Frequently Asked Questions
FREQUENTLY ASKED QUESTIONS
WHICH IS BETTER, A REVOCABLE LIVING TRUST OR A WILL?
Many clients
ask whether they should use a revocable living trust (also known as an inter vivos
trust) or the traditional
“Last Will and Testament”. The answer is, “It depends on your circumstances,
priorities, and goals.” Without learning that information first, it is not
possible to advise a client on which estate planning instrument to use. So the
purpose of this article is to provide a basic explanation of each, but not to
advise which one you should use. A basic will nominates the person to handle
the affairs of a deceased person and directs the distribution of the decedent's
property. A simple revocable living trust performs the same tasks. But the
tasks are accomplished by different means.
To be operative, a will must be probated. Although the definition and explanation of the probate process is the topic of a separate article, a simple explanation for the purpose of this article is that probate is the legal process for proving the existence or non-existence of a valid will for a deceased person, settlement of the decedent's affairs and distribution of the decedent's assets to the appropriate persons. A will does not eliminate probate. It is the decedent's instructions as to who will do the probate and how it will be conducted. A properly created revocable living trust can accomplish most of the same goals, without court involvement. So the common argument in favor of the revocable living trust is to avoid the probate process.
A revocable living trust can eliminate the need for probate because it is a legal entity that does not die. So if it owns your property at the time you die you will have no property to be transferred via the probate process. Instead, your Trust Agreement appoints a person to serve as the Successor Trustee and instructs that person to distribute the trust property to your beneficiaries.
A revocable living trust is created by executing a Trust Agreement or Declaration. It is the document that identifies you as the Settlor (also known interchangeably as Trustor or Grantor), you as the Trustee, another person as the Successor Trustee and the Beneficiaries. The Settlor creates the trust, the Trustee manages the trust and the Beneficiaries benefit from the property held in trust. The trust is funded by transferring some or all of your property to it. If at the time you die you have effectively transferred or conveyed all of your property to the trust there will be no property in your name to be transferred to someone else at the time of death. Hence, there may be no need to probate your estate—at least for that purpose.
It is possible that the probate court might have to appoint a personal representative (formerly known as executor or executrix) to deal with other issues and it is possible that at the time you die there might be some property that did not get transferred to your trust. Therefore, it is standard practice among estate planning attorneys to have clients also execute “pour over” wills to nominate your choice for personal representative and to direct that any property owned by you at the time of your death is to be “poured over” into your revocable living trust. So even if you use a revocable living trust, you still need a will.
To be operative, a will must be probated. Although the definition and explanation of the probate process is the topic of a separate article, a simple explanation for the purpose of this article is that probate is the legal process for proving the existence or non-existence of a valid will for a deceased person, settlement of the decedent's affairs and distribution of the decedent's assets to the appropriate persons. A will does not eliminate probate. It is the decedent's instructions as to who will do the probate and how it will be conducted. A properly created revocable living trust can accomplish most of the same goals, without court involvement. So the common argument in favor of the revocable living trust is to avoid the probate process.
A revocable living trust can eliminate the need for probate because it is a legal entity that does not die. So if it owns your property at the time you die you will have no property to be transferred via the probate process. Instead, your Trust Agreement appoints a person to serve as the Successor Trustee and instructs that person to distribute the trust property to your beneficiaries.
A revocable living trust is created by executing a Trust Agreement or Declaration. It is the document that identifies you as the Settlor (also known interchangeably as Trustor or Grantor), you as the Trustee, another person as the Successor Trustee and the Beneficiaries. The Settlor creates the trust, the Trustee manages the trust and the Beneficiaries benefit from the property held in trust. The trust is funded by transferring some or all of your property to it. If at the time you die you have effectively transferred or conveyed all of your property to the trust there will be no property in your name to be transferred to someone else at the time of death. Hence, there may be no need to probate your estate—at least for that purpose.
It is possible that the probate court might have to appoint a personal representative (formerly known as executor or executrix) to deal with other issues and it is possible that at the time you die there might be some property that did not get transferred to your trust. Therefore, it is standard practice among estate planning attorneys to have clients also execute “pour over” wills to nominate your choice for personal representative and to direct that any property owned by you at the time of your death is to be “poured over” into your revocable living trust. So even if you use a revocable living trust, you still need a will.
WHAT IS PROBATE?
