Passive Guy has received a couple of private emails from authors who suggested he write about the legal aspects of what happens when an author dies.
Since we have a lot of international visitors, PG will note this is all US law. PG will also note the rules relating to probate and the estates of deceased persons are governed by state law and each state has some of its own wrinkles and terminology. However, while legal terms, time limits, etc., vary, the general structure of what goes on after someone dies will be similar from state to state.
When a person dies, heirs are identified by one of two means:
- If the deceased person has a will, the heirs are named in the will.
- If the deceased doesn’t have a will, heirs are determined according to state law. Generally, this means a spouse receives a percentage of the estate and children receive a percentage of the estate. If neither of those exist, a hunt for brothers, sisters, uncles, aunts and cousins begins.
All the property, including real estate, personal property, bank accounts and contract rights, owned by the deceased goes into what is usually called the estate of the decedent.
Absent specific actions taken to avoid probate (discussed later), whether or not there is a will, the deceased’s estate goes through a court-supervised process called probate.
Fundamentally, probate is designed to identify property owned by the deceased, pay creditors of the deceased and distribute remaining property to the proper recipients after payment of court costs and attorneys fees.
Traditionally, probate has been a time-consuming and expensive process (Think Jarndyce and Jarndyce in Bleak House). In at least some states, attorneys fees for handling probate may be set as a percentage of the value of the estate, so handling the probate for a bazillionaire can be profitable, particular if lots of probate court hearings are involved. On the other hand, for a typical author, probate attorneys won’t be lining up around the block.
If the deceased had a will, an individual traditionally called an executor is named in the will. The executor organizes the estate, identifies and collects property, locates creditors and confirms the amounts of their bills and generally serves as the business manager of the estate. Unless the executor is an attorney or extremely self-reliant, he/she will typically hire an attorney for the estate to help with the legal stuff.
If there is not a will, the probate court will appoint someone, usually the first family member to show up, to perform those same functions.
Different states have different titles for these people – administrator, personal representative, etc. PG will generically refer to this person as an executor.
In recent years, many states have taken steps to make probate go faster and cost less, particularly for smaller estates as defined by state law. Small estates can skip some of the steps required for big estates. PG’s impression is some estates move faster than they formerly did, but others do not.
After a period of time, all the property is inventoried and reported to the court, the creditors are identified and paid and the heirs are located.
Property is distributed to the appropriate heirs either in kind (“I bequeath my diamond bracelet to my son, Robert, and my AK-47 to my daughter, Ann.”) and/or property is sold and the proceeds distributed to the heirs (“I direct that all remaining property be divided equally between my children.”) Once the property is parceled out and all the paperwork filed, the court enters an order closing the estate.
PG won’t ruminate on the shortcomings (or longcomings) of probate but will, in passing, note that a long time ago, he gained some local notoriety in his former law practice by engineering the settlement of a will contest that had lasted for 17 years and involved over a dozen different attorneys.
In United States, there are two classifications of death taxes:
- Federal estate taxes
- State inheritance taxes
The Federal Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The includible property may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
The value of the copyrights a deceased author owns will be included in the author’s taxable estate.
The fair market value of copyrights is based upon their income producing potential, discounted to present worth. A general rule of thumb used by estate tax experts for computing fair market value of a copyright is to calculate the average annual earnings of the copyright over a 5 year period then multiply that annual amount by a number usually falling between 3 and 7.
For example, if a copyright earned an average of $100,000 in each year during the 5 years prior to the author’s death, the fair market value of that copyright for estate tax purposes would range between $300,000 and $700,000 depending on factors such as the length of the remaining copyright term, the prior uses to which the copyright was put, and the likelihood that income from those uses would either increase or decrease in the future.
Remember that everything a decedent owns, not just copyrights, goes into the estate tax basket, so it’s copyrights plus real estate plus autos plus those gold bars you bought after you saw a commercial on TV.
Most estate planning attorneys prefer stability on the tax front. Unfortunately for them, the estate tax has been subject to a lot of changes in recent years. At the present time, the first $5 million of an estate is excluded from taxes, so most authors don’t pay it unless they have another way to make money. (PG hopes many of his visitors will have to pay estate tax because of what they learned here, but not for a very, very long time.)
Once you get into estate tax territory, things get expensive. The current top rate is 35%. To give you an idea of how the estate tax has changed, in 2001, the exclusion amount was $675,000, so the tax caught many more people then.
The general rule is that an estate tax return must be filed within nine months of an author’s death. Absent an extension of time to pay, the tax is payable with the return. There are some tax provisions that can extend the deadline for tax payment for an author’s estate, but it will require a tax lawyer or accountant to access them.
State death taxes, often called inheritance taxes, vary widely from state to state. Some states have none and others have relatively stiff taxes and do not provide for an exemption nearly as large as the current federal exclusion. A state inheritance tax may be payable even if there is no federal estate tax.
