc.) and have the good sense to transfer ownership of it during their lifetimes can still get hit with an estate tax bill on their copyrights when they die.
How does that make sense, and what can successful creative types do about it? Let’s discuss.
Estate Planning 101
Contrary to popular belief, estate planning is not just planning for when you die (ahem…when you pass). Estate planning is also, in large part, about transfer strategies designed to shift wealth to younger generations at a reduced transfer tax cost (translation: figuring out how to give away stuff while you’re still alive).
Whether you give property away during your lifetime or hold on tight to it until your death, you’re going to pay some kind of tax. Estate and gift taxes are currently assessed at a rate of 35%, reverting to pre-Bush-tax-cut levels of 55% in 2013. But, for reasons you probably don’t care to know, even though the estate and gift tax rates are the same, it is “cheaper” to give your property away during lifetime (and pay gift tax) than to hold onto it and pay estate tax at your death. (For those gluttons who refuse to take my word for it, feel free to Google-search the terms “tax inclusive” and “tax exclusive,” and good luck staying awake.)
Congratulations, you’ve now passed Estate Planning 101! Now you’re ready for the advanced course. (Don’t worry, we’ll get back to Francis Ford Coppola in a moment.)
Estate Planning 201
The goal of many advanced estate planning techniques is to reduce the client’s overall estate tax liability at death by making tax effective transfers to the next generation during his or her lifetime. (Wow, my entire job description was just reduced to one sentence.) However, when you give away property during lifetime, if you keep “strings” to the property, such as the right to change who gets it (power of disposition), the right to take it back (power of revocation) or the right to benefit from the property during your lifetime (receipt of income), the IRS is likely going to come after your estate for estate tax, even though you didn’t actually own the property at your death.
So what’s all this got to do with Francis Ford Coppola?
The Copyright Act grants most authors (like our friend FFC) “termination interests,” which allow them (or their heirs) to essentially revoke transfers of copyright after 35 years. The idea behind termination interests was to protect the small unknown authors (with little or no negotiating power) from big bad studios who could acquire extremely lucrative copyrights on the cheap before anyone could know how valuable those copyrights actually were. And because termination rights are based on a public policy of artist protection, they are unwaivable andnon-assignable. Which all sounds great, until you remember that bit about “strings” above. Because what Congress giveth with one hand, the IRS taketh away with the other.
Because copyright termination powers are unwaivable and non-assignable, an artist can never truly give away a copyright, at least not as far as the IRS is concerned. While artists who are determined to hold onto everything until death (estate tax be damned!) might never know the difference, artists who choose to dispose of their copyrights during their lifetimes — either to corporate buyers or to their own intended heirs — will find that their latent termination interests are still taxed by the IRS as part of their estates.
Moreover, when Congress created statutory termination rights, it also decided, on behalf of every artist in America, who would get to inherit those rights. If you’ve got a 1950s Leave It to Beaver-style nuclear family thing going, again, this might not be a concern. But what if you’re on your second marriage, or have kids from multiple marriages, or just never really liked that ingrate son of yours that much? Too bad, says Congress, at least with respect to your copyrights that have termination interests: your statutory successors (spouse and kids) will share and share alike, whether you want them to or not.
In other words, the same lifetime transfer techniques that work for cash, securities, real estate, baseball cards and vineyards fail for copyrights, because the Copyright Act makes it effectively impossible to give a copyright away no-strings-attached (that 35-year termination right — which is inheritable by all of your statutory successors in equal measure — being one heck of a string).
I could leave the discussion there (i.e., “the IRS is making your life difficult, now deal with it”), but for those of you who are willing to join me in the really advanced class, there are some silver linings to be found.
Estate Planning 301
If a copyright is a “work made for hire” (akin to a “commissioned work,” for which the copyright vests from inception in the commissioning party), then it isn’t subject to the Copyright Act’s statutory termination provisions. While some authors may lament the loss of those cushy Congressionally-granted rights, this wrinkle — combined with some forethought and creativity — can help authors get around the troubles we learned about in Estate Planning 201.
For example, for a variety of tax reasons, many authors work through so-called “loanout corporations,” which, on paper, employ authors and “lend” their services out to third-party employers. While there’s some ambiguity, a creative work created through a loanout is probably a “work made for hire” in the loanout’s favor. This allows for string-free copyright transfer by the loanout corporation, or a transfer of the loanout itself, thereby avoiding the estate tax complications caused by the unwaivable termination right “string.” (As always, these things are more complex than they can be made to sound in 3 sentences, so thorough T-crossing and I-dotting will be in order.)
And to return to our friend Mr. Coppola, I’m sure a Lifetime Achievement Award winner of his stature is lucky enough to work for art rather than money. So, if he wants to make his daughter Sofia the recipient of the proceeds from his next hit screenplay with minimal tax consequences, he can give her a smallish, non-taxable gift (up to $13,000 in 2011) to set up a new company, and have that company hire him to write The Godfather IV: Let’s Just PretendGodfather III Never Happened, Okay? (subject, presumably, to certain WGA obligations, etc.). Sofia, Inc. can then flip the script to a studio buyer, and all of the income derived from the screenplay will belong, from inception, to Coppola’s daughter’s company, without transfer tax implications.
Sounds like an offer from Francis that Sofia can’t refuse.
Super Special Bonus Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein. While you’re reading this, go ahead and read our usual disclaimer in the gray bar on the right of your screen as well.
This article first appeared in the February 28, 2011 issue of ALM’s The Recorder.