Technically and historically, the term “probate” refers to the process whereby a decedent's will is proven by a court of law to be either valid or invalid. Common usage has expanded the term to include the administration of the estate of a decedent who died without a will. Forged wills are not common, but do occur from time to time. A purpose of the probate process is to determine whether a will is a forgery or not. The court must also determine whether a will meets the statutory requirements to be a valid will and confirm that it was not revoked by either a subsequent will or by some action by the decedent short of physically destroying the document. If a person dies without a valid will, he or she is deemed to have died “intestate”. Intestate status might be because either the decedent did not execute a will or the purported will is not valid.
Once it has been determined that the decedent either did or did not leave a valid will, the administration of the estate in Colorado is very similar in both instances. The probate court will appoint a personal representative to act on behalf of the estate. The probate laws are designed to protect those persons who claim to have an interest in the affairs of the decedent, as well as those who are entitled to distribution of the assets of the decedent. Specifically and most commonly, those persons claiming an interest are creditors of the decedent. To protect those persons or claimants, the law requires the personal representative to give notice to the decedent's creditors and provide them with an opportunity to present their claims. If the personal representative knows the identity of such a claimant, he or she is obligated to give actual written notice to the claimant. But in an effort to protect unknown claimants, the law further requires the personal representative to cause a Notice to Creditors to be published in a local newspaper. Whichever way the notice is given, it includes a deadline by which all claims must be filed with either the court or the personal representative. The deadline is 4 months from the date the published notice first appears in the newspaper. If the claim is not filed by that deadline the personal representative may legitimately deny the claim. It may also be denied on other grounds. If the claim is denied, the claimant still has the right to petition the court to rule on whether it should be paid or not. Until a personal representative has definitively determined there are no claims against the estate, or that they have been satisfied, it is unwise to distribute the assets of the estate. To do so would expose the personal representative to personal liability for any claims ultimately determined to be legitimate if there are insufficient assets remaining in the estate to pay those claims.
Other tasks assigned to the personal representative include filing a final income tax return for the decedent, possibly filing an income tax and or an estate tax return for the estate itself, collecting and preserving all assets that belonged to the decedent and possibly selling or otherwise disposing of assets such as real property, automobiles, personal possessions, etc.
Once the personal representative has completed all tasks assigned, he or she will distribute the assets of the estate to those persons entitled to receive them. If there is a will identifying those persons, they are referred to as devisees or beneficiaries. If there is no will, the court must determine and identify the decedent's “heirs at law”. Heirs at law are defined by statute and assigned priority under what is sometimes referred to as the intestate statute of descent. Typically, the order of priority for a decedent's heirs at law will be the decedent's spouse and children or children of deceased children. If there is no spouse and no children or grandchildren, the decedent's parents are next in priority and thereafter the priority follows bloodlines. On a rare occasion a person dies with no heir at law and no will.If so, the property of the decedent must still pass to someone and the law provides that it shall pass to the common good of all citizens of the state by a provision referred to as “escheat”. The assets are reduced to cash and paid over to the Colorado Treasurer to be held for a period of 21 years. If it is unclaimed by a rightful heir of the decedent within that time period, it is paid over to the public school fund. As previously stated, this is very rare.
Once it has been determined that the decedent either did or did not leave a valid will, the administration of the estate in Colorado is very similar in both instances. The probate court will appoint a personal representative to act on behalf of the estate. The probate laws are designed to protect those persons who claim to have an interest in the affairs of the decedent, as well as those who are entitled to distribution of the assets of the decedent. Specifically and most commonly, those persons claiming an interest are creditors of the decedent. To protect those persons or claimants, the law requires the personal representative to give notice to the decedent's creditors and provide them with an opportunity to present their claims. If the personal representative knows the identity of such a claimant, he or she is obligated to give actual written notice to the claimant. But in an effort to protect unknown claimants, the law further requires the personal representative to cause a Notice to Creditors to be published in a local newspaper. Whichever way the notice is given, it includes a deadline by which all claims must be filed with either the court or the personal representative. The deadline is 4 months from the date the published notice first appears in the newspaper. If the claim is not filed by that deadline the personal representative may legitimately deny the claim. It may also be denied on other grounds. If the claim is denied, the claimant still has the right to petition the court to rule on whether it should be paid or not. Until a personal representative has definitively determined there are no claims against the estate, or that they have been satisfied, it is unwise to distribute the assets of the estate. To do so would expose the personal representative to personal liability for any claims ultimately determined to be legitimate if there are insufficient assets remaining in the estate to pay those claims.
Other tasks assigned to the personal representative include filing a final income tax return for the decedent, possibly filing an income tax and or an estate tax return for the estate itself, collecting and preserving all assets that belonged to the decedent and possibly selling or otherwise disposing of assets such as real property, automobiles, personal possessions, etc.
