By Beth Andersen-Filson
A common question in estate planning is whether you need a trust or if a will alone suffices.
In Colorado, a will alone is often sufficient. Unlike some other states, Colorado has a relatively simple probate process. It is not overly onerous and can often be accomplished with very little legal assistance, if any. For this reason, we are NOT a state where everyone needs a trust.
Nonetheless, there are several circumstances where someone definitely should have a trust. In deciding if you need a trust and, if so, what kind of trust you will need, consider the following. In addition, feel free to call Andersen Law PC at 720-922-3880 or call or text my cell at 303-808-4794 to schedule a free consultation on whether you need a trust.
The Difference Between A Will And A Trust
A Last Will and Testament is a document that outlines how your personal representative (sometimes called an executor) will distribute your assets and pay your debts after you die.
A will can also address other matters such as who you want as personal representative; who will serve as guardian and conservator for your minor children; how you want your burial and funeral handled; and whether you have a Memorandum for Non-business Tangible Property.
Meanwhile, a trust is a document into which you transfer, title or otherwise convey property. The trust appoints a trustee to handle the property in the trust. Sometimes, as set forth below, you can put a testamentary trust in your will. This trust will spring into effect when you die. And every trust has a trustee who manages the property in the trust, including anything to be paid.
The Testamentary Trust
A testamentary trust is set up as part of your will. It will be set forth in a separate section and will explain how the trust will be created, who will be the trustee, and how the trustee should manage the trust. This trust is sometimes called a springing trust because it springs into effect when you die. It is also called a residuary trust because it explains how you want the “residuary” of your estate handled after debts are paid.
An advantage of a testamentary trust is that it is affordable and easy. You do not need to fund it before you die. On your death, the assets go into the trust.
If you have minor children, you should have a minor’s trust. Children cannot inherit and manage their own property. They will need a guardian, conservator or trustee to manage their assets for them. A minor’s trust is a simple document to make this happen. It gives you control over who manages your property for your children after you die.
A minor’s trust is especially important if you are divorced and do not want your ex-spouse and their partner controlling all your property after you die.
A minor’s trust is important in the event your spouse and you both die at the same time. It allows you to decide who will manage your children’s property.
Even if your children are a little older, you still may want a minor’s trust because you do not want them blowing through their entire inheritance the first year they inherit it buying a sports car, throwing a party, etc. Instead, your minor’s trust can state that the children can only receive money for a “reasonably priced” car, education, health issues, relocation for a job, first home, etc. Many people want the child not to inherit the bulk of the trust funds until they are 25 years old or even older depending on the circumstance.
If your children are grown but you have grandchildren, you may want a grandparents’ trust in case one of your children die before you and leave behind minor children. The grandparents’ trust allows you to control what happens to your money left to your grandchildren and who will act as trustee. It is truly a triple tragedy when someone loses an adult child and then passes away themselves only to see their deceased child’s surviving spouse, or surviving ex-spouse and new partner controlling all of the property they left behind. A grandparents’ trust prevents this.
Spendthrift Trust Provision In A Will
If someone is ill and needs to rely upon Medicaid, Supplemental Security Income or other governmental support to survive and pay their medical bills, there are rules on how much money they are allowed to have in the bank. If they exceed these amounts, they lose their critical, life-saving benefits. In this case, getting an inheritance could destroy their eligibility for benefits, causing more harm than good. Having a Spendthrift Trust Provision in the will prevents this from happening because it allows you to set limits on what the beneficiary receives and protects assets in the trust from creditors.
Other Testamentary Trusts
Sometimes one of your heirs has a substance issue, abusive relationship, spending issue or other situation making it unwise to let them inherit without a trustee to manage their funds. In these situations, again, a testamentary trust can be an easy and affordable way to prevent them from wasting the inheritance meant to help them.
Revocable Living Trust
A revocable living trust is more expensive and time consuming than a will or a will with a residuary trust. With a revocable living trust, you convey some or all your assets into the trust and the trust owns it.
However, a revocable living trust allows you to remain in control of these assets. You can appoint yourself as the trustee. You call all the shots as to what is put into the trust, what is removed from it, and how the trust property is managed. For this reason, the trust is sometimes called a self-authenticating trust.
There is no tax consequence to this trust because you still control the property in it. Also, you have the right to revoke the trust.
Many people do not realize that they must fund their trust. For example, real estate must be titled to the trust and the quit claim deed must be filed with the clerk and recorder in the county of the real estate in order to be in the trust.
At Andersen Law PC, we take funding the trust planning very seriously. We are happy to spend time walking you through the process of funding your trust as part of our estate planning package. See also our blog on funding a revocable living trust.
