There’s a well-known idiom that states “You can’t take it with you,” meaning you leave behind your money and any other possession when you die. It’s a good reminder to enjoy our blessings while we are still here on earth. It is also a hint for older adults that planning for the end of life is an important task that should done sooner rather than later. We never know how long we have.
For this article, we will focus on just the distribution of your finances and possessions. If you’d like more information regarding other estate planning decisions, such as setting up advanced directives or a Power of Attorney, please read our recent blog on the topic.
What is an estate?
Let’s start with the basics. An estate includes items you own like your home, car, clothing, jewelry, and any other asset in your name. Financial assets are also part of your estate, including bank accounts, investments, retirement accounts, and life insurance policies. Any business you own either as a partner or as a sole proprietor is part of your estate. Your estate also includes your liabilities or everything you owe, such as unpaid bills, your mortgage, and business loans.
Your estate is the net worth of your assets minus any liabilities. You may think that you can’t possibly have enough to require the need for estate planning. However, there is no minimum dollar amount required. If you can’t take something with you, it counts as part of your estate, and you can benefit from estate planning.
What is an estate plan?
Not everyone may be looking forward to discussing their estate plan, but it’s one of those tasks that every responsible adult should do to protect themselves and their loved ones. There is no ideal age when you should start estate planning. If you have financial assets of any value, you should consider how you want them handled in the event of your passing.
Estate planning means, in part, deciding what to do with your estate. Estate planning can help minimize gift, estate, income, and other taxes that your estate will be responsible for, taxes which reduce the amount of money that goes to your beneficiaries. The estate planning process allows you to decide what happens if you become disabled during your life, how your care should proceed at the end of your life, and how assets should be distributed after you are gone. If you do not do this while you are able during your life, your loved ones will face some difficult decisions if you are ever incapacitated or after you are gone. Importantly, your assets may go places you don’t want them to go to!
An estate plan can also include your preferences for who you would like to care for any minor children or pets, your healthcare decisions should you become unable to make them yourself, and funeral arrangements.
Fortunately, you don’t have to make these decisions alone. There are professionals who can help you, including your financial planner, an estate planning lawyer for seniors, and your insurance agent. These professionals can offer you options for the decisions you need to make, answer your questions, and prepare the necessary documents you will need. They can also help your loved ones carry out your wishes when you are gone.
Let’s talk about the financial components of estate planning for senior citizens.
Last Will and Testament
A will is a legal document that names an executor of your estate as the beneficiaries of your estate. This person will be authorized to distribute your assets to the beneficiaries you designate. You can name any person you trust as executor. If you have multiple adult children or people you trust, you can also appoint co-executors. An executor does not have to be a family member.
A will should give directions on how your assets are to be distributed and, if necessary, managed for the benefit of the beneficiaries. It may be appropriate to include provisions in your will naming guardians, known as the individual who is responsible for the care of a minor child, and conservators, known as the individual who is responsible for managing money on behalf of a minor child. You could also appoint guardians to take care of your pets. Further, a will may also include your funeral and burial arrangements. Your will goes into effect when you die.
It is vital to review your will whenever you experience major life changes to determine whether you need to update your plan. Events that could trigger a plan review include buying a new house, getting married, having a child, inheriting money, selling a business, or any other major life or financial change.
When you leave a will, your estate will most likely need to go through probate. Probate is the legal process by which a court verifies the will and officially appoints the executor. This will be discussed further below. Your executor will need your lawyer to help with the probate process, which can take anywhere from six to twenty-four months. Because you will need to go to court and file paperwork (known as pleadings), your estate will be a matter of public record.
A living trust is a legal document created during your lifetime that allows a person, known as a trustee, to manage assets for a beneficiary. Like a will, a living trust directs how assets are supposed to be distributed after your death. However, unlike a will, a living trust is active upon signing and can benefit you while you are alive.
There is a common misconception that trusts are only appropriate for ultra-wealthy individuals or families. That is simply not true. You can set up trusts for yourself and for your loved ones regardless of the value of your assets. If you do trust-based planning, you do not need to give up control of your assets. While you are alive, you will “fund” the trust, meaning that you will make sure that the trust owns the asset or is the transfer on death beneficiary (more on that below).
Any asset included in or owned by a trust will not have to go through probate and is available immediately after your death. A trust can help keep assets private and protected from costly litigation.
When establishing a living trust, you will choose between a revocable and an irrevocable trust. A revocable trust can be modified or revoked at any time by you as the grantor. Any income generated by financial accounts in the trust is dispersed to you during your life and counts as income on your tax returns. You can make changes to your trust whenever you want. By contrast, with an irrevocable trust, you generally cannot make changes to the trust document after it has been executed. Further, in many cases, you will be required to give up ownership to the assets in an irrevocable trust. The advantage is you can protect your assets from creditors or predators while you are alive and will face fewer estate taxes when you are gone, which maximizes the amount of money your beneficiaries receive.
