Key Considerations for Dividing Intellectual Property and Royalties in Divorce

By: Gus Dimopoulos, Esq.

Divorces are complicated financially – splitting assets is rarely as simple as dividing by two. This is especially true for high-net-worth divorces, where significant sums of wealth and a wide variety of holdings are involved. Unlike divorces limited to more straightforward assets, high-net-worth individuals, along with their legal and financial teams, must divide assets that go beyond basic retirement accounts and cash savings. These types of divorces can involve sprawling real estate holdings, complex stock portfolios, and – in certain cases – substantial intellectual property (IP) and royalties.

The IP and royalties potentially involved in a divorce can range from trademarks and trade secrets to patents, copyrights, and perpetual earnings from music and other content. IP and royalties can be substantial, too: In a recent divorce I litigated, the husband had almost 200 technological patents to his name. While the types of IP and their nuances can vary, there are a handful of fundamentals that advisors should know to maximize their clients’ interests.

Determining IP and royalty ownership isn’t straightforward. With more traditional assets like bank accounts and 401(k)s, it is relatively easy to conduct forensic work and divide assets. Financial institutions keep meticulous records of account openings, deposits, withdrawals, and interest, making it simple to match an account earnings with a marriage timeline. IP and royalties, however, are often a different story. They can have a paper trail – like the paperwork associated with a patent or trademark – but there are qualitative elements at play, too. For example: Did the idea behind that patent occur during the marriage or beforehand? And what role, if any, did the spouse play in its creation?

Valuing IP and royalties isn’t simple, either. Figuring out the precise value of IP can be equally difficult. Again, it’s much more complicated than the numbers printed on a bank statement. There are several different approaches for valuing IP. For example, an income-based approach determines anticipated future earnings, while a market-based approach derives value from the recent sale of similar assets. Because there’s no way to truly know an IPs potential value – no one can see into the future – there is always an element of subjectivity involved. And remember: When it comes time to value IP, make sure to engage an IP valuation expert. Royalties aren’t always considered marital property.

IP can be addressed in a prenuptial agreement. There are many myths and misconceptions about prenuptial agreements, especially when it comes to which assets can be protected and how. Despite its intangible nature, IP can be safeguarded with a well-drafted prenup. This is particularly important for individuals whose work or ideas may result in significant IP holdings over time, such as inventors, authors, or artists. Having a clear understanding of how IP is treated in these agreements can provide an extra layer of protection in the event of a divorce. It’s essential to work with legal experts who are familiar with the nuances of IP to ensure that such assets are adequately covered and clearly defined in the agreement.

Splitting assets equitably in a divorce is rarely easy – even without adding emotion into the equation – and IP and royalties are notoriously difficult to value. But with a clear understanding of how to approach this asset class, the divorcing couple, their financial advisors, and their lawyers can put together a comprehensive and fair strategy.

Gus Dimopoulos, Esq. is managing partner of Dimopoulos Bruggemann P.C., a matrimonial and family law firm based in Westchester County, N.Y. and New York City that specializes in high-net-worth divorces. For more information, visit www.dimolaw.com.

This article was originally published in Family Wealth Report and can be viewed here.