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 ere you will find articles
written by Rachel covering various aspects of the legal services she
provides. The information given here can be a valuable reference tool for anyone
approaching these topics.
Is it Time for a Will or Trust Check-Up?
When was the last time you had your will or trust reviewed? How do you know when it’s time? Here are a few hints: When your first child was born you found time to see an attorney about a will. It was important to you to make sure you named a guardian and that your affairs were in order if something happened to you. That child just got married. One of the people you named as “personal representative” (executor) in your will has moved to Hawaii. It’s probably time for a will check-up. The passage of time is a good enough reason to have your will reviewed. Over time, friends and family move, get married, die and give birth. People that you named as guardians, trustees or executors, may no longer seem like the ideal choices for those roles. You know more about people in your life. You may believe that your children are not as responsible with money as you had hoped they would be and decide to leave their inheritance to them in a trust. The opposite also may be true and you may decide to leave assets to children at a younger age than indicated by the terms of your existing will. A new will may be needed to accommodate any or all of these changing circumstances. The laws governing wills and trusts change. A review of your estate plan will tell you whether your will should be updated to take advantage of new laws. Change in Social Status (Divorce or Marriage or Remarriage) If your marital status has changed since your will or trust was signed (or your current spouse is not the one named in the documents), it’s time for a new will. Colorado law automatically revokes any bequest to a former spouse in a will, treating the former spouse as if he or she died before the person making the will. When it comes to deciding who will receive your retirement benefits, however, or other benefits regulated by federal law, you will actually need to change the beneficiaries listed with the institution holding the account. And if you want to leave your former spouse something in the will (it happens, albeit rarely, but it happens), you will need to remake the will after the divorce. A new spouse will undoubtedly appreciate your thoughtfulness in taking care of him or her in your will. Change in Financial Status (Richer Hopefully) Perhaps you were just starting out when you made your last will. It was fine to handle the little bit of equity in your house and the small investment account you maintained with a national brokerage house. Now your assets have grown. Your business is successful but you are not sure what will happen to it on your death. You own a condo in Cabo, Mexico. You have a large self-directed IRA. You would like to know where you stand in terms of estate tax. It’s time to see your estate planning attorney to educate yourself, to create a plan to minimize estate taxes, and to implement a business succession plan. You made a will in Texas. Now you have moved to Colorado and plan to remain here. The laws governing wills and trusts vary from state to state. You need a will check-up. Colorado honors a will validly executed in another state, but you will want to be educated about how to hold your assets in Colorado, and Colorado may offer certain estate planning tools that were not available in the state where your will was made. So, you’ve decided to update your will. You take out a pen and scratch out the name of the executor that you no longer talk to. You write in your current boyfriend’s name. What you have effectively done is to remove the old executor without replacing him. You can revoke a will without formalities, by tearing it up or scratching out the text. But you can’t create new will provisions without several formalities that include witnessing and notarization. Once you decide to update your will, you have two choices: create a whole new will, or revise your current will with a codicil. A codicil is an amendment to a will that is executed in front of witnesses and a notary public. Depending on the extent of the changes you want to make, a codicil may be sufficient. If you are reducing someone’s inheritance, however, or removing someone as executor or trustee, you may not want them to see that they were originally slated for a larger portion or more responsibility. The solution is to create a new will or trust. Do You Need a Living Trust in Colorado? Clients often call me or come into my office asking me to set up a living trust for them. They may have read in a national magazine or estate-planning handbook that a living trust is a must for them to save inheritance taxes and avoid probate. I spend a good deal of time talking them out of it. The problem with advice in national magazines is that the law of wills and trusts varies from state to state. And what's right for residents of California or Florida are not necessarily right for Colorado residents. In the case of a living trust, that's especially true. To be clear, what I'm talking about here is a revocable living trust-sometimes marketed as a "loving trust." This type of trust is set up during a person's lifetime and the person transfers all of his or her assets into the trust. The trust can be changed or revoked by that person during his or her lifetime. There are all kinds of trusts-irrevocable trusts (which