As an example, here is the current inheritance tax for Ohio:
Over $338,333 but not over $500,000 – $13,900 plus 6% of the excess over $338,333
Over $500,000 – $23,600 plus 7% of the excess over $500,000
The problem with any death taxes for an author is there is no ready market for copyrights, so if an author spent all the royalties on high living and fast women (or fast men), the heirs may have problems raising the money for taxes. You can’t sell a copyright like you can ten thousand shares of Apple stock.
Enough of taxes.
One of the items of property in an author’s estate will be copyrights.
If the author has publishing contracts, an author’s heirs will inherit his/her contract rights under those contracts, including the right to any royalties, subject to the limitations and obligations included in the publishing agreements. If the author granted only exclusive limited publishing rights, e.g. English language world-wide rights for print and ebooks, the heirs are free to sell other rights, e.g. French and German translations.
You’ve probably heard of authors who appoint a literary executor, someone who manages their books and copyrights. This person is probably not an executor in the legal sense, because the executor of someone’s estate has no continuing power after the probate court closes the estate. A literary executor will be working much longer.
One of the reasons is that an author’s copyright lasts for 70 years after he or she dies. Another reason is that many publishing and agency contracts today are for the life of the copyright. PG doesn’t like it, but it’s reality. Somebody’s going to be dealing with royalties, out of print clauses, etc., long after all the other items of property are long gone. If some of the original heirs die, leaving heirs of their own, royalty checks may be split into more and more small pieces.
One way of handling the management of an author’s copyrights, publishing contracts, etc., after death would be to establish a trust for the benefit of the author’s heirs. The trust could be established while the author was still alive (a living trust) or under the terms of the author’s will (a testamentary trust). Copyrights, contract rights, etc., would be transferred to the trust.
A trust has one or more trustees who manage the assets of the trust for the trust beneficiaries. If an author created a trust while she was alive, she could be the trustee and handle contracts, royalties, etc., in the same way she would without a trust. She could also be the beneficiary so long as she was alive. When she dies, the trust would get a new trustee, someone she selected, and the new trustee would handle the business end of her writing.
The trustee would have full power to enforce the contracts, negotiate new contracts for books that had not been sold, renegotiate contracts where possible, exercise termination rights, etc. The royalties from the deceased author’s books would be paid into the trust and distributed to the heirs according to the author’s directions included in the trust.
The trust could hold more than copyrights, of course. It is common for people to put most or all of their assets into a trust, either to avoid probate or for circumstances such as to provide for the care of small children. Should the parents die prematurely, a trustee will handle the money for the children’s benefit. The same theory is sometimes applied to adult heirs who still act like children.
The only catch for an author is that the type of people who are experienced in managing real estate or investments in stocks and bonds might not be well suited to deal with publishers and agents.
One additional point to make with any attorney setting up such a trust – The provisions concerning the selection of a replacement trustee are important because the trust will last longer than most estate-planning trusts.
What are Passive Guy’s basic rules for authors who may die some day?
1. Make sure you have a will.
2. Make sure you have copies of all of your publishing and agency contracts (even old ones) where they can be easily located if you don’t make it through your next set of revisions.
3. If you have paid for cover art or cover design, keep those contracts as well so there is no question that you have licensed the design. (You do have contracts with your artists, don’t you?)
4. Even better, give copies of your contracts to the person who will be your executor or trustee. You might want to provide a short description of each of the contracts as a roadmap. Your executor or trustee will need to contact your publishers and agents after your death, so give them that information so they don’t have to dig through contracts to find it.
5. If you have unpublished manuscripts you expect to publish in the future, make certain your executor or trustee knows about those as well.
6. It is always easier for an executor to work with an accountant rather than digging through all of your jumbled up financial records and royalty reports.
7. There are lots of non-author general rules for making it easier on those you leave behind, but PG will let you hunt those down on the web.
Where do you go for help with all of this?
If you might have a taxable estate, you will want to go to an attorney who specializes in estate planning. (PG used to do some of this, but his knowledge is way out of date.)
If you do not have a taxable estate, quite a few attorneys are able to prepare wills or trusts that don’t involve sophisticated tax planning.
PG tends to like trusts because he’s already been to probate court a bunch of times, but watch out for “living trust” shysters. Any estate planning attorney and many regular attorneys who don’t appear on television every 5 minutes can handle a simple living or testamentary trust.
Don’t be afraid to ask how much everything will cost right up front. Any good attorney will be happy to give you an answer to that question after getting a general sense of your situation.
One more thing – A great many documents you might pay an attorney to prepare will never get used. You’ll never receive any benefit from them. A will is a different story. Sooner or later, everybody uses their will.
If you’ve been involved in handling the business and legal details of the estate of a family member or friend, don’t hesitate to share your experiences in the comments. We have a number of attorneys who stop by regularly and PG invites them to chime in with suggestions and corrections.