When you decide it's time to do your will or update it, it's also time to prepare a âletter of final instructions.â Ignore the legalese. The âletterâ is an informal document that spells out where you keep important personal papers and what your assets are, among other things.
Usually, you make the letter available to your spouse, one or more of your adult children, your lawyer, or your executor. Keep the letter up-to-date and accessible.
The letter is worth the time and effort. Without one, your daughter, say, might find it difficult or even impossible to locate your assets when death, a serious illness, or some other kind of crisis leaves you unexpectedly unable to manage your financial affairs.
Reminders for Writers and Other Creative Types
Prepare a letter that alerts your heirs to the financial details of your writing career. In particular, spell out what they're likely to receive from book publishers, magazines, websites, blogs, and other writing endeavors. Here are some guidelines on the kinds of information to include.
Agents and publishers. Let's suppose you're a writer who uses literary agents to negotiate contracts with book publishers. Indicate where you keep agreements with agents and publishers and other related documents. List agents' and publishers' names, addresses, telephone numbers, and email addresses.
Name the persons who are entitled to receive royalties after your death and how frequently they can expect to receive them. Who knows? You could be one of those writers whose books generate royalties long after they're gone. Think Truman Capote or J.D. Salinger.
Be aware of twists and turns in the tax rules for writers and their heirs. For instance, the IRS uses one set of rules when it calculates how much to exact from you and other writers on amounts received as royalties and other payments for books, magazine articles, plays, photographs, or other kinds of creative efforts. But the IRS invokes other rules that ask for less when those kinds of payments go to writers' heirs.
The IRS collects income taxes from you and other writers on royalties and the like. You report those amounts on Form 1040's Schedule C.
Writers who fill out Schedule C for their income taxes also have to pay another kind of tax and complete another form. They shell out for self-employment taxes and calculate those taxes on Schedule SE.
The tax code includes a relief provision that permits you to recoup some of the SE taxes, courtesy of a deduction for one-half of the SE tax that you enter on the front of the 1040 form, same as you do for, say, alimony payments. Thus, you qualify for the write-off whether you itemize or use the standard deduction.
Use the letter to remind your heirs that they qualify for a valuable tax break. Like you, they also have to pay income taxes on royalties. Unlike you, they aren't dunned for SE taxes on royalties and don't have to fill out schedules C and SE. Instead, they complete Schedule E, used for reporting, among other things, royalties received by those who inherit or purchase copyrights on books, photos, and other material that they didn't create.
Also, heirs might overlook contracts for magazine articles that entitle you to payments for reprint rights. Remind them to ask periodically about those payments. Should there be any, heirs report them on Schedule E.
Going in the other direction, use the letter to advise heirs whether you've received unearned advances for books that might be uncompleted at your death. In the event heirs need to return those advances, they use Schedule E to deduct repayments to publishers.
About the author:
Julian Block writes and practices law in Larchmont, New York, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. More on this topic is available from âJulian Block's Year Round Tax Strategies,â available at julianblocktaxexpert.com.
About Julian Block
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes” (Wall Street Journal), and “an authority on tax planning” (Financial Planning magazine). More information about his books can be found at julianblocktaxexpert.com.