In the fourth post, I discussed the difference between these two types of Estate Plans when it comes to the level of protection you want during any period of incapacity. You can click here to access the fourth post in the Trust Series.
The focus of this post is on how the nature of your assets affects the decision between having a Revocable Trust-based Estate Plan or a Will-based Estate Plan.
Nature of Assets Can Impact Decision
Your responses to the following statements, among others, will help guide the discussion about whether a Revocable Trust-based Estate Plan or a Will-based Estate Plan is appropriate for you.
I own real estate in another state besides Colorado. Yes No
I own primarily non-retirement liquid assets held
in one investment account. Yes No
I am an entrepreneur actively engaged in several businesses. Yes No
Let’s drill down a bit more on each of these statements and see how they can impact the decision-making process.
If you own real estate, such as a vacation home, outside of Colorado, you may be subject to the probate laws of that other state in addition to the probate laws of your Colorado home state. If the real estate outside of Colorado is titled in your name alone at the time of death, probating your Will in that other state will be necessary to transfer title to your beneficiaries. Depending upon the probate laws of the other state, this may or may not involve a court proceeding with the related court costs and attorney fees. If, instead, you create a Revocable Trust and transfer your vacation home to the Revocable Trust during your lifetime, you can avoid the need for a probate in the other state. When death occurs, your beneficiaries will be able to transfer title to the real estate, subject to any rights of creditors, more efficiently and cost-effectively without having to resort to a probate proceeding.
Let’s say you own the vacation home as a joint tenant with rights of survivorship with your spouse or perhaps with a child. I’ll address the pros and cons of owning property in joint tenancy in another post, but for now, if the first of two joint tenants dies, the vacation home will pass automatically to the surviving joint tenant. This is a consequence of owning the vacation home as “joint tenants” under most state laws. But probate could be necessary to transfer title to the vacation home upon the later death of the surviving joint tenant unless the surviving joint tenant creates a Revocable Trust and transfers what became his or her sole property to the Revocable Trust. If the intention is to maintain the vacation home long-term, a Revocable Trust-based plan may be appropriate, even if you and your spouse own the real estate outside Colorado as joint tenants with rights of survivorship.
If your finances involve primarily non-retirement, liquid assets that are consolidated in one investment account, a Will-based plan, coupled with a general durable power of attorney, may be a suitable option. A general durable power of attorney may provide sufficient control and protection during any lifetime incapacity. However, a cautionary note is in order – the account custodian may suggest using its own durable power of attorney form. If this is the case, that form should be reviewed carefully as it may contain provisions restricting or limiting the powers of your designated agent and seeking indemnification for a multitude of actions that generally benefits the custodian and not you. And that is the crux of the issue – whether the custodian will accept the durable power of attorney prepared by your attorney. Colorado law provides enforcement mechanisms so that the directions of an agent operating under a custom-drafted durable power of attorney are accepted by third parties. Nonetheless, if a third party refuses to accept a duly signed durable power of attorney, the time and expense involved in enforcing acceptance (even if the expenses are recoverable from the custodian refusing to accept the durable power of attorney) may outweigh other available options, including a Revocable Trust-based plan which may be considered more acceptable.
Despite some assertions to the contrary, the probate process in Colorado is relatively straightforward and inexpensive and provides some advantages in dealing with creditors over a fully funded Revocable Trust-based plan. In particular, if a creditor of the decedent does not file a claim within a specific period of time after the personal representative has published notice to creditors, the claim is not enforceable. There is no similar procedure in the case of a deceased settlor of a Revocable Trust who has fully funded his or her Revocable Trust during lifetime and has no probate estate.
In deciding upon a Revocable Trust-based plan or a Will-based plan, additional diligence needs to be exercised when planning involves business interests. The business interests may fall within certain categories of income tax-qualified interests for which special rules apply if a lifetime transfer occurs. These same rules generally would apply if the business interests are passed at death to a testamentary trust created under the entrepreneur’s Will. Moreover, the entrepreneur may be a party to buy-sell agreements or other business contracts. These business contracts must be reviewed to determine whether they contain provisions addressing what happens to the business interests upon the incapacity of the owner and the extent to which transfers are permitted during lifetime. These same business contracts generally also contain clauses detailing what happens upon the death of a business owner and will need to be taken into account in planning the entrepreneur’s Estate Plan.
Stay tuned for the next post where I’ll discuss other factors that play a role in comparing and contrasting a Revocable Trust-based Estate Plan with a Will-based Estate Plan.
Working to Preserve Your Wealth and Protect Your Future in a Constantly Changing World.
This post has been brought to you by the Law Office of Barbara Ann Dalvano. This information is provided for educational purposes only and to generate ideas, provoke thought and facilitate conversation. It is not intended to create an attorney-client relationship. Each person’s situation is different and this information should not and cannot be relied upon as legal, tax, accounting or investment advice.
Barbara Ann Dalvano, Esq.
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