cannot be changed or revoked once established), trusts set up to hold life insurance, trusts created on death (also called testamentary trusts). I'm only talking about the type of trust created during a person's life, with a primary purpose of avoiding probate, and why it may not be right for you. Probate is not a four-letter word To start with, Colorado residents need not be overly concerned with avoiding probate. Probate in Colorado is not particularly costly or time-consuming. The state adopted a pragmatic approach toward the probate process that keeps costs down. By contrast, in California, the average probate eats up about 6% of the estate. On a million dollar's worth of assets, the cost is about $60,000.00. On a two-million-dollar estate, the bill for probate is about $120,000.00. New York costs for probate are similar. At those prices, California and New York residents are well advised to set up living trusts to avoid probate, and many of them do. However, it would likely cost only one-tenth of those amounts to probate similar estates in Colorado. An amount not that different from the cost of setting up a living trust. What is that mysterious process called probate? When an individual dies, in order to transfer certain property out of that person's name-and into the names of his or her heirs--it is necessary to go to court. While there are many steps in the probate process, the main steps are lodging the person's will with the court, inventorying the person's assets, paying any debts, and distributing the assets according to the person's will. The costs of probate include court costs (it costs $91.00 to file a probate case in Colorado). The larger cost is that of the attorney who represents the estate. But while attorneys in California, New York and Florida are legally entitled to a percentage of the estate, Colorado attorneys are entitled only to a reasonable hourly fee. Living Trusts Don't Provide Tax Advantages But what about the chance to save inheritance taxes? In fact, a trust has no advantage over a will when it comes to estate taxes. All of the assets in the trust are part of the person's "taxable estate," just as if the person owned the assets outright. Proper planning through either a will or a trust can save an individual hundreds of thousands of dollars in inheritance taxes. The key is proper planning, not the living trust. The trust can be the vehicle for tax planning, but a will is equally effective. Drawbacks of a Living Trust Now that you know that you may not need a trust, here are some reasons not to set one up. A living trust can only act on property in the trust. For your trust to work, you need to transfer your property into it. But dealing with certain property in a trust is a hassle. For example, dealing with real estate in a trust is more complicated than dealing with real estate held in your own name. Some lenders won't lend to a trust, and selling property out of a trust is more complicated than selling property owned outright. Many people, who enthusiastically set up a living trust and initially transfer their assets into it, don't maintain their trust over the years. They buy real estate in their own names and fail to transfer the real estate into the trust. They put new investments in their own names. Any property not in the trust when an individual dies will be subject to probate. I have seen numerous clients who set up living trusts need to go through probate because they failed to maintain the trust. The bottom line: They paid for a living trust and paid for probate. Who Should Have One Now that I've talked you out of a living trust, let me say that a trust is right for some Colorado residents-just not for all. If you own real estate in a state with an expensive probate process, a condo in California or Florida, for example, you should have a trust own that property to avoid subjecting the real estate to the probate system in that state. If you own real estate in several states, you should probably have a living trust no matter which states the properties are in. Otherwise your heirs will need to go through probate in each state where you own real estate. A Colorado court cannot transfer title to out-of-state real estate, only a court of that state can. The cost of multiple probates, no matter where they are, quickly adds up. By having your living trust own all of your real estate, you will avoid having to probate the real estate anywhere. Management of Assets If you want someone else to manage your assets now or in the near future, and your assets are substantial, a living trust is a good idea. The living trust allows you to decide who will be the trustee, effectively the manager, of the property once you no longer want or are able to manage your property. If incapacity is on the horizon, a living trust can avoid having a guardian appointed for you. While you could instead give power of attorney to someone to allow them to manage your assets, a trust is more efficient for estates of significant size. Privacy If you want your estate plan to remain private, a living trust is a good alternative to a will. Once someone dies, his or her will must be lodged with the court and it becomes public. Not so, with a living trust, which can remain private. Alternatives to a Living Trust For individuals with small estates who don't need to worry about reducing estate taxes, there are ways to avoid probate that are simpler and less costly than a living trust. Putting property in joint tenancy avoids probate. But be careful-the