- What is a will?
A will is a document which allows you to leave your property at death to the people or charities in the percentages or specific amounts you wish. It also names guardians for your minor children, trustees for any trusts you create and your personal representative. A will can be typed and signed by two witnesses and a notary or can be holographic (entirely handwritten). It can be as simple as "at my death, I leave all of my property to my wife." More likely it will be more complex, especially if you have small children, a large estate, or are in a second marriage.
- What happens if I do not have a will?
If you do not have a will, your "probate property" (the assets in your own name) will be distributed according to intestate succession which is the pattern of distribution found in the Colorado statutes. The statutes have been changed to reflect the demographic reality of second marriages, step families and longer living parents.
- When do I need a will?
Not everybody needs a will. However, most people can benefit from having a will. The major categories in which you need a will are discussed below.
- You Have Minor Children. If you have minor children (under age 18), you will want to choose a guardian for your children. A guardian is the person with whom your children will live if both parents die. In addition, a trust should be established to manage their assets and you will want to name a trustee for the trust. If you do not choose a guardian and trustee, the court will appoint them. Also, in the absence of a trust, the child will receive all assets outright at age 21 (a frightening thought to many parents). When you establish a trust in your will, you may choose an age older than 21 for your child to receive his or her assets and stipulate other terms that may be important to you.
- Children (or Other Beneficiaries) Are To Be Treated Unequally. If you want to treat children (or other beneficiaries) unequally, you need to have a will. For example, if you have given one child a down payment for a home you may want to equalize the other children at death. In addition, a disabled child may need more assets than other children.
- You Do Not Like Intestate Succession. If you do not like the intestate succession laws, you need to have a will. For example, if you are single and your parents have adequate assets, you may want to leave your property to brothers and sisters. Under intestate succession, your assets would be given to your parents.
- You Are In A Second Marriage with Children from a First Marriage. If you are married for the second time and have children from a prior marriage, you almost always will want a will. Under intestate succession, a portion of your assets and your half of joint assets pass outright to your second spouse who may then give the assets to his or her children (or even to a subsequent spouse). You should consider a trust with assets available to your spouse for his or her life and the remainder then passing to your children at your spouse's death. Your estate planning may need to be coordinated with any prenuptial planning you have done for your second marriage.
- Tax Considerations. Couples can achieve tax savings through wills. This is discussed in more detail later in this handout.
- You Have Other Special Circumstances. You will need special estate planning considerations, if you own a business or a family farm, own out-of-state property or oil and gas interests, have large retirement plans or a large estate, have diseases such as Alzheimers in your family history, or have a disabled child. These will be discussed at our estate planning meeting.
- What is a Fiduciary?
Together, personal representatives, guardians, trustees and conservators are called fiduciaries. They have many powers but are subject to certain duties as set forth in the Colorado statutes.
- Personal Representative. A personal representative handles your affairs for the six to twelve months after your death. A personal representative used to be called "executor" or "executrix."
- Guardian. A guardian is the person with whom your children live. The guardian is responsible for the education, health, moral and religious upbringing of your children or a disabled person.
- Trustee. A trustee manages the assets in your trust. For example, if your will establishes a trust for your children, the trustee would invest and distribute these assets. A trustee may be the same person as the guardian or may be different.
- Conservator. A conservator is a person appointed by the court to manage assets for a minor child or disabled person if you have not named a trustee.
- Do all assets pass by my will?
No. Property which passes by a will is called "probate property." Probate property consists of the assets titled in your own name with no beneficiary designation. Property which does not pass by a will is called "non-probate property." The four major kinds of non-probate property are life insurance, retirement plans, trusts, and property owned in joint tenancy.
- Life Insurance. Life insurance proceeds are paid to a named beneficiary and generally do not pass by the terms of a will.
- Retirement Plan. Retirement plan benefits also are paid to a named beneficiary. Retirement plans include IRAs, 401(k) plans, SEP plans, profit-sharing plans and pension plans.
- Joint Tenancy Property. Property owned in joint tenancy passes automatically by operation of law to the surviving joint tenant. Both real property and personal property such as a bank account can be placed in joint tenancy. For example, if you own your fishing cabin in joint tenancy with your friend George and your will states you leave your cabin to Beth, the cabin will pass to George. Joint tenancy is different than tenants in common. Property owned as tenants in common passes by a will. In this example, if the cabin is owned as tenants in common with George, and your will states you give the cabin to Beth, your one-half interest will pass to Beth.
