A will is a legal document which directs where you would like your assets to pass upon death. You name a personal representative (“PR”), known as an executor in many other states, who will inventory your assets, pay off creditors, and distribute your estate according to your will. This must be done through a court proceeding known as “probate.”
Probate is the legal process for administering a will under state law. Probate is a public judicial proceeding.
Colorado has adopted the Uniform Probate Code, which is a streamlined probate process. In many/most cases, probate can be opened informally (i.e., with no court appearance) and your PR can administer the estate without ongoing court supervision. Therefore, this firm does not actively counsel clients to avoid probate unless they have a practical and deliberate reason to do so. In some states, probate is unduly expensive and it makes sense to actively avoid probate. For example, in California, state law permits attorneys to charge as their fee a percentage of the estate, and attorneys must often appear in court. Probate attorneys in Colorado may not charge a percentage fee and court appearances are rare unless an estate is disputed.
Will-based plans are generally more cost-effective (often half the cost) to set up because the client and attorney do not need to transfer assets to the RT.
Clients return when their circumstances change (e.g., a PR can no longer serve, a guardian needs to be changed, the client’s financial circumstances change, the client’s dispositive wishes change, estate tax laws change) or when laws change (e.g., the federal estate tax exemption changes, or Colorado inheritance law changes).
Under Colorado probate law, unknown creditors have one year from the date of death to bring claims, otherwise, they are barred. By opening probate, your attorney can publish notice in a newspaper, which shortens the creditor claims period from one year, to four months from the date of first publication. This can give family members unfamiliar with a decedent’s financial situation peace of mind.
Every probate estate is different, however, the PR is a fiduciary and must pay creditors and satisfy tax compliance obligations prior to making distributions. In most cases, estate distributions should not be made until after the creditors’ claim period runs, and the PR is satisfied that sufficient funds will be available to satisfy tax obligations and pay other verified creditor claims.
Since all assets remain titled in your name during your lifetime, a will does not protect your assets from claims of your creditors.
During your lifetime, all assets remain titled in your individual name. A will does not affect your income tax filing in any way.
A will-based plan can build in a number of contingencies to minimize estate taxes, and leverage your generation skipping transfer tax exemption, if appropriate. For 2020, the estate tax exemption (i.e., the amount you can pass at death without incurring a federal estate tax) is $11.58 per individual ($23.16 for a married couple).
A will can name guardians for minor children, name a trustee (i.e., a financial parent) to manage a child’s assets until the child reaches a specified age, set up the parameters for use of funds (education, etc.), and even protect the child’s inheritance from her creditors.
Small changes to a will (e.g., naming a new PR) may be done with a “codicil.” More complex changes require a new will, in order to avoid the confusion which comes from reading together and interpreting a series of related documents.
A revocable trust (“RT”) is a legal document which directs where you would like your assets to pass upon death. Rather than keep assets in your own name, you retitle your assets in the name of the RT and name a trustee to manage them for your benefit. “Revocable” means that you retain the ability to change the trust at any time during your lifetime. At death, your trustee will inventory your assets, pay off your creditors, and distribute your estate according to your trust. This may be done without probate, but in most cases, still requires attorney guidance.
Trust administration is the private legal process for administering a trust under state law. In most cases, lay trustees need attorney guidance.
Revocable trust-based plans are generally twice as costly to set up because counsel must draft both revocable trusts and pour over wills (to catch any assets not transferred to the trusts), and the RT must be properly funded.
When clients acquire new real estate, open accounts at new financial institutions, acquire new business interests, etc., they must properly transfer these assets to their RT. When clients fail to do so, the probate they worked so hard to avoid ends up being necessary. Clients who do not have the time to maintain their RT, or the desire to pay an attorney to help them where necessary, are not good candidates for revocable trusts.
When your family administers your RT after death, unknown creditors have one year from the date of death to bring claims. There is no private mechanism outside of probate to shorten the creditor claims period.
Every trust estate is different, however, the trustee is a fiduciary who must pay creditors and satisfy tax compliance obligations prior to making distributions. Bank trustees who know the decedent’s current financial status can sometimes make distributions quickly, but in most cases, the trustee must take time to inventory trust assets, satisfy creditor claims, and work with a CPA to make tax projections before making distributions.
A common lay person’s misconception is that revocable trusts provide asset protection. To the contrary, since you maintain complete control (including usually the ability to amend, revoke, and add/remove assets) over your RT during your lifetime, all assets in your RT are exposed to creditor claims against you during your lifetime.
During your lifetime, your revocable trust is a disregarded entity for income tax purposes (no separate tax identification number or tax return is required), so all income, expenses, etc. are reported on your individual tax return.
Since you retain control of the trust assets during your lifetime, no additional estate tax planning objectives can be achieved with an RT which cannot be achieved with a tax-planned will. Clients with taxable estates who wish to achieve additional tax reduction objectives might wish to consider a variety of irrevocable (unchangeable) trusts. Giving up control over assets can remove those assets from your taxable estate.
An RT can accomplish all of the same objectives as a will as to minors. In both a will and an RT, the child or grandchild’s trust is “testamentary,” meaning it is not funded until your death.
Small changes (e.g., adding a specific gift to an additional beneficiary) may be done with an amendment. More complex changes require an amendment and restatement of the RT. However, assets already titled in the name of the trust need not be retitled because the RT name will remain the same.