Protecting Your Family from Financial Disaster with Proactive Estate Planning

You have probably been thinking for some time now about putting an estate plan in place. You may have even started to take steps to move this forward. But now I want to ask you a pointed (and perhaps undiplomatic) question: Are you satisfied with what you have done about it?

We are going to show you how you can easily take control of your assets and protect your loved ones.

Introduction to Estate Planning

Wouldn’t it be nice to not lay awake at night worrying about whether you have everything in place? Wondering if you have done the right thing to protect your family. You have worked hard your whole life. Very hard.

Take a look around you. You have done well and in turn, may have accumulated things like:

  • A house (maybe two)
  • Cars
  • Life insurance
  • Stocks, bonds, mutual funds, commercial real estate, and other investments
  • Bank accounts

You probably feel as though you should be the one to determine where all these assets that you have worked so hard to accumulate should go after you are gone. You are the one, after all, who knows best who could benefit the most from them and who is most ready to handle receiving wealth. But if you don’t write your plan down, the courts or the government are going to make the decision for you.

What if all of your assets were tied up in probate for months or years before they could be passed on to your loved ones? What if 40% or more of your estate went to the government in estate taxes? Wouldn’t it give you peace of mind to know that there is a solution to these problems? Did you know there is a way you can:

  • Avoid probate? (More on what probate is and how it works later.)
  • Pass on property to the people of your choice?
  • Greatly minimize or avoid estate taxes altogether?
  • Put restrictions on when and under what circumstances a child or grandchild can receive property? For instance, restrictions like attending college and maintaining a certain grade point average before they can receive an inheritance from you. Or maybe you want to make sure an 18 year old grandchild isn’t driving around in a new Corvette because he or she blew his entire inheritance while driving past the Chevy dealership!

There is a solution. The solution is planning. Estate planning to be exact. Estate planning will ensure that your hard earned assets and property pass smoothly and easily to your loved ones. If done right, it can help your loved ones avoid the hassle and expense of probate and potentially avoid or limit estate taxes as well.

What is an estate?

Let’s start with the basics of what exactly an estate consists of. The term “estate” consists of all the property a person owns or controls at their death.

It includes things like:

  • Real property such as houses, condos, and land
  • Personal property such as cars, home furnishings, and bank accounts
  • Collectibles such as art, antiques, and jewelry
  • Life insurance proceeds
  • Investment accounts such as 401(k)s, IRAs, and brokerage accounts
  • Business interests such as corporations, partnerships, etc.

… and the list goes on.

If everything is a part of my estate, then what exactly is an estate plan?

It is a way to determine a series of “what if” scenarios and working through those scenarios. Then, everything is simply laid out in writing, so that when you are gone, or if you have become incapacitated in some way, someone you have named to handle your estate can clearly and easily understand your wishes. That person can then step into action and handle your affairs based on your wishes.

If done properly, this can be done with no interference from the courts or the government. So often, however, people think that a proper estate plan only takes care of what happens to their property when they die? The larger question, and one that most attorneys are unprepared to deal with, is “what happens if I outlive my assets?”

Do I just need a will?

A will does not avoid probate. Of course, a will is better than no planning at all. With no planning at all and no will, your estate would still have to go through probate. But instead of you deciding where your property should go, the state of Colorado will do it for you based on what is called “intestate succession.” At least with a will, you decide where your property will go.

A will does not avoid probate

But carrying out the instructions in a will still requires probate (more on probate later). Wouldn’t it be better if your assets could pass to your loved ones without a court’s involvement? And wouldn’t you like to have a way to exercise some control over how those assets get used even after you have passed away?

What about a living trust?

A living trust is a legal agreement between the individual creating the trust and a person or entity established to manage assets within the trust (the “Trustee”). Most of the time, if you and your spouse establish a trust, you would be the initial trustees of the trust. If you die or become incapacitated and can no longer serve as trustees, you would simply name a series of successor trustees to continue to manage the property in the trust and carry out the objective of the trust.

These successor trustees can be anyone. In a living trust agreement: The trustee is given the legal right to manage, control and invest the assets held in the trust. The trust names people or institutions (“beneficiaries”), such as charities, who are to receive the income and principal on or after the death of the person or people establishing the trust (the “settlors”)

The trustee has a fiduciary obligation, which means he or she is in a position of trust and confidence, and is subject to high standards of performance. Without the settlor’s express written permission, the trustee cannot use trust property for the trustee’s own personal use, benefit, or self-interest. A living trust can be a very important part of an estate plan, and in many cases it is the most important part.

So let’s review briefly. There are three parties to a trust:

  1. The trustmaker (also known as the settlor or the grantor). This is the person or persons setting up the trust.
  2. The trustee. This is a person or entity (such as a bank) who you put in charge of managing the trust assets and eventually distributing those assets to your loved ones.
  3. The beneficiaries. These are the people who receive the benefit of the trust assets. These are your loved ones to whom you would want your property to go.

What are the benefits of a living trust?

The number one benefit of having a living trust is that it will spare your loved ones the hardship and heartache of having to go through a probate proceeding. Probate is the legal process by which a person’s estate is settled in a court. Probate takes on average 18 months which is entirely too long.  It can also be very expensive.

It’s not uncommon at all for people to die with a million dollar estate. Remember, that everything is considered part of your estate. So if you add up the value of real property, bank accounts, IRA’s, 401ks, life insurance proceeds, etc., your estate would have to pay potentially very large attorneys’ fees.