In many cases, you may need both a will and a living trust. For example, a trust does not specify guardians for minor children, but a will does. Further, sometimes assets may not get into a trust, in which case you will need to conduct a probate to get them into the trust. It is critical to have both in place to help ensure you’ve covered all your bases.
What is an asset? Your assets are any tangible or monetary item you own and will be leaving behind for your loved ones. That includes bank accounts, real estate, investments, pensions, retirement funds, life insurance, businesses, furniture, cars, art, and Grandma’s wedding ring. Especially for personal property that has sentimental value, if you add more detail into your estate plan about those assets and who should acquire them, you will reduce the likelihood that beneficiaries will fight amongst themselves after you are gone.
We all leave unpaid debt behind when we leave this earth. It could be your mortgage, home equity loans, credit card debt, business debt, or medical bills. Your executor or trustee may also need to file a final tax return if you earned enough income in the year before you pass away. If there is a co-signer on a loan, that person becomes solely responsible for the outstanding debt.
If you use a will-based estate plan, the executor identifies and resolves the unpaid debts through the probate process. The executor is not required to pay the costs out of pocket. If you use a trust-based estate plan, the trustee will identify the debts and determine which need to be paid. Similar to a will-based plan, the trustee is not responsible to pay your debt from their own pocket but can use funds in the trust to satisfy the debt.
Probate is the legal process used to transfer your assets to your heirs. All wills and some trusts must go through probate, but the degree of court involvement vary in complexity and cost.
1. Small estates (under $70,000 and no real property).
Whether or not you have a will when you die, if you have $70,000 or less in personal property (including bank accounts and cash), your heirs may collect your assets without going through probate. This procedure requires the executor collecting your assets to sign a Small Estate Affidavit whereby they swear they are entitled to act on your behalf and will distribute it to any entitled heirs. Importantly, this process cannot transfer real property – if there is real property in your estate, such as your house, your executor will need to go through probate as outlined below.
2. Uncontested estates (informal probate)
This informal process is generally allowed when there is a valid will, no one is expected to contest your will, and there is a qualified executor ready to be appointed. The court has a limited role in the administration but ensures that your directions are followed and provides a venue for your heirs to hold the executor accountable.
3. Contested estates and/or invalid or questionable wills (formal probate)
A formal probate is one where the probate court takes a more active role overseeing the administration of your estate. Formal probate may be required for several reasons, including when a will is contested, unclear, invalid, or when there are challenges in administration. The court may require that the executor get approval for every transaction or allow the executor to administer the estate unsupervised. Both informal and formal probates must be with the court for at least six months, but complete administration may take much longer.
Regardless of the probate process, you should consider assign transfer on death (TOD) beneficiaries for all your assets. If a TOD beneficiary is not assigned, the asset may have to be individually probated by the court, even with if you have a trust-based plan. Assigning a TOD for your accounts can help you avoid the probate process.
Assets that can be transferred using TOD beneficiary forms include but are not limited to:
- Life insurance policies
- Payable-on-death bank accounts
- Payable-on-death savings accounts
- Transfer-on-death securities
- Transfer-on-death real estate deeds
Colorado probate costs depend on the size and complexity of your estate. If you are comfortable preparing the document yourself, you can hire a law firm simply to assist with filing. For informal and formal probates, we suggest consulting professional counsel who can help guide you through the process, file the appropriate documents, and resolve any problems that arise. If you decide to hire a lawyer, the lawyer will keep track of their time and bill on an hourly basis. The fees can increase if the administration of your estate is more complex or if probate litigation occurs.
End of Life Taxes
When estate planning, taxes are an important variable. There are two kinds of taxes to be included in your estate planning checklist for older adults: estate tax and inheritance tax.
Estate taxes must be paid by the estate before any assets are released to your heirs. There is a federal estate tax that applies to estate assets that exceed a certain value as set by Congress. For 2021, this number is $11.7 million or $23.4 million for married couples. There is no additional Colorado estate tax.
Inheritance taxes are paid by your individual heirs. Each heir will pay taxes on the amount of assets each of them receive. This tax rate will vary depending on the state. Colorado does not levy its own inheritance tax. Further, individual heirs receive a step-up in basis on the value of the assets they inherit, meaning that the value of the asset is determined on the date of death of the owner. This can help the individual heir reduce or entirely eliminate any capital gains tax owed.
As we age, we all want to enjoy the things we’ve worked hard to acquire during our lifetime. But it is crucial to take some time to decide what to do with those things when we leave this world. It is also a chance to ensure your loved ones are taken care of when you are gone. There are professionals who can help you create the most effective estate plan that addresses both your needs and your heirs. You can better enjoy your life when you’ve made your plans.
Since opening its doors in 1982, The Osterman Law Firm has proven to be a progressive, client-centered law firm focusing solely on estate planning, wills, trusts, probate, estate administration, and elder law. Denver families rely on our expertise with estate planning for senior citizens and know that we will provide practical advice and a cost-effective approach.