joint tenant may be able to remove funds or sell a portion of the property while you are still alive. Any type of financial account, including retirement accounts and insurance policies, that allows you to specify a beneficiary, will not go through probate. So if your net worth is less that $500,000 (including life insurance payable on your death), titling assets in joint tenancy can be an appropriate "probate-avoidance" tool for you. Rachel Maizes is an estate-planning attorney in Boulder County. She can be reached at 303-527-3462 or via her web site www.coloradowill.com. She does not have a living trust. How To Determine Whether You Need a Will While you're still "of sound mind" and capable of making a will you may wonder, do I really need a will? If you have children, you may have thought of making a will to designate a guardian in the event something were to happen to you. Do you really need a will for that? If you recently received an inheritance from a parent, you may have realized that, unlike your parent, you have not prepared a will. Is there any reason for you to write one? Does a will change what happens to your property when you die? Tax savings Not everyone needs a will. If you are "worth" more than $650,000 you may be able to save a significant amount of death tax through a carefully drafted will. The catch: It's not what you're worth alive but what you're worth dead. So in determining what you're worth, include the value of any life insurance you carry. Don't forget to add retirement assets, too. If you're worth less than $650,000 you don't need a will for tax savings because your property will not be taxed when you die. You may want a will, nevertheless, for other reasons. What happens to your stuff when you die? When people die what happens to their property? The answer is different for different types of property. Retirement funds, insurance policies, and many financial assets such as mutual funds are in the form of contracts that spell out who gets what when you die. You probably have filled out a beneficiary designation form at work indicating who should receive an insurance death benefit and the balance of your 401(K) account at your death. These "beneficiary designations" control who gets the property, even if you say something else in a will. If you own a house, what the deed says may control who gets the house when you die. If you own the home in "joint tenancy" with someone else, that someone else will get the property when you die. Again, even if you say something else in a will. So if all of these assets can be "willed" without a will, why make a will? Lots of property is not subject to beneficiary designations. A bank account of which you are the sole owner may not be. A house that you own by yourself, or with someone else if the deed says you own the property as "tenants in common," is not. Jewelry, furniture, automobiles, collectibles and lots of other stuff aren't either. If you die without a will, all that stuff will go to your spouse and your heirs under Colorado law. Your heirs are your ancestors and your descendants (but not those of your spouse). Your heirs include adopted children, but not stepchildren. Here are just some of the complicated rules that spell out how your property is divided if you die without a will:
Other choices The rules summarized above are default rules. You can change them by making different provisions for your property in a will. If you want to leave money to a friend or a charity, you must make a will. You must make a will if you want to leave unequal amounts to your children. If you want to provide for a stepchild, you can only do so in a will. You can use a will to disinherit people, too. In Colorado, you may cut anyone, other than a spouse, out of your will. As to your spouse, you can reduce the share he or she receives, up to a point. What about the ring you received from your grandmother? Heirlooms and other sentimental items can be directed to specific individuals through a will. Control If you don't write a will, your property will go to your spouse or heirs outright. There are situations where you will want to avoid that. For example, if you have young children, you may want to leave the property in trust for the children and specify in a will who the trustee will be. Likewise, if your spouse or another beneficiary is incapacitated, you may want to leave property to them in a trust set up in your will. This will avoid your heirs having to go to court to set up a caretaking arrangement after your death; it will also allow you some control over the money through choice of trustee and other trust provisions such as when and how assets are to be used for, or given to, your child or other beneficiary. Choosing a representative Who will handle the distribution of your property on death? If you don't spell it out in a will, the law provides default rules that include your spouse and other close family members. If you want to nominate a friend or choose a relative other than the one given priority in the rule, you can do so by nominating a different "personal representative" in your will. Nominating a guardian You don't need a will to nominate a guardian for your children. Colorado allows parents to nominate a guardian to care for their children through a simple, one-page legal document. The form can be used to nominate a guardian during a parent's temporary absence or in the event of a permanent loss. Rachel L. Maizes is a Boulder attorney. |
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