- Trusts. A trust is an entity in which a trustee holds title to certain assets and manages them for the benefit of another. When a trust is created, it states who will receive the property and when the trust will end.
- Should my assets pass by my will?
Most likely. If you have accurately set down your wishes in a will, it is important to have your property be "probate property" so that it is captured by and passes under the terms of your will. For example, if your will states that your child's money is to be in trust until age 35, it is important that the beneficiary of your life insurance proceeds be that trust (and not your child), so the proceeds are captured by the will. If the proceeds are payable to the child outright, he or she will receive the life insurance proceeds at age 21. We will give you specific beneficiary designations for your life insurance and retirement plan proceeds.
- Can I disinherit my spouse?
Not completely. If you do not give your surviving spouse adequate assets in your will, he or she has the right to "elect against the will." This means your surviving spouse may take from $66,000 up to one-half of your combined augmented estates, depending on the length of your marriage and the value of property that each of you owns. You can change these rights by a prenuptial or postnuptial agreement.
- Can I disinherit a child?
Yes. If you have a will, a child can be disinherited, that is, left nothing in the will. In rare cases, a child may have a right to "elect against the will" (for example, if it appears that you did not know about a child or if the child was born after the will was signed).
- So what is Probate?
Probate is the court process in which a personal representative is appointed with authority to collect assets, pay debts and taxes, and to distribute your assets according to your will (or intestate succession if there is no will). "Probate property" will be subject to probate which typically lasts six months to one year.
- Should I avoid Probate with a living or revocable trust?
Maybe, but probably not. It used to be more costly to pass property by a will than to pass property by non-probate transfers (joint tenancy or a revocable trust). Colorado has adopted the Uniform Probate Code which significantly simplified probate.
- What is a revocable trust?
A revocable trust is an alternative to a will. You enter into a written agreement (trust agreement) that provides for ownership and management of your property during your lifetime and also disposes of your property at your death. You may name yourself, another person or a trust company as the trustee. You have unlimited access to the trust property for your benefit and are free to change or revoke the trust at any time. Only the property and accounts that are titled in the name of the trust are subject to the terms of the trust.
- Why would you want a revocable trust?
Three situations still exist in which the use of a revocable trust makes sense. If you own property outside Colorado, ancillary probate (probate in another state) can be avoided by holding the property in the name of a revocable trust. Second, if you think you may get to the point where you do not want to or cannot manage your assets, a revocable trust is a good idea. It can be a useful tool for managing assets in the event of dementia. Third, the revocable trust is used for privacy reasons. A revocable trust generally does not have to be filed with the court.
- What are the disadvantages?
Contrary to popular belief, a revocable trust does not avoid federal estate taxes or creditors. Probate is avoided only if property is actually transferred to the trust (called "funding" the trust). It can be cumbersome to transfer each asset to the trust.
- What are the estate tax consequences?
You may be required to pay estate taxes upon your death.
Federal Estate Tax. A federal estate tax is imposed upon the fair market value of the total of your assets less certain deductions. The easiest way to compute the value of your assets is to add your net worth to the face amount of life insurance.
Both probate and non-probate property are subject to estate tax. This includes joint tenancy, living trust assets, life insurance, and retirement plan proceeds. A common misconception is that life insurance proceeds are not taxed.
- Exclusion Amount. You may pass a certain amount to others free from estate tax at death (the "exclusion amount"). Currently, the exclusion amount is approximately $12,920,000 per person (indexed for inflation). You will pay an estate tax only if your assets are over the exclusion amount.
- Marital Deduction. Estate tax law provides that your spouse may receive any amount estate tax free. This is called the "unlimited marital deduction."
- Colorado Estate or Inheritance Tax. Colorado does not have a separate estate or inheritance tax.
- Federal Estate Tax. A federal estate tax is imposed upon the fair market value of the total of your assets less certain deductions. The easiest way to compute the value of your assets is to add your net worth to the face amount of life insurance.
- Will my beneficiary pay income or estate taxes?
