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Living Trusts

 

What is a living trust? What is probate?

Should probate be avoided?

Can a living trust save taxes? Can creditors reach assets in a trust?

Can heirs challenge a trust? What effect does divorce have upon a living trust?

Can a person disinherit a spouse by signing a revocable trust? Can a living trust jeopardize qualification for government assistance programs?

Under what circumstances can a living trust prove beneficial?

What are the comparative costs of wills and trusts? Where do I get more information?

Although costs will vary depending on the attorney and the area in which you live, having a will prepared by an attorney can cost $150 and up, depending on the complexity of your affairs. Probating a will through a Colorado probate court can cost as little as $200 to $3,000 including attorney fees, court costs and the expenses of publishing notices to creditors. Generally speaking, most middle-sized estates can be probated for less than $2,000 to $3,000.

The cost for preparing a living trust will generally run from $700 to $5,000 depending on the complexity of the trust. In addition to the cost of creating the trust, there are costs associated with transferring assets into and out of the trust, administrative expenses and tax filing expenses.

 

If you are interested in a living trust, then make an appointment with an estate planning attorney to help determine what estate planning arrangement best suits you. Many attorneys will offer a free initial consultation. Remember that in estate planning, one size does not fit all. While your will or trust may be similar to your neighbor's, each is different for special, personal reasons. Trusts are complex legal documents that require the use of competent and experienced estate planning attorneys. For this reason, you should not try to create your own trust or purchase a pre-printed living trust. Beware of purchasing a living trust from a national marketing organization where your individual needs are not considered and where you have not met with the attorney who prepares the document.

What if I have been a victim of fraud?

If you think you have been the victim of fraud in the sale of a living trust, please call the Colorado Attorney General's Consumer Protection Division at 303-866-5125.

 

 


 

(2003) This pamphlet is published as a public service by the Colorado Bar Association. Its purpose is to inform citizens of their legal rights and obligations and to provide information regarding the legal profession and how it may best serve the community. Changes may have occurred in the law since the time of publication. Before relying on this information, consult an attorney about your individual case.

 

    • If you have assets in a state that has not adopted the streamlined procedure of the Uniform Probate Code, a living trust may allow you to avoid a complicated and expensive probate administration.
    • If you are incapacitated, or if you are contemplating your disability, your assets would be managed for your benefit.
    • You may want to see how an adult child will cope with responsibility by giving him or her a supervised trial run as trustee.
    • You may no longer wish to be involved in the management of your financial affairs and you want to place your assets under management.

 

No. The rights of a surviving spouse to a share of a deceased spouse's property are not avoided by having a living trust rather than a will.

 

Yes. If assets are held in a living trust created by a deceased spouse and for the benefit of the surviving spouse, who is a Medicaid recipient, such assets are counted as available resources (and the income of the trust as available income) even though the trustee may have full discretion to pay or withdraw principal or income. This is a federal rule. This is not the case where a trust is created under the deceased spouse's will for the benefit of the surviving spouse.

 

Yes. Both wills and living trusts are susceptible to challenge by disgruntled heirs.

 

Under Colorado law, any gift made in a will to a former spouse is revoked. Under a living trust the rule is the same for decedents dying after July 1, 1995.

 

The living trust avoids no more estate tax than a will. (Avoiding probate never means avoiding estate tax.) Both a will and a living trust, when well written, can save substantial family assets that would otherwise be used for payment of estate taxes.

Generally, you will be treated as the owner of the assets in the living trust because you have the right to amend or revoke the trust and reclaim the property. Consequently, there are no advantages for income tax purposes. Further, since you maintain some control over the trust property, the trust property will be treated as part of your estate for estate and gift tax purposes, just as if you owned the trust property in your own name.

Under current law, if the total assets at death are under $1,000,000 in the year 2003, and the death occurs in that year, then no federal estate taxes or Colorado estate taxes will be imposed. This asset value increases to $1.5 million if the death occurs in 2004 or 2005, or $2 million if the death occurs in 2006-2008. Please note that these numbers are likely subject to change by actions of the U.S. Congress.

 

Yes. Present and future creditors can legally get to the assets in a trust to pay outstanding bills while the trust is revocable.

Under probate, claims of creditors can be eliminated when the required notice provisions are followed.

Under a living trust, the position of creditors can actually be improved. If assets pass under a will through the probate process, the family is guaranteed an exempt property allowance and a family allowance. These allowances must be paid prior to the claims of general creditors. This priority over creditors is not available to assets passing under a living trust. Also, there is no claims period limit for a funded living trust.

