Estate Planning for Residual Income

Most people think of estate planning in terms of the need to decide how the assets they own at the time of their death will be distributed to their loved ones. For some people, however, they must also consider assets that continue to accumulate after they pass away, otherwise known as residual income. To ensure that you have considered all your assets when you create your estate plan, the Indianapolis attorneys at Frank & Kraft discuss estate planning for people who expect to include residual income in their estate.

What Is Residual Income?

Residual income refers to ongoing payments received for work done in the past. While residual income is particularly prevalent in the entertainment industry, it can also apply to writers, inventors, and a variety of other occupations. A recent CNBC article about Friends co-star Matthew Perry offers a recent example of how important it is to plan for residual income within your estate plan. The continued success of the television series Friends is estimated to produce over $20 million a year in residual royalties for Matthew Perry, all of which became part of his estate when he died recently.

Estate Planning Options for Residual Income

We may never know who inherits Matthew Perry’s residual income; however, we do know the ways in which residual income can be handled within an estate plan. Typically, you have four basic options for how residual income is incorporated into your estate plan, including:

• Designated Beneficiaries: In the case of royalties related to the entertainment industry, the Screen Actors Guild-American Federation of Television and Radio Artists has contracts in which its members can list beneficiaries for residual payments upon death. These work like a “payable on death (POD)” account which is a designation available for most financial accounts. The owner of the account, or in this case the owner of residual income, has the option to designate a beneficiary who will automatically inherit the asset upon the death of the owner. The asset does not go through probate, one benefit to using this option. Unlike joint ownership, a designated beneficiary has no legal ownership rights to the asset while the original owner is alive but, instead, inherits ownership upon the death of the owner.
• Creating a Trust: Residual income can be transferred into a trust created while the owner is alive or at the time of death. A primary benefit to using a trust is that you name a Trustee who is responsible for protecting, investing, and managing the trust assets. If you expect to have significant residual income, naming a professional Trustee is best. The terms of the trust can be used to direct the distribution of the residual income and may even be used to direct how that income can be used by the beneficiaries of the trust. There may also be important tax advantages available if you elect to create a trust and trust assets can bypass probate, also providing the benefit of privacy. Finally, if you wish to give some or all your residual income to charity, a trust can be an excellent way to accomplish this goal. You can even create a charitable lead or charitable remainder trust and split the inheritance between a charitable and a non-charitable beneficiary.
• Last Will and Testament: Residual income can be included as a general asset in your Last Will and Testament. While including that income in your Will is better than not addressing it at all, your ability to control what happens to the income after your death is extremely limited using this option.
• Intestate Succession: If you die intestate, meaning without a Will or Trust, your estate assets will be distributed using the Indiana intestate succession laws. Typically, this means that only close relatives will inherit from your estate. If your residual income is significant and/or increases after your death, leaving an intestate estate dramatically increases the likelihood of litigation during the probate of your estate.