A guide to avoiding probate and reducing Federal estate tax.

The Living Trust Solution

Why should I bother with Estate Planning?

Control after death

Control at incapacity

What assets comprise my estate?

When do I need to prepare an estate plan?

Procrastination is dangerous in the estate planning arena
Plan while you are able to, before it will need to take effect

What are common estate plan mistakes?

Relying upon a Last Will and Testament only
Having no documentation at all
Placing assets in Joint tenancy ownership
Giving assets away
Using beneficiary designations only

What are the problems with relying upon a Last Will and Testament only?

If you pass away with assets totaling in excess of $66,000, including real estate and personal property (even if a mortgage remains on the real estate in question), the only way to legally transfer those assets is through probate regardless of whether you have a will or not. (If the assets in your name total less than $66,000, a Small Estate Affidavit will exempt you from Probate.)
A Will only deals with the transfer of assets that are in your name.
There is a court administered legal proceeding during which the Will is admitted to Probate. An executor is appointed to administer your estate, distribute assets and pay various liabilities and debts.

Examples of property to be transferred

Checking accounts
Stocks
Bonds
Mutual funds
CDs
Home, real estate in Colorado or in other states (Each state may require a probate to be opened)
Personal property
Business assets

Payments to be made from your Probate estate

Attorney’s fees/Filing fees
Publication fees
Executor’s fees
Appraisal fees
Various liabilities/debts
Final income taxes/Federal estate taxes (if the estate exceeds certain dollar amounts)
Balance remaining to be distributed to beneficiaries, whether it be family or otherwise

Why should I worry about Probate?

Cost

Numerous expenses, including, but not limited to those payments listed above

It takes a great deal of time and trouble

Death Probate in Colorado has to be open for a period of not less than six months. Most estates take anywhere from one to two years, and many longer, after death. Incapacity Probates will remain open Probate until the incapacitated party passes away or recovers. Minor's Probate will allow property to be distributed in Colorado at age of eighteen.

It strips your privacy

Court files are matters of public record, open for anyone to see, i.e., family, friends, neighbors, enemies, debt collectors, and salespeople.

It makes the will easy to contest

One does not need to retain an attorney in order to contest a Probate estate. We find that approximately one out of every ten estates are contested.

It can strip your control

May need approval for sale of assets and/or payment of debts thereby delaying sale of property or distribution of same. Controlled by attorney and judge.

Your Last Will and Testament is powerless upon incapacity

A Will is not relevant in the event that you are incapacitated. In lieu thereof, we may go to Probate Court to have someone named as guardian. In Colorado, this is known as a Guardian for Disabled Person. This is an expensive court proceeding which is a matter of public record. The Guardian takes control of your assets and payment of your debts and may also require the Probate of your estate upon your passing away.

Why can't I rely upon a Property Power of Attorney only?

There are numerous problems with these types of documents as a stand-alone for an estate plan. Upon your death they are no longer in effect. Additionally, these documents generally do not take effect unless you are incapacitated. They must contain certain language to comply with the Internal Revenue Service regulations. Powers of Attorney work as a portion of a complete estate plan package.

Why do I even need to have documents?

What about placing my assets in joint ownership with my spouse or child?

You lose control of the assets

That person may either be able to access bank accounts and/or brokerage accounts.
All signatures are required to transfer real estate or stock certificates.
Home equity loans only require one signature.

You may unintentionally disinherit heirs

Property passes to the surviving joint tenant upon the death of the first joint tenant.
Second marriage situations – You may unintentionally disinherit children from your first marriage. Also, you may unintentionally disinherit one or more of your children depending upon who you have named as joint owner.

Lawsuits

Assets held in joint tenancy are subject to the claims of the creditors of any one of the joint tenants – you could lose YOUR property to someone else’s debt!

Probate

Keeping property in joint tenancy does not avoid Probate, only postpones it.
May be required upon the simultaneous death of the joint tenants and/or the death or incapacity of the surviving owner.

Why can't I just gift my assets to my heirs?

Medicaid

Some people transfer property in an attempt to qualify for Medicaid. There are numerous problems regarding this, particularly involving timing and amounts. Giftees may end up responsible for YOUR medical bills!

Gift tax possibility

Non-taxable gifts limited to $15,000 per person per year. Transferring ownership into joint tenancy may be a gift subject to gift taxes. Gift tax rates begin at 40%

Income tax implications

There are also income tax implications in the gifting of property, whether the property is sold during your lifetime, or after you pass away. If you receive property by a gift during your lifetime, you will not receive the stepped-up basis of the date of death value upon the death of the party who originally owned the property.

What is the problem with setting up Beneficiary Transfers?

As long as you have a surviving joint tenant who is competent and not a minor, beneficiary transfers will avoid Probate. However, if you become incapacitated, your beneficiary cannot receive the property until you pass away, therefore, without the appropriate legal documents, it will require a Probate.
Beneficiary designations provide you with limited control over how the funds are to be used for the benefit of the beneficiary.

Why should a Revocable Living Trust be in my Estate Plan Package?

Any assets that are titled in your name alone (including real estate and personal property) in excess of $100,000, are required to go through Probate. The goal is to transfer your assets into your living trust so that there are no assets required to be Probated. That allows us to distribute funds to your beneficiaries in a timely manner.

LIVING TRUST

GRANTOR

Creates Trust

You (and Spouse)

TRUSTEE

Manages Trust

You (and Spouse) Other Individual Corporate Trustee

SUCCESSOR TRUSTEE(S)

Manages Trust

Individual(s) Corporate Trustee

BENEFICIARIES

Receive Trust Property when you die

Any Person Any Organization

Practically speaking, most people (especially those with smaller estates) act as their own trustees and have their adult children as successor trustees.

