A prerequisite for the estate planning professional is a working
knowledge of (if not an expertise in) the Internal Revenue Code of
1986, as amended. For those professionals tasked with estate
planning for authors and artists, however, a working knowledge of a
different federal statute – the 1976 Copyright Act, as
amended, which became effective on January 1, 1978 (the "1976
Act") – is also of great importance. If an estate
planning professional does not have a working knowledge of the 1976
Act, the consequences to his or her client may be detrimental and
could wreak havoc with the intended disposition of the copyrights
associated with the client's creative works.
The 1976 Act creates three potential pitfalls that an estate
planning professional must consider when disposing of a
client's creative works and the copyrights associated
therewith, both during the client's lifetime and upon his or
her death.
A Gift or Bequest of a Creative Work Does Not Transfer the Copyright
First, in order to transfer the creative work and the copyright during the client's lifetime or upon death, the client must specifically state that the copyright is being transferred with the creative work. A gift or bequest of a creative work, such as a painting, without a corresponding gift or bequest of the copyright will only pass the creative work to the donee or beneficiary. For example, if the client bequeaths a painting to a friend and bequeaths the residue of his or her estate to his children, the friend will receive the painting and the copyright will pass as part of the residue of the estate to the client's children. If the client intends to bequeath the copyright with the painting, the will must specifically bequeath the copyright to the friend.
Copyright Termination Rights Devolve Under Forced Heirship
Second, the estate planning professional must understand the
uncertainty associated with transferring the client's
copyrights during the client's lifetime or upon the
client's death, other than by the client's will. The
1976 Act provides creators with the opportunity to exploit their
"original works of authorship" by prohibiting others from
profiting from the work for a limited period of time without
consent.1 During that limited period of time, the
creator can sell, lease, license, and gift the right to reproduce,
distribute, perform, display, and prepare derivative works as one
undivided "bundle of rights," or more commonly as
individual intangible rights. The ability to separate rights
from the bundle and transfer them independently enables the creator
to control the work's exposure and profit as he or she may
desire.
But what if, as may be the case with new talent, the highest
bidders are not interested when the creator first seeks to benefit
from his or her work? The 1909 Copyright Act, as amended (the
"1909" Act), sought to provide authors and artists with a
second opportunity to profit from an already exploited copyright
through a right of renewal for that very purpose. In 1943,
however, the United States Supreme Court upheld the validity of
assignments of renewal rights prior to their vesting under the 1909
Act,2 thereby depriving creators of a second opportunity
where they had assigned their renewal rights under the terms of an
initial transfer. In response to the Court's holding, the
1976 Act dispensed with the right of renewal, and for copyrights
created after January 1, 1978, created a statutory right of
termination.
As explained in the legislative history of the 1976 Act, Congress
believed that the renewal right should be substituted with a
different provision to protect creators who entered into
"unremunerative transfers."3 Citing the
unequal bargaining positions of creators that result from their
inability to predict the value of a copyrighted work before it has
been exploited, Congress proposed Section 203 of the 1976 Act,
which provides for a termination right over any transfer of a
copyright as defined in Section 101 of the Act or any nonexclusive
license (hereinafter collectively referred to as a
"transfer"), other than a transfer by the creator's
will.4 Section 203, as it appears in the 1976 Act,
provides that in the case of "any work other than a work made
for hire, the exclusive or nonexclusive transfer or license of a
copyright or of any right under a copyright, executed by the author
on or after January 1, 1978, other than by will, is subject to
termination." The remainder of Section 203 dictates the
specific requirements for termination. Unlike the automatic
renewal right, the 1976 Act's termination right requires
affirmative action on the part of the creator and cannot be waived
or contracted away.
The year 2013 marked the first opportunity for authors and artists
to recapture rights they transferred or licensed away on or after
January 1, 1978. Assuming that the creator of the work is
still alive, any exclusive or nonexclusive transfer may be
terminated during the five-year period beginning 35 years from the
date of the transfer.5 Notice of the termination
right must be provided no more than 10 years, but not less than two
years, prior to the effective date of the termination.
By way of illustration, assume your client sold a copyright to a
song to a record label in September of 1978 for a small
royalty. Further assume that your client subsequently found
fame as a world-renowned performer. Over time, the record
label realized substantial profits without any similar compensation
being paid to your client. Under the terms of Section
203(a)(3)-(4), during the five-year period from September 2013 to
September 2018, your client has the right to terminate the sale by
serving written notice on the record label anywhere from 10 to two
years before the effective date of the termination and recording a
copy of the notice with the United States Copyright
Office.6 By following the procedures of Section
203(a)(3)-(4), the copyright will then revert back to your client
under Section 203(b) upon the effective date of the
termination. Under Section 203(a)(2), if a creator dies
before the commencement of the termination period, the termination
right vests in a surviving spouse and/or children and
grandchildren.7 This termination right is an automatic
right of inheritance and cannot be altered by the client's
will, testamentary substitute, or other agreement. In these
circumstances, the creator's spouse and/or children and
grandchildren have the ability to terminate the creator's
post-1978 transfers, with the caveat that any bequest under the
deceased creator's will cannot be terminated. In
situations where more than one person owns the termination right,
only 50 percent of those persons need to agree in order to
terminate a creator's lifetime transfer by complying with the
same procedures outlined in Section 203(a)(3)-(4).
