Freelancers and self-employed individuals have unique financial and estate planning challenges.
Self-employment has many benefits.
In modern-era America, the "gig economy" is in full swing.
It allows for greater control over your schedule and more creative and professional freedom.
Although you do not have to navigate complex company policies and dynamics, other challenges are associated with freelancing.
Those who own their own businesses are fully responsible for protecting their business assets, managing life with an irregular income, and preparing for financial and estate planning goals related to personal and business needs.
Freelancers must prepare to protect their businesses and loved ones if something happens to them.
Those who work for a business often have additional benefits beyond their income through the company.
These can include disability coverage, retirement plans, and life insurance.
Self-employed individuals must mitigate these risks and prepare financially for their future alone.
Freelancers also often have the equipment necessary for their work.
Often, finances and business assets can become tangled.
To avoid unnecessary complications for heirs, freelancers must address tax and legal hurdles, income provision for dependents, and business and intellectual property transfer in their estate planning.
Having a comprehensive estate plan allows self-employed individuals to protect the financial security of their loved ones.
If your business is your primary income source, then what you built could all be lost when you die.
Yikes!
How can you preserve the business you have created and provide for your family when you die?
Appointing a Successor.
A business cannot run without leadership.
You should appoint someone to run the business after you are gone or sell the business to benefit your heirs.
Creating a Buy-Sell Agreement.
A buy-sell agreement is beneficial if your freelancing involves a joint venture or partnership.
This agreement outlines the transfer of ownership interests.
Documenting Procedures.
Whether you have someone to take over your business or to manage its sale, this person will benefit from clear instructions and records.
You cannot assume they will simply know about operations or management of your intellectual property.
Managing Irregular Income
Anyone self-employed or a freelancer knows there is an inconsistency between business and income.
These fluctuations can make traditional estate planning and financial planning more complicated.
To address these vulnerabilities, you should have emergency savings, consider investments or annuities to give income streams to heirs, and work with an experienced estate planning attorney for a comprehensive plan with appropriate asset protection strategies.
Retirement Savings
Freelancers cannot rely on employer-sponsored retirement savings.
Instead, all retirement saving and planning are their responsibilities.
Options available for self-employed individuals include Roth IRAs and Solo 401(k)s or SEP IRAs.
Roth IRAs allow you to invest savings for retirement while allowing them to grow tax-free.
As a result, your heirs will have easier access to the funds.
Solo 401(k)s, or SEP IRAs, allow self-employed people to have tax-advantaged retirement accounts.
Digital Assets
Business owners and freelancers often use various digital assets as part of their work.
These can include domain names, online portfolios, or other intellectual property.
Because these are assets, they should be included in your estate plan.
You must gather login credentials for your accounts, compile documentation regarding ownership of digital products or websites, and provide instructions for licensing or transferring intellectual property.
Protecting Intellectual Property
Many freelancers receive portions of their income from intellectual property.
Intellectual property can include artwork, writing, or designs.
Your estate plan should address the management of trademarks, copyrights, and patents after you die.
Freelancers and self-employed individuals must assign ownership to beneficiaries or heirs, use trusts to manage royalty payments, and provide instructions for selling or licensing rights to provide an income stream to heirs.
A last will is foundational to any estate plan.
This document will provide instructions for distributing business interests, personal property, or other assets through probate proceedings.
If you do not have a last will, state law will govern distribution rather than your wishes.
These can have dire consequences for your business and your loved ones.
Powers of attorney are necessary for giving authority to someone to oversee your healthcare and financial decisions should you become incapacitated.
Without these documents, self-employed individuals and freelancers will see their business and personal affairs suffer in times of crisis.
A living trust manages and distributes property while bypassing probate efficiently.
When freelancers have multifaceted assets like business income or intellectual property, a trust can provide tailored instructions for management.
If you are self-employed, the income source for your family may die with you.
You should have life insurance to allow your family to cover future expenses and replace lost income.
Policy beneficiaries should align with your comprehensive estate planning.
Although freelancers and self-employed individuals may be used to working alone, they should not tackle estate planning and financial planning independently.
Business owners should work with tax advisors, financial advisors, and estate planning attorneys to ensure their plans address their needs.
After creating a plan, you should review it regularly and update it accordingly as your life circumstances shift.
Those who are self-employed tend to be self-starters.
They should channel this strength into proactive estate planning.
Taking action now will help ensure your personal and business interests benefit your loved ones should something happen to you.
Neglecting to create buy-sell agreements or to select successors leaves small businesses vulnerable to avoidable financial and professional losses.
Because freelancers tend to have fluctuations in their income, they must be proactive in building emergency funds and setting up retirement savings accounts.
All intellectual property and digital assets should be inventoried and addressed by an estate plan.
Retirement savings and life insurance policies can protect the financial future of dependents.
The best way for self-employed people to protect their loved ones and achieve their planning goals is to work with an experienced estate planning attorney.
This post is for informational purposes only and does not provide legal advice. You should contact an attorney for advice concerning any particular issue or problem. Nothing herein creates an attorney-client relationship between Harvest Law KC and the reader.
Reference: American College of Trust and Estate Counsel (ACTEC) (Oct. 19, 2023) "Estate Planning for Freelancers and the Gig Economy"
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