Trusts used to be a very popular estate planning avenue. However, times change and Colorado continues to find ways to avoid probate. Therefore, a trust may not be the right option for you. Of course, there are a few exceptions that are briefly addressed here. That said, trusts a legally complex and have risks that you must discuss with a certified public accountant (CPA) and qualified attorney before deciding to have a trust over the other estate options.
Trust vs. Will: Choosing the Right Tool for Your Estate Planning
When planning for the future of your estate, understanding the differences and benefits of trusts and wills is crucial. Both serve distinct purposes in estate planning, and the choice between them depends on your specific circumstances, goals, and the complexity of your financial situation.
Complexity and Cost – Simplicity vs. Comprehensive Planning
Trust: Setting up a trust is generally more complex and costly upfront than writing a will. However, it can offer more comprehensive estate planning solutions, particularly for larger or more complex estates.
Will: A will is usually simpler and less expensive to create. It’s a straightforward way of designating beneficiaries and an executor but lacks the capabilities of a trust in terms of detailed asset management and avoiding probate.
Estate Size and Composition – Simple vs. Complex Estates
Trust: For larger estates or those with complex asset compositions, such as business interests, real estate in multiple states, agricultural land, or special needs beneficiaries, trusts offer a level of detail and control that a will cannot match.
Probate Considerations
There is a myth that trusts are the only way to avoid probate. This is not true. Colorado has adopted several avenues that allow a person to avoid probate. For example:
- Beneficiary deeds
- Transfer or Pay on Death Designations
- Small estate affidavits
Your attorney will review all options during the estate planning process. These options are typically straightforward and less complicated.
Types of Trusts
Generally speaking, there are two types of trusts: living trusts and testamentary trusts. Living trusts are those created during your life and may be revocable or irrevocable. Testamentary trusts are those created within a will and do not take effect until you pass. Then, those trusts break down into other types of trusts.
- Disability Trusts: Established by a guardian or grandparent for the benefit of a person with a disability under the age of 65 that need public assistance.
- Pooled Trusts: Contains individual accounts for people with disabilities who require Medicaid. Pooled trusts can be a cheaper option.
- Third-Party Special Needs Trust: Created by a third party for a beneficiary receiving public benefits. There are no age limits to this type of trust.
Pour-over Wills
An unfunded living trust can be funded by the will at death. In other words, the trust is created during your life but has no assets. At death, your assets pass by bequests through the will.
Estate Tax Considerations
The state of Colorado does not have an estate tax. For the IRS (federal taxes), every person has a lifetime estate tax exemption. In 2024, the estate tax threshold is $13,600,000, which means that there would be no tax to be paid for gifts in that amount or less. This number changes annually. That said, if you have a large estate, a trust may be the perfect option for you.
Medicaid Considerations
This topic is very complicated. A person may be able to create an estate plan that successfully protects their assets from Medicaid and allows them to qualify for Medicaid during their life. It is important to consider how any transfers are made and when they are made because Colorado and the IRS have certain look-back periods. Furthermore, if a transfer of property is made without consideration, that transfer may not be protected. Therefore, if you believe you may be in need of Medicaid, it is important to consult with an attorney sooner than later.
Contingent trusts
A trust with contingencies may be the right choice if you have beneficiaries that need restrictions before receiving the gift. For example, you may want to ensure the person is not using illegal substances before receiving any large sums of money. These trusts clearly articulate the specific conditions or events that must occur for the trust to activate or distribute its assets. These could include age milestones, educational achievements, or other significant life events.
Complementary Nature of Trusts and Wills
In many cases, using a trust in conjunction with a will provides the most comprehensive estate planning. A will can cover any assets not placed in the trust, including last-minute acquisitions or overlooked items. This combination ensures a complete approach to estate planning, addressing various scenarios and providing peace of mind that your assets and loved ones are well taken care of according to your wishes.
Trustees
A trustee is a pivotal figure in a revocable trust in Colorado, necessary from the inception of the trust to manage its assets in accordance with the trust agreement. The appointment of a trustee is mandatory for the operation of a revocable trust, as they are responsible for carrying out the terms of the trust both during the trust creator’s lifetime and after their passing. This role combines fiduciary responsibilities—acting in the best interests of the beneficiaries—with crucial administrative duties like asset management, tax filing, and record-keeping. The trustee’s involvement is essential, especially in making key decisions about investment and asset distribution, while maintaining impartiality and avoiding conflicts of interest. Given their significant legal accountability and the profound impact of their actions on the trust’s effectiveness, selecting a trustworthy and financially astute trustee is vital. This ensures that the trust functions as intended, safeguarding the interests of the beneficiaries and adhering to legal standards.
Need Guidance in Colorado?
If you’re uncertain about whether you need a trust or will or both, our Colorado estate planning attorneys are here to assist. Contact us for a consultation to explore your options and identify the most suitable estate planning strategy for your situation.
Fill out our form or call us at 720-594-7360 to get started.