Assets received by a beneficiary from an estate or from an insurance contract are not subject to income tax. However, because income taxes on qualified retirement benefits have been deferred, these proceeds will be subject to income tax. There are, however, favorable roll-over rules for spouses and other individuals. Estate taxes are paid by the estate prior to distribution and may or may not be allocated to a beneficiary, depending on the terms of your will.
- How can I reduce estate taxes?
- Married Couples. If you are married, you can reduce estate taxes. It takes a combination of tax-planned wills and correct titling of your assets. In addition, upon the death of a married spouse, he or she may want to elect to preserve the deceased spouse’s unused exemption.
- Gifts to Children and Grandchildren. If you have a large estate, lifetime gifts to children and grandchildren may be appropriate to reduce your eventual estate tax. You may give $17,000 (indexed for inflation) annually tax free to any number of individuals. Tuition and medical payments are also tax free if the payment is made directly to the institution or medical provider. Currently, you also may give approximately $12,920,000 (indexed for inflation) without estate or gift tax during your life.
- Irrevocable Insurance Trusts. If insurance is owned by an irrevocable insurance trust, the insurance can escape taxation at the death of both spouses.
- Gifts to Charities. Assets given to a charity are excluded from taxation at your death. Gifts may be made in your will, but there are also ways to give these gifts during your life, and still receive the income from these assets.
- Family Partnerships or Limited Liability Companies. A family partnership or a limited liability company (LLC) should be considered if you would like to bring family members into a business or start a gift- giving program for assets that are difficult to divide, such as real property. A discount can often be applied to gifts of partnership or LLC interest to children, resulting in larger gifts, greater reduction of your estate and less estate tax.
- Generation Skipping Tax Trusts. Generation skipping tax (GST) trusts can be established for children. The GST trusts generally protect against creditors (including a child’s spouse) and will not be taxed at a child’s death. This trust runs for the life of a child with the remaining trust estate passing to grandchildren. Distributions can be made for the health, support, maintenance and education of a child and his or her children. The child may be the trustee.
- Business Succession Planning. If you own a closely-held business, you may want to consider a buy-sell agreement. A buy-sell agreement can minimize eventual estate taxes and more importantly provide adequate security for a surviving spouse.
- Other Planning Ideas. There are a number of ways during your lifetime to reduce estate taxes such as charitable remainder trusts, private foundations, qualified personal residence trusts, grantor retained annuity trusts, and sales to intentionally defective grantor trusts. We would be happy to discuss these at our meeting.
- What additional estate planning documents should I consider?
Complete estate planning includes advance directives regarding your wishes for medical care and financial needs in the case of potential disability.
- Financial Power of Attorney. A financial power of attorney is a document in which you name another person to act on your behalf for legal and financial matters. By appointing an agent, you can avoid a court procedure to appoint a conservator. The power of attorney may be broad (that is to allow your agent to do all acts) or limited.
- Medical Power of Attorney. A medical power of attorney names another person to act on your behalf for medical decisions. A medical power of attorney is used only if you are unable to make decisions for yourself. It can be a simple appointment of an agent to make all decisions, or it can be customized.
- Living Will. A living will is a directive not to be kept alive by artificial life support systems if you are in a persistent vegetative state or have a terminal condition. In Colorado, a doctor is required to follow the directive. The Colorado statute regarding living wills addresses the withholding of both life support systems (respirator, heart machine, etc.) and food and water.
- Anatomical Gift. You may provide that any part of your body be used for transplant or research. This can be accomplished by signing the organ donor instructions on the back of your driver’s license or separate written instructions.
- Burial Instructions. You may wish to leave written instructions regarding your burial wishes.
- What can I expect when I first call Goddard & Hawkins?
The estate planning process usually begins with a short telephone conversation, during which we gather preliminary information and provide you with a fee quote for your estate planning work. We feel very strongly that knowing what you can expect to pay for your estate planning as early in the process as possible relieves many client anxieties.
- What is the next step?
Also, during this telephone conversation, we schedule an estate planning meeting with you that usually lasts from an hour to an hour and a half.
- How long does the process take?
At the end of the first meeting, we schedule an appointment for you three weeks from our first meeting to sign your estate planning documents. We will send you drafts of your documents prior to the meeting.