Retain full control of all assets

Trust is owned and administered by you

Nothing changes but the titles
Your property will be titled in the name of your Trust instead of your name
You can buy and sell property as before

Amend or revoke Trust

You can change or revoke the trust if you so choose at any time
Your Trust contains your instructions for what you want to happen at incapacity and at death, so even then you keep control

Control how property is to be distributed

Outright or in Trust for spouse
Outright or in Trust for children and/or grandchildren
Special provisions for handicapped or disabled beneficiaries
Property held in Trust for minors for an extended period of time
Property held in Trust for those with credit issues
Will totally avoid Probate at death or incapacity
Will allow for the prompt distribution of your assets to your beneficiaries, or to remain in Trust for an extended period of time with controls.
Difficult to contest
Will prevent the unintentional disinheriting of heirs
Allows for corporate administration of your Trust if you deem it appropriate
Provides maximum control and flexibility for your assets
Trust is not a public document so maintains your privacy

Miscellaneous Aspects of Living Trusts

Not recorded or registered
File same Income Tax return
Retain all tax exemptions and deferrals
No re-assessment of property
Personal property included
Funeral/Burial instructions

A Living Trust is one part of a comprehensive estate plan. All the components work together as a package to control your assets and watch over your interests if you become incapacitated as well as watch over the interests of your loved ones when you pass on. All parts are necessary building blocks and form a firm foundation to provide you with privacy, control and to maximize your assets so that the minimum amount is taken in administration, taxes and other outside costs.

THE COMPREHENSIVE ESTATE PLAN

Abstract of Trust – This three or four-page document summarizes the trust and is used for the financial institutions as needed when performing the re-titling.

Trust – This is the main working document of the estate plan. This is where you will indicate who will receive your assets, how they will receive them and who will administer the trust when you are no longer able to as well as many other instructions.

Will (“pour-over”) – The Last Will & Testament reflects the terms of the Trust. It is called a “Pour-Over Will because it directs that all assets not titled in the name of the Trust, now be bequeathed to the Trust and distributed in accordance with the provisions of the Trust.

Durable Medical Power of Attorney for Health Care – Together with the below referenced documents, this appoints an agent to carry out the instructions you leave regarding how you want health care providers to proceed in cases when you are unable to speak for yourself.

HIPAA Authorization and Release – This standard document is in accordance with the laws of the State of Colorado and, along with the Medical Durable Power of Attorney for Health Care, allows for the free flow of information between your health care providers. Living Will – This standard document is in accordance with the laws of the State of Colorado and, with the Medical Durable Power of Attorney for Health Care, directs health care officials as to how you would like your life prolonged if you are unable to speak for yourself at any time.

Colorado Statutory Form Power of Attorney – This document appoints an agent to handle your financial affairs should you be unable to do so during your lifetime. Generally, you will appoint the same person that you have designated as the Successor Trustee of your Trust. Durable Medical Power of Attorney for Health Care – Together with the below referenced documents, this appoints an agent to carry out the instructions you leave regarding how you want health care providers to proceed in cases when you are unable to speak for yourself.

Your Comprehensive Estate Plan covers all eventualities so that your loved ones will be able to make sure that your wishes are carried out as efficiently as possible, in accordance with your instructions, and in the manner that you have laid out for them. These documents are ready to be used whether you become incapacitated temporarily, permanently or are healthy until the last day of your life. The Comprehensive Estate Plan will allow your loved ones to spend less time deciphering administrative tasks and more time comforting each other.

What do I have to do?

Re-titling

Changing titles is very important

Anything left out of the Trust may have to be probated

Make sure you change all titles

Home and other real estate (local and out-of-state)
Large checking/savings accounts
Any other assets with formal titles
Business entities
Stocks, bonds, mutual funds, brokerage accounts, Certificates of Deposit

Change beneficiary designations

You will not have to re-title your day-to-day checking account, but we advise you to keep less than $50,000 in that account
You will not have to re-title your automobile unless it is worth over $50,000
Change beneficiary designations on life insurance policies to the Trust
Generally speaking, all titles and beneficiary designations should be changed to the Living Trust to completely avoid Probate

The exceptions are tax-deferred savings, like IRAs and 401(k)s, retirement accounts and retirement/pension plans – you may want your spouse, if applicable, to be primary beneficiary of these so he/she can have the option of rolling these proceeds over into his/her own IRA and defer taxes until later. If the Living Trust is the beneficiary, the proceeds may be taxed sooner. Everyone’s situation is different; therefore, this decision requires careful thought and counsel with a tax professional.

TAX SAVINGS DEVICES

Gifting
Charitable Remainder Trust (CRT)
Personal Residence Trust (PRT)
Family Limited Partnership (FLP)
Grantor Retained Annuity Trust (GRAT)
Irrevocable Life Insurance Trust (ILIT)

GRANTOR– You (and spouse)

1. You gift cash to Trust.

IRREVOCABLE LIFE INSURANCE TRUST

2. Trustee notifies Beneficiary of gift.

3. Beneficiaries refuse gift.

4. Trustee uses gift to pay insurance premium. Trust is owner and usually beneficiary of policy.

5. When you die, Trustee distributes proceeds tax free to beneficiaries according to your Trust instructions.

BENEFICIARY (IES)

A Life Insurance Trust keeps your insurance policies from being included in your taxable estate and is the least expensive way to pay Estate taxes, if applicable.

Want to learn more?

Complete the form below and to speak with a knowledgable, friendly expert and schedule your free consultation.

Illinois and Colorado Estate Planning Attorneys

Illinois and ColoradoEstate Planning Attorneys