 

A living trust can make probate unnecessary. Advertisements of some living trusts would have you believe that probate is extremely burdensome and something to be avoided at all costs. Probate laws differ from state to state. However, because of the Uniform Probate Code, Colorado probate is a relatively simple, usually inexpensive and quick procedure for the distribution of a decedent's estate.

Probate may be necessary with a living trust if even one asset has not been transferred to the living trust prior to death. Generally, a "pour-over" will is drafted with a living trust to transfer any remaining assets into the trust at death.

 

During probate, most estates do not require direct court involvement. However, there are filing requirements with the court that must be met. Court supervision is available if disagreements or conflicts arise. Delays in distributing assets should not be greater with the probate process than with a living trust. In both cases, a personal representative (formerly known as an executor) and trustee must protect themselves from liability for premature distribution of assets before creditors and taxes are paid.

There are instances when bypassing probate is a good idea financially. This is especially true if you own real property in more than one state.

 

 

 

 

Probate is the legal process that ensures your will is valid, your debts are paid and your property goes to the people you name in your will. It is also the process that determines, in accordance with state law, who will receive your property if you have not left a will or a trust.

There are many types of property that pass outside of probate. For example, life insurance and retirement plan proceeds pass to the named beneficiary. Property held in joint tenancy with a right of survivorship pass directly to the surviving co-owner.

A trust is a written agreement where you put legal title to certain property (called the trust property) in the name of a person or firm (called the trustee) to be held for the benefit of yourself or a third party (called the beneficiary). A living trust is created during your lifetime and may be funded or unfunded. A funded living trust is an alternative to a will and to probate. In a funded living trust, you put property and money into a trust during your lifetime for the benefit of yourself and possibly other family members. You can change or revoke the living trust at any time. Generally, you are both the creator of the trust and, while you are living, the beneficiary of the trust.

An unfunded living trust typically receives assets through a simple, pour-over will following your death.

During your lifetime, the trustee (who may be you) of a funded living trust handles your assets in accordance with your instructions for your benefit. You (and other parties you may name) may receive monetary distributions from the trust. A funded living trust can manage the everyday details of your personal finances.

If you should ever become incapacitated, alternate trustees are usually named in the trust to assume trustee responsibilities, the most important of which is providing for your financial needs or the financial needs of your beneficiaries. You will usually name a spouse, adult child, relative, friend or a bank as your alternate trustee. Thus, the trust, through the trustee, will continue managing your assets for your benefit.

Your trustee provides for your maintenance and support from the assets in your trust. This usually occurs without having to involve the court. This saves your family from having to have a court appoint a conservator to handle your affairs. The court procedure to have a conservator appointed can be expensive and requires that a detailed annual accounting of your assets and liabilities be filed with the court.

Although you may have left detailed instructions on how to handle your estate upon your death in your will, your will has no effect until your death. If you become incapable of managing your own affairs, then a living trust can be helpful.

After your death, your trustee will follow the terms of your living trust. Your living trust may direct that the assets held in the trust be distributed to your named beneficiaries or the living trust may direct that the assets continue to be held in the trust and managed for the benefit of your beneficiaries.

Unlike a will, at your death your trust agreement is not filed with the court and does not become public. However, the trust must be registered with the court and the beneficiaries are entitled to copies of the trust. This allows you to keep your financial affairs private. If all property was transferred to the trustee during your lifetime, probate of your estate will not be necessary.

A living trust has several advantages if it is set up properly and fully funded, meaning all of your assets are placed in the trust. First, a fully funded trust can reduce or eliminate the need for probate upon your death. Second, a Colorado resident who owns real property in another state can put that real estate into a living trust and thereby reduce or eliminate the need for probate in the other state. (This is subject to the laws of the state where the property is located.) Third, a living trust may avoid the need for a conservatorship for you if you become legally disabled. However, a living trust cannot avoid a guardianship, because the trustee of a living trust cannot make medical or care decisions for you unless the trustee is the named agent for you under a separate Medical Power of Attorney.

 

There are good reasons to use a living trust in certain circumstances. However, there is a lot of false information about living trusts. Many of the advertisements for living trusts are misleading. This pamphlet will explain a "living trust" (also known as a "revocable trust" or an "inter vivos trust"), how it is created, what it may or may not accomplish for you and under what circumstances it may be appropriate.