Once the personal representative has completed all tasks assigned, he or she will distribute the assets of the estate to those persons entitled to receive them. If there is a will identifying those persons, they are referred to as devisees or beneficiaries. If there is no will, the court must determine and identify the decedent's “heirs at law”. Heirs at law are defined by statute and assigned priority under what is sometimes referred to as the intestate statute of descent. Typically, the order of priority for a decedent's heirs at law will be the decedent's spouse and children or children of deceased children. If there is no spouse and no children or grandchildren, the decedent's parents are next in priority and thereafter the priority follows bloodlines. On a rare occasion a person dies with no heir at law and no will.
POWERS OF ATTORNEY
A power of attorney is a legal document signed by the Principal appointing an Agent (also known as attorney-in-fact) with legal authority to act on behalf of the Principal. Powers of attorney may be used for varying purposes, may have various characteristics and may appear in an unlimited variety of formats. This article will identify and explain the more common purposes, describe the typical characteristics and address the issue of formats.
Perhaps the oldest and most common purpose of a power of attorney is to authorize an agent to conduct business on behalf of the principal. For example, a principal might authorize his/her agent to sign another legal document, negotiate a transaction or simply discuss matters with another person on behalf of the principal. Another purpose of more recent vintage is the power of attorney for medical or healthcare purposes where the principal authorizes an agent to receive information on their healthcare matters and even make medical decisions on their behalf. However, a healthcare power of attorney almost always has a delayed effect causing the power to “spring” forth to the agent only when and if the principal is determinated to be incapacitated to the point where he/she is not able to receive and process information and/or is incapable of 2-way communication. Powers of attorney for business or financial purposes may also be designed to become effective only in the event of the principal becoming incapacitated.
Whether a power of attorney is effective immediately or designed to become effective only in the event of incapacity, it is automatically revoked when the principal dies and may be revoked by the principal at any time so long as the principal is not incapacitated. Although the law originally deemed a power of attorney to be automatically revoked if and when the principal became incapacitated, modern views on the subject have caused most legislatures to recognize that many, if not most, principals would want the power of attorney to remain valid in the event of their incapacity. Consequently, the law now recognizes what is referred to as “durable” powers of attorney, meaning that it will remain effective even if the principal is incapacitated. In fact, the Colorado Uniform Power of Attorney Act, which governs most but not all powers of attorney, provides that a power of attorney is presumed to be durable in nature unless it states to the contrary.
The Colorado Uniform Power of Attorney Act also seeks to address what may be the weakest feature of all powers of attorney. It carries only as much weight as the party to whom it is presented is willing to afford it. For example, if a bank is going to make a loan to the principal where an agent is signing the promissory note it is understandable the bank will want to be satisfied the power of attorney is not a forgery, is valid, has not been revoked and gives the agent the authority to bind the principal to repayment of the note. The Act tries to address all of these issues. Although the Act does not require that the principal’s signature on a power of attorney be notarized, it does provide that if it is notarized there is a presumption that the signature is “presumed to be genuine”and that if it has been executed in accordance with the Act it is presumed to be valid. It further provides that if the principal’s signature was notarized and the recipient does not have actual knowledge or reason to believe it has been revoked it is presumed that the power has not been revoked. But the party receiving it may also require and rely upon a certification to that effect signed by the agent. Finally, the Act includes a standardized form that may be used. Use of the statutory form is not required. But the intended benefit is that it will eventually become widely recognized and as a consequence more readily accepted as people become more familiar with it. So once the bank’s attorney has reviewed the same or similar document several times to confirm it does authorize an agent to borrow money and bind the principal to repay the loan it is reasonable to think the banker will not require his/her attorney to review and issue a legal opinion on every power of attorney in the future.
Powers of attorney may also be general or limited in scope. For example, a principal might appoint an agent for the limited purpose of signing documents related to the sale or purchase of a specific parcel of real estate where the authority is automatically terminated once the transaction has been completed. Often these limited powers of attorney include a time limitation. For example, it might specify that the power will terminate upon completion of the transaction or 30 days from the date of execution, whichever occurs first.
© 2013 Darrell J. Gubbels
What is “estate planning”?
Typically, an estate plan will include either a traditional will or a revocable living trust and powers of attorney for both financial and medical matters. A client with young or possibly disabled children would be well advised to identify a guardian, trustee and conservator for their children. All clients should also seriously consider an Advance Medical or Surgical Directive, commonly known as a Living Will.
Some, but not all, clients might need to incorporate estate tax planning provisions. There are also many other tools to consider, such as whether joint tenancy is a good idea (it can be a bad one), Pay on Death and Transfer on Death designations, beneficiary designations for retirement accounts and life insurance to name just a few.
