Part II – A Trust or an LLC Can Help Manage Author Assets after Death

Yay, you came back! On Monday, we talked about what happens to a writer’s intellectual property (IP) after they die. A will was mentioned as a fairly simple way to pass on this asset. However, a will has some drawbacks.

“Every state is different, but a will can spend up to a year in probate,” said Chad Whitfield, an attorney with Hunter, Smith and Davis in Tennessee. “It has to stay open between four months and a year, and things become public. The copyrights you own, all the assets have to be on the inventory. Some people like to keep it private. With a living trust, you can accomplish the same goals, but it’s private.”

The other issue with an income-generating item is if you leave something to a person via a will, it is theirs to do with as they please. “Most of the time it will go to the kids outright and they can fight over it, or sell the rights,” Whitfield said. “If I want the kids to get the benefit of it, but not own it, then that has to have proactive planning.”

One way to do that is with a trust, which is essentially a legal entity that acts as a bucket to hold your assets and is governed by a set of instructions (the trust document). The trust gives the “trustee” latitude to make decisions that fulfill your instructions.

“[Clients will] create a trust that owns the copyright interests and they’ll have a third party be the trustee that oversees it,” Whitfield said.

When a trust owns the IP asset, the trustee can make decisions to manage it, and pay out the royalties to the beneficiaries. If the trust, rather than a person owns the asset, it insulates the asset from liability. “Let’s say a book takes off and the book goes to a kid whose marriage does not last,” Whitfield said. “If it’s in a trust for the kids, it’s protected. It’s not an asset that needs to be divided in the divorce. [Or] if the kids are physicians or in a high risk business, where they can get sued, being in the trust will protect those assets.”

So, how long can your assets be managed in the trust? Each state’s law is different, but probably long enough to cover the time period covered by copyright (the life of the author + 70 years). “In Tennessee, you can have a trust in place for 300 years,” Whitfield said.

In addition to having some control over what happens with the asset after death, there’s also another advantage to a living trust. “The living trust is a private document and it’s harder to challenge,” Whitfield said. “The timeframe to challenge a will is two years, whereas a living trust is 90 days.”

If you establish a trust, you’ll need to give some thought as to who will be the trustee after your death. That person should understand your writing and be able to oversee all the royalty streams and handle any issues that arise with the books. One last note about trusts: A living trust is revocable and is used when the author is alive. Revocable trusts offer no protection against lawsuits, as the living trust is the same as a person. With a living (revocable) trust, the author is the trustee during his or her lifetime. A successor trustee takes over after the author’s death, at which time the trust converts to an irrevocable trust (the kind that offers protection against lawsuits). If you place your assets in the trust while you are living, when you die, your assets will pass privately to heirs. If you don’t put your assets in the trust while you are living and simply will them to the trust, the assets will go through probate, like any other willed assets.

Make Lovers, Not Fighters

A death is a difficult and stressful time for survivors due to the loss, but fights over assets can make it more difficult. Both Whitfield and attorney Julian Block say that minimizing fighting amongst heirs is a worthy goal in estate planning.

If you’re one of those types who says, “I’m dead and gone, what do I care if the kids fight,” Whitfield has something for you to consider. “Do you want me to make more money?” he asks with a laugh. If the kids decide to make a court challenge, then the estate has to deal with that in court, and the money to pay the legal fees to defend the challenge comes from the estate. “It’s always the lawyers who make the money out of it. So, do you want me or your kids to have the money?”

What are the common issues people fight over? Well, the heart of it is money, but the cause of the fight is really failed expectations, the lawyers contend. Julian Block said it’s important for people to talk to their heirs about what they plan to do so the reality meets their expectations.

“It’s less likely there will be a family squabble if it’s been discussed,” Block said. “If your intention is to leave everything to your son and daughter, then have a meeting with your son and daughter. The main point is to plan ahead and anticipate what is going to come up.”

Be honest not just with your heirs but with your attorney, as he or she can often make suggestions that will help you create harmony and carry out your wishes. “You need to be bluntly honest with your attorney,” Whitfield said. “Don’t tell your attorney you have three kids and they get along just fine, if they don’t.”

Simple things can cause conflict. “If they have more than one child, they have to decide which one they want to appoint as executor,” Whitfield said. “Sometimes there’s mistrust there [among siblings] and you may want to appoint a bank or third party. Be honest about the way the children are, and we can make suggestions to head off problems.”

The Remainders

We covered most of the issues above, but I’ll throw in a couple here at the bottom that Block and Whitfield noted.

While wills and trusts are great, Whitfield notes that writers also have the option of setting up an LLC (limited liability corporation) to manage their writing IP. This is mainly done to avoid your writing assets being attacked in a lawsuit. The LLC, because it’s a corporation, also transitions nicely after your death, because it’s got a definitive structure for managing the assets.

An LLC, however, is a more complicated legal structure with managers and managing members, and it’s probably not necessary for most writers, as it’s expensive to maintain if you don’t have much writing income. “I can’t quote for all lawyers, but in Tennessee, you’re going to spend a $300 annual fee to the state and $12 to record it,” Whitfield said. “And you’re going to have a one-time fee to a lawyer to set it up, of $800 to $1200.”

Block cautioned that heirs should get proper tax advice for royalty income they receive from your books. “As a writer, you receive book royalties,” Block said. “You are liable for income taxes. You are liable for self-employment tax. But, after you die, if your daughter receives royalties, she is liable for income tax just like you are. She is not obligated to pay the self-employment taxes. She didn’t do the work, so she’s like someone who is getting royalties from a mine or oil well.”

For those who are gung ho to create or amend their wills, Legal Zoom notes the cost of a will through an attorney ranges from $150-$600, while the cost of a will along with trust documents can run from $1,000 to $1,500.