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Letters of Instruction

Legal instruments like wills, trusts, and partnership agreements carry the force of law; that is, they legally obligate your executors, attorneys-in-fact, trustees, and partners to carry out your wishes, but they may not tell your loved ones and beneficiaries everything they need to know to do that. They can’t convey the location of important documents, and they were never meant to contain your current passwords. Furthermore, when you grant your executors, attorneys-in-fact, trustees, and partners discretion in taking or not taking various actions, it is often useful to provide them with a guide describing your preferences in terms of alternatives, advisors, and outcomes. That guide is a letter of instruction (LOI). Your will, trust, designation of attorney-in-fact, or partnership agreement may request that your fiduciaries consult the LOI in fulfilling their duties.

An LOI is a way of telling your loved ones everything they need to know in event of an emergency as it happens. It can be short or long. You can use it to tell them the location of your will and other important documents, the status of your published works, information about your insurance, military benefits, passwords, what kind of funeral you want, et cetera.

Julian Block, a New York tax attorney, drafted a sample “Letter of Final Instructions” for the Society of Children’s Book Writers and Illustrators (SCBWI) and graciously provided us a copy, which concludes this section. M. L. Buchman offers a more expansive variation in his book Estate Planning for Authors: Your Final Letter and Why You Need It. Buchman states that he has no problem with writers using his version as a template. But he recommends recasting it in your own voice, as it will be more meaningful to your survivors. He also recommends updating and sharing the LOI with your loved ones or executor every three months. They don’t need to read every update. They just need to have it available.

We recommend reviewing both examples before you draft your first LOI. The more perspectives you have, the easier it becomes to craft the best LOI for your needs.

Regardless of the format you choose, consider including a line directing your beneficiaries and executor to SFWA’s Estate Project. The Estate Project is a database that provides publishers, scholars, anthologists, filmmakers, and other potential licensors an easy, safe, and reliable means to connect with the managers of deceased writers’ literary estates. The Estate Project lists deceased writers whose works are known to be in the public domain, including writers who were not SFWA members. It also displays the names of literary agencies, corporations, and public trusts acting as literary executors for specific estates. Again, membership in SFWA is not required. The Estate Project’s goal is to aid all writers, regardless of their association with SFWA or any other professional writers’ organization. Private individuals are not listed on the Estate Project page. Their identity is protected by directing inquiries to the Project’s coordinator, Mishell Baker, at estates@sfwa.org.

The SFWA Estate Project, created and maintained until his death by Bud Webster, is a win­–win for all concerned. It puts money in your beneficiaries’ pockets and helps keep your name and legacy alive by encouraging paid reprinting and licensing of your work. Seriously, put it in your LOI. Your beneficiaries will thank you.

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Letter of Final Instructions: Why Writers Should Have One

By Julian Block

When you decide it’s time to do your will or update it, it’s also time to prepare a “letter of instructions.” Ignore the legalese. The “letter” 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 SCBWI members and other writers. 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, web sites, 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 (Profit or Loss From Business).

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 (Social Security taxes for the self-employed) and calculate those taxes on Schedule SE (Self-Employment Tax).

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 (claim donations to charities and the like on Schedule A) or use the standard deduction (the amount available to people who don’t itemize).

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 (Supplemental Income and Loss). Schedule E is 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. Your heirs should also ask a tax advisor if it is better to move IP and future earnings into trusts (if it was not done already) to protect both the IP and your heirs, as well as potential tax benefits.

Retirement plans. Detail all of your tax-deferred retirement accounts. The possibilities include 401(k)s and individual retirement plans. IRAs come in three flavors: traditional deductible, Roth, or traditional nondeductible.

When you do that, remind heirs of this difference: Like you, heirs have to pay income taxes on their withdrawals from traditional deductible accounts. Like you, heirs generally aren’t taxed on removals from Roth IRAs or the portions of withdrawals from traditional nondeductible accounts that are attributable to nondeductible contributions. These distinctions may often be misunderstood or forgotten.

Help your heirs cope with the IRS after you are no longer around. Disclose where you keep copies of checks, and other documents that substantiate the amounts shown as income, deductions, and other Form 1040 figures. What if the IRS disputes those figures and substantiating records are unavailable? What winds up with your heirs will be diminished by assessments for additional taxes, interest charges, and perhaps penalties. Ditto for any applicable state taxes.

Getting professional help. Those heirs might need help with taxes, contract provisions and other details. Remind them that their first step should be to contact your agents and publishers. Also, it might be advisable to discuss taxes with qualified professionals, like lawyers or CPAs, and intellectual rights with attorneys specializing in that area.

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Julian Block, an attorney in Larchmont, N.Y., has been cited as “a leading tax professional” (New York Times) and “an accomplished writer on taxes” (Wall Street Journal). His books include Julian Block’s Easy Tax Guide for Writers, Photographers and Other Freelancers, praised by Professor James E. Maule of Villanova University as “an easy-to-read and well-organized explanation of the tax rules. Writers, photographers, and artists would be well advised to buy this book.” To order his books, go to julianblocktaxexpert.com.