Who can make an estate plan and what is required?
A person must be 18 years of age or older and of sound mind. Sound mind basically means they know what they have and where they want it to go. The will must be typed or handwritten, signed and either have two witnesses or a notary.
Video and audio wills are not recognized as valid under Colorado. A holographic will is a will in the person making the will’s own handwriting is recognized in Colorado but is not a preferred method due to authenticity issues. Once you are gone a handwriting analysis may be required to determine if the handwriting is the person’s it purports to be.
Some, but not all, clients might need to incorporate estate tax planning provisions. There are also many other tools to consider, such as whether joint tenancy is a good idea (it can be a bad one), Pay on Death and Transfer on Death designations, beneficiary designations for retirement accounts and life insurance to name just a few.
Who can make an estate plan and what is required?
A person must be 18 years of age or older and of sound mind. Sound mind basically means they know what they have and where they want it to go. The will must be typed or handwritten, signed and either have two witnesses or a notary.
Video and audio wills are not recognized as valid under Colorado. A holographic will is a will in the person making the will’s own handwriting is recognized in Colorado but is not a preferred method due to authenticity issues. Once you are gone a handwriting analysis may be required to determine if the handwriting is the person’s it purports to be.
Isn’t estate planning only for wealthy people?
The short answer is no. Whether you consider yourself wealthy or not, you need to plan for the risk you might be rendered unable to handle your own financial affairs or even make your own medical decisions. If you don’t name people to handle your affairs and make those decisions the court will. That can be very costly, and you may not be happy with who the court appoints.
Regardless of how large or small your estate is, a proper estate plan will reduce the time and cost to transfer it to whoever you want to receive it. A small estate only gets smaller without proper planning.
Is my Will valid if it was created in another state?
It is valid in Colorado if it was valid in the state it was created. However, it is a good idea to have it reviewed to make sure it does not need to be updated and possibly have an amendment to be interpreted under the laws of the State of Colorado.
How can I do an estate plan if I don’t know what I want to do, who I want to handle my affairs or who I want to inherit my estate?
These are common questions that unnecessarily keep people from acting. Attorneys at Law are also Counselors at Law. Your attorney cannot and should not dictate these matters. But he/she can and should counsel you to help you decide what can be difficult decisions. An estate planning attorney should answer your questions, ask you questions you may have not recognized and ultimately help you to complete a plan that gives you peace of mind.
Isn’t a Living Will and a Last Will and Testament the same thing?
No. A Living Will is an advance medical directive whereby if you are ever in a persistent vegetative state or have a terminal condition and:
i. You are unable to communicate;
ii. You are on a life support system; and
iii. You have been deemed with some medical degree of certainty that you are not going to get better and continuing life support will only prolong the moment of death then the Living Will directs what you want done with the life support system, artificial nutrition and hydration.
A Last Will and Testament directs what to do with your property when you die and nominates someone as personal representative/executor to administer the estate.
Is an estate plan expensive?
Only you can decide what is “expensive”. But here are some thoughts to consider:
Most estate planning attorneys offer a free initial consultation just to learn about the client, determine what is appropriate and to quote a fee. So it typically costs nothing to find out what it will cost and only then can the client decide whether it costs too much.
There are no “free lunches”. Before you decide the fee is too high, consider what it might cost if you do nothing. For example:
- If you do not have a power of attorney for financial affairs and you do become unable to handle your own affairs someone still has to do it for you. Without a power of attorney, the courts will appoint a conservator. That will cost you a few thousand dollars and you don’t know who the court will appoint to be your conservator.
- If you do not have a power of attorney for healthcare decisions and you do become unable to make your own decisions someone still has to do it for you. Without a power of attorney, the courts may have to appoint a guardian. That will cost you a few thousand dollars and you don’t know who the court will appoint to be your guardian.
- If you die without a will or a trust someone still has to pay your final bills, preserve, protect and liquidate your property, file a final income tax return and probably perform many other functions before distributing what is left to whoever is entitled to receive it. All of that will be done by someone you may not even know and at a cost that will probably be much greater than it would have been had you implemented a proper estate plan.
- If you are on a life support system and do not have a Living Will you could be left on the support system longer than you want at great expense. Without a Living Will you may be leaving the decision on what to do if you are ever on a life support system up to someone else and if they do not agree then it may be a court decision. By putting your decisions in writing you are taking the stress off loved ones who are already dealing with a difficult situation. If the court decides it may or may not be what you would have done in the same situation.