Self-Employed must take a Proactive Approach to Estate Planning
Freelancers and the self-employed must take a proactive approach to estate planning. These types of jobs operate without the safety nets provided by traditional employment. This independence brings freedom. However, it also adds complexity to financial and estate planning. From managing irregular income to protecting business assets, creating an estate plan ensures that your hard work is preserved and distributed according to your wishes.
Unlike salaried employees, freelancers often lack access to employer-sponsored benefits, such as life insurance, retirement plans, or disability coverage. Their business assets and personal finances are frequently intertwined, making careful planning essential to avoid unnecessary complications for heirs.
A well-crafted estate plan for freelancers addresses:
- Transfer of business assets or intellectual property.
- Continuity of income for dependents.
- Minimization of taxes and legal hurdles.
Freelancers and the self-employed must create a plan that considers their unique financial circumstances and provides long-term security for loved ones.
Freelancers often rely on their business as their primary source of income. Without a plan, the value of that business could be lost upon their death. Key steps include:
- Appointing a Successor: Identify someone to take over the business or handle its sale.
- Creating a Buy-Sell Agreement: Outline how ownership interests will be transferred for partnerships or joint ventures.
- Documenting Procedures: Maintain clear records and instructions to help successors understand ongoing operations or intellectual property management.
Freelancers often experience fluctuations in income, which can complicate traditional estate planning strategies. To account for this:
- Establish a rainy-day fund to provide a financial buffer for your estate.
- Work with an estate planning attorney to identify flexible asset protection strategies.
- Consider annuities or investments that provide steady income streams for beneficiaries.
Unlike traditional employees, freelancers must set up their own retirement savings plans. Options include:
- SEP IRAs or Solo 401(k)s: Tax-advantaged accounts tailored for self-employed individuals.
- Roth IRAs: Flexible savings accounts that grow tax-free, offering greater liquidity for heirs.
Ensuring that retirement savings are properly designated to beneficiaries avoids complications later.
The self-employed often own valuable digital assets like intellectual property, domain names, or online portfolios. These assets must be included in your estate plan to ensure seamless transfer. Create an inventory of:
- Login credentials for key accounts.
- Ownership documentation for websites or digital products.
- Instructions for transferring or licensing intellectual property.
Many self-employed generate income from intellectual property, such as writing, artwork, or designs. An estate plan should specify how copyrights, patents, or trademarks are managed after death. This may include:
- Assigning ownership to heirs or beneficiaries.
- Creating trusts to manage royalty payments.
- Licensing or selling rights to preserve income streams.
The first step to creating an estate plan is drafting a will that distributes assets, business interests and personal property according to your wishes. Without one, state laws determine asset distribution, which can result in unintended consequences. However, there’s much more to an estate plan than just making a will.
Establish Powers of Attorney
Freelancers should designate a trusted person to handle financial and healthcare decisions, if they become incapacitated. Powers of attorney ensure continuity in managing personal and business affairs during emergencies.
Consider a Living Trust
A living trust can help freelancers avoid probate and ensure that assets are distributed efficiently. Trusts are beneficial for managing complex assets, like intellectual property or business income.
Secure Life Insurance
Life insurance provides a safety net for freelancers with dependents by replacing lost income and covering future expenses. Policies should be aligned with your estate plan to ensure that benefits are directed appropriately.
Reach Out to an Estate Planning Attorney
Freelancers should consult estate planning attorneys and financial/tax advisors to create a plan that addresses their unique circumstances. Regular reviews ensure that the plan evolves alongside income, assets, or family structure changes.
Freelancers and the self-employed must take a proactive approach to estate planning. You can ensure your hard-earned legacy benefits your loved ones by addressing business continuity, income fluctuations and digital assets. An estate plan tailored to your needs secures your financial future and provides peace of mind, knowing that your assets and values will be protected. If you would like to learn more about planning for the self-employed, please visit our previous posts.
Reference: American College of Trust and Estate Counsel (ACTEC) (Oct. 19, 2023) “Estate Planning for Freelancers and the Gig Economy”
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