Real Estate In Multiple States
While you may own real estate in more than one state, you do NOT want to have probate in more than one state. This is an unnecessary hassle and expense. You could even end up with court confusion or inconsistent results. The perfect solution is to put your real estate into a revocable living trust, thereby avoiding multiple probates.
For a variety of reasons, many people want an extra layer of privacy around their estate plan. For example, you may own a business or have a liability concern and do not want people looking up all your assets online. You may be a public figure or have an ex-spouse who is always digging into your affairs. Lawyers and others can get access to this information online or through research. Having a revocable living trust can help keep assets and their passing upon your death more private.
Do NOT confuse this, however, with avoiding liability. A revocable living trust does NOT help you protect assets from being attached if you are liable because you still have control over them and own them. See also the section below regarding fraudulent conveyances.
Sometimes a person will want to give their spouse, partner or child the right to live in a house in their lifetime with the house turned over to another person or other people upon that spouse, partner or child’s death. For example, a married person with children from a prior relationship may have entered their second marriage owning a home. They may want their spouse to be able to live in the home during their lifetime if they predecease them. However, they may also want their own children to get the house after that spouse dies. This can be accomplished a variety of ways, one of which is to create a trust giving the spouse a “life estate” in the home.
Call an attorney to discuss this, including the risks, benefits, and alternative options that may better fit your situation. For a free consultation with Andersen Law PC on this issue, call 720-922-3880.
Control Over Assets And Behaviors After Death
In addition to the foregoing, some people want a trust to protect the inherited property from being thrown away on drugs, alcohol, wasteful spending, or the undue influence of a trust beneficiary’s friends or relatives. Or you may be leaving some of your property to a person who has dementia, mental illness or cognitive impairment. You want some say in how the trust is used. A revocable living trust can extend this protection past the date of your death to prevent the assets you are leaving to someone from being wasted on these things.
An irrevocable trust cannot be revoked and, to a large extent, cannot be controlled by the person creating the trust. There are a variety of reasons to create such a trust, but MOST PEOPLE do NOT need to create such a trust, nor can they survive on the funds left behind once an irrevocable trust is created.
Estate and Gift Tax
A common reason to create an irrevocable trust is to avoid the payment of estate and gift tax. Keep in mind, however, that Colorado does NOT currently have estate and gift tax. Federal estate and gift tax affects only the very wealthy. In 2024, the exempted amount will be $13,610,000 per person. Remember also that you can only live on the money NOT put into the trust and, in some situations, the income of the trust. Consulting an attorney is critical if you are of means and have estate and gift tax concerns.
If you have a critical illness and want to remain eligible for Medicaid, you may need to put funds into a trust because there is a cap on how much money you are allowed to own in order to qualify for Medicaid.
For many who try to enroll and are older than the cut off age, there is a five-year look back on eligibility. This means any money given away or put into a trust in the past five years may be considered in determining your Medicaid eligibility. You need to plan ahead.
Old or young, having an excellent estate planning attorney can help you plan for Medicaid by putting some of your assets into a Medicaid trust.
A “spendthrift” is NOT a thrifty person. To the contrary, a spendthrift is a person who spends money in an extravagant and irresponsible way. Spendthrift trusts are meant to protect money from being thrown away, but they DO allow money to be spent on the finer things in life like trips, luxuries, and self care. Spendthrift trusts can help the beneficiary stay eligible for public assistance, such as SSDI, while retaining funds for these special things. Talk to an attorney if you have someone needing public assistance, for example a disabled or elderly person, while wanting to have inherited funds for the finer things. A spendthrift trust may help.
A common misconception is that trusts, either revocable or irrevocable, can protect you from liability from a lawsuit. While it is true that funds you give away for good cannot be touched in the event of an unforeseen lawsuit down the road, you cannot simply give money away to avoid a current or quickly approaching lawsuit. In all events, consulting with an attorney is imperative in creating an irrevocable trust.
Creating a trust for liability concerns is definitely something you should discuss with an attorney. Beware of fraudulent conveyance concerns among other things. See the Fraudulent Conveyance section below. Call Andersen Law PC at 720-922-3880 for a free consultation on this issue.
When you give away something and do not receive “due consideration” (i.e., fair value) for it in order to avoid current creditors or liability in a current or quickly upcoming lawsuit, a court has the ability to set that transfer aside under the doctrine of “fraudulent conveyance.” You need to go over this risk whenever you set up a trust because of liability risks.
For all of the trusts laid out above, my firm Andersen Law PC and I are happy to give you a free consultation on your rights, risks, questions and selection of the right trust and estate plan for you. Call our office at 720-922-3880 or call or text my cell at 303-808-4794 for your free consultation.