Notwithstanding action by as few as 50 percent of the owners of the
right, the terminated interest vests in all of the holders
of the termination right upon the effective date of the
termination.
In light of the federal copyright law's preference for
promoting the wishes of the author or artist, from an estate
planning perspective it is particularly frustrating that the 1976
Act creates an automatic right of inheritance in the creator's
surviving spouse and/or children and grandchildren, who may not
even be the intended beneficiaries of the creator's
estate. This frustration becomes more pronounced once one
realizes that the termination right appears to apply to any
transfer made during the creator's lifetime, including
transfers to management companies, lifetime gifts, and charitable
donations.8
Consider the possibility that the creator's surviving spouse
and/or children and grandchildren (the holders of the termination
right) are not the named beneficiaries of the creator's assets
under his or her will. Assume that your client is survived
only by children, but executes a will leaving all assets of the
estate to a significant other, thereby disinheriting the children
under the terms of the will. If your client dies before the
termination right vests under the 1976 Act, the surviving children
will have the opportunity to terminate the sale of the copyright,
take possession of it, and exploit it for their personal
gain. The right of termination does not (and cannot) pass
under the client's will to the significant other. In this
case, the client's children have the opportunity to frustrate
your client's testamentary plan and circumvent their
disinheritance.
Transfers of Copyrights Other Than Those Made by Will May Be Revoked
The third consideration for estate planning professionals is
that Section 203 not only overlooks the fact that a creator's
surviving spouse and/or children and grandchildren might be
different persons than the beneficiaries of a will, but its sole
carve out for transfers made pursuant to a will presents an
opportunity for a creator's surviving spouse and/or children
and grandchildren to undo lifetime estate planning transfers if
they do not inure to their benefit. Particularly in states
where the probate process is lengthy and complex (e.g., New York,
California, and Florida), estate planners often utilize
testamentary substitutes, such as revocable trusts, in lieu of
traditional wills that would trigger probate. For example,
the surviving spouse and/or children and grandchildren who are not
the beneficiaries of the creator's revocable trust can
frustrate the creator's testamentary intent by terminating an
inter vivos transfer of a copyright after the
creator's death. Plainly, this interferes not only
with the creator's wishes regarding to whom the copyright
devolves, but also with the desire to avoid probate. This gap
in the statute, which allows for the unraveling of an estate plan
merely because the creator elected to utilize a revocable trust
over a will, highlights the need for revisions to Section 203 of
the 1976 Act to except transfers to testamentary substitutes from
the right of termination by a creator's surviving spouse,
children, and grandchildren. Indeed, if a creator chooses to
transfer copyrights to a limited liability company for management
purposes during the creator's lifetime, that too can be undone
by a surviving spouse and/or children and grandchildren if they do
not receive the limited liability company interests upon the
creator's death. As with a transfer to a trust, Section
203 grants the family the right to terminate the copyrights owned
by the limited liability company during the termination
period.
As you can see, estate planning professionals must have a working
knowledge of the 1976 Act in order to inform their clients of these
and other potential pitfalls that are unique to authors and artists
and then advise them of the best means of disposing of their
copyrights.
Footnotes
1 The 1976 Act provides that works created on or after
January 1, 1978, which are not works made for hire, are extended
copyright protection for a period of the author's life plus 70
years. Works created prior to January 1, 1978, are outside
the scope of this article.
2 See Fred Fisher Music Co. v. W. Witmark &
Sons, 318 U.S. 643 (1943).
3 See H.R. Rep. 1476, 94th Cong., 2d Sess.
(1976).
4 Id. at pages 124-125.
5 If the grant covers the right of publication of the work,
the period begins at the end of 35 years from the date of
publication of the work under the grant or at the end of 40 years
from the date of execution of the grant, whichever term ends
earlier. See 17 U.S.C. §203(a)(3).
6 In order to effectuate a termination in September 2013,
notice would have been required to have been served in September
2011.
7 The creator's surviving spouse will own 100 percent of
the termination right unless the creator has descendants then
living. In such case, the spouse will own 50 percent of the
termination right and the creator's descendants, per
stirpes, will own the other 50 percent. If the creator
dies without a spouse or descendants, the termination right may be
exercised by the executor, administrator, personal representative,
or trustee of the creator's estate.
8 We anticipate that the blanket application of the
termination right to common lifetime estate planning transfers will
be challenged by litigation as more terminations are effectuated
under the 1976 Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.