Additionally, the person appointed as executor, would be entitled to compensation as well. And, in the meantime, all of your property is tied up in probate. This means that if you have a house or other property that you would want to go to your loved ones, they would have to wait to take possession of it or sell it. But with a living trust, because you have transferred title to your assets into the trust, you no longer legally own the assets. Your trust does. And it keeps going, after you pass away.

Of course, because you’re the trustee while you are alive, you still have complete control over the assets and can change, amend, or revoke your trust, in whole or in part, at any time. The result? You end up with a very flexible document where you have named trustees, who are responsible for managing the property in the trust, and making sure your property is transitioned smoothly and efficiently to your loved ones (your beneficiaries) without the need for probate. Doesn’t that sound like a win-win? It also makes your estate plan a private event, rather than a public affair. If probate is involved, it becomes public record, inviting every creditor to file against your estate.

Does this mean everyone needs a living trust?

No, there are a few factors to look at when determining whether a trust is appropriate. If the person is at risk to become incapacitated (e.g., they have a degenerative disease) or the risk of death is higher (i.e., cancer or heart disease runs in the family), then no matter what the person’s age, a trust very well may be appropriate. The greater the value of your assets, especially if they include real estate, the greater the need for a living trust.

A young, healthy person with very little assets probably does not need a trust right now (that does not mean that a young person does not need estate planning such as a will and other documents like a power of attorney). But, as someone ages, particularly as they get into their 50s and beyond, it is very important to consider whether a trust makes sense. Older people tend to have more stuff. And of course, sad to say, their risk of death is higher too.

Does a living trust help me if I become incapacitated?

With a trust in place, you have named successor trustees. Their job is to not only act in the event of your death, but also in the event you become incapacitated. Those successor trustees would take over your responsibilities and would begin managing your trust assets for you. If you have not set up a trust or other power of attorney document naming someone to act on your behalf should you become incapacitated, a court would have to name a person to act on your behalf in a guardianship or conservatorship proceeding. This can be a long, drawn out, expensive process. There is substantial, and ongoing court intervention into your financial affairs. This can be avoided by setting up a trust for trust assets and power of attorney documents for everything else, naming an agent to act for you.

How does a living trust benefit me when I die?

Assets held in your living trust at your death can be managed by the trustee of your living trust and distributed in accordance with your directions in the trust. The trustee is also accountable to your beneficiaries for the trust assets held for their benefit after your death. Trust assets would not be required to go through probate, and therefore can be distributed quickly, smoothly, and privately, without court intervention. The cost of setting up and managing a living trust is often far less than the cost of going through probate.

Who should be the trustee of my living trust?

Most people are their own initial trustees. In the case of couples, both may serve together as initial trustees. When one has died or can no longer act, the other person simply continues on as sole trustee. Then, once both people have died or can no longer act, successor trustees would have been named in the trust, who would act to carry out your wishes as established in the trust.

As long as you choose your trustees wisely, there really is no downside to having a trust. The initial cost of setting one up will be higher than a will, depending on how complex the estate is. But, the advantages of not having to deal with the hassles and headaches (not to mention the very high cost) of probate for your family is often worth the extra expense up front.

If I set up a living trust, would I still need a will?

Yes. You would need what’s called a “pour-over will.” Your trust would only control assets you titled to the trust. If for some reason you forgot to transfer a piece of property into the trust, the will would sweep up those assets and “pour-over” those assets into the trust, to be administered and distributed according to the terms of the trust.

It’s particularly important to make sure any substantial assets acquired during your lifetime, find their way into your trust. Also important to note is that a will is the place where you can name a guardian for your minor children should you die. If you don’t name a guardian, a court would have to name one for you, and that may not end up being someone you would have wanted. So it’s very important to set up a will as a part of any estate plan.

I’ve heard I can save on income taxes if I set up a living trust. Is that true?

No. You cannot avoid or minimize income taxes by setting up a trust.

Does a living trust save on estate taxes?

It can. For a single person, it is difficult to minimize or eliminate taxes. However, for married people, certain types of tax planning can be done within the context of a living trust which can postpone, reduce, or eliminate estate taxes. Estate taxes can be substantial (over 40%) and would come off the top of your estate before your loved ones get anything. See a qualified estate planning attorney to discuss your options.

What other estate planning documents should I have?

Critically important to any good estate plan are power of attorney documents. There are three such documents. One is a Durable Power of Attorney for financial decision making. Another is the Medical Power of Attorney, for medical decisions and access to records. And then finally, there is an Advance Directive, often referred to as a “living will,” for end of life decisions. In each of these documents, you name an agent to act on your behalf to make decisions should you become incapacitated. For example, if you were to develop Alzheimer’s disease, and were no longer able to make decisions for yourself, these documents would allow someone you have named to act on your behalf as your agent to make decisions for you.

These documents are particularly important, because without them, a court would have to name a guardian or conservator to act for you. As discussed above, getting a guardian or conservator appointed to act on your behalf is a very long, drawn out process, with substantial court intervention and frequent reporting required. It can be very expensive.

What Next?

If you think it might be time to think through your estate plan, you can:

  1. Give us a call at 303-578-2745 to schedule a “Discovery Session” at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
  2. Get a copy of our estate planning checklist to see where you currently stand.
  3. Learn more by attending one of our free webinars, reading our blog, or watching our videos.