Pet Trusts in Colorado
Clients often ask me if they can provide for their pets in their estate plans. The answer is yes – Colorado does allow for pet trusts – and many people use these as a means to ensure that their beloved companions are provided for if they are either disabled or upon their death.
My dear sweet Master Luke.
Pet trusts are extremely useful in a number of situations. For most household pets, pet trusts are used as just-in-case planning, very similar to naming a guardian in your will for minor children. This ensures that your pets are provided for without burdening your loved ones. For pets with a long lifespan, such as tropical birds, pet trusts may be viewed as a necessity so that pet owners can provide certainty of care for pets that will almost certainly outlive their human companions.
In general, trusts need certain types of beneficiaries before they will be recognized and upheld by the law. Typically, these types of beneficiaries have been either ascertainable individuals or charities. Therefore, historically, it was difficult to provide for the continuing care of pets after death. In the past, estate planning to care for pets involved leaving assets to a trusted friend or family member with the understanding that they would use the assets to care for the pet. Although this method has certainly worked, there have undoubtedly been times when the pets have not been taken care of in the way that their human counterparts would have expected or the pets have not been cared for at all, with the trusted friend or family member using the assets for self-benefit instead of the benefit of the pet. Finally, the most obvious person to care for a pets physical needs may not be the best choice to manage the assets placed in the trust for the benefit of the pet. Pet trusts can accommodate this practical reality.
PET TRUSTS IN COLORADO
Many Colorado estate planners draft their pet trusts to allow pet owners to leave assets for the benefit of their pets as well as to allow the pet owners to designate both a pet guardian to manage the care of the pet and a trustee to manage the assets in the trust and make appropriate distributions to the guardian. Because of this separation of duties, the creator of the pet trust can ensure that the best person is selected to care for the pet and the best person is selected to manage the assets funding the trust for the pet.
SPECIFICS OF THE COLORADO PET TRUST
Under Colorado law, pet trusts operate in the following manner:
- Assets can be placed in trust for the benefit of a pet.
- The trust can be written so that if the pet is pregnant at the time the trust goes into effect, the trust will remain in force to provide care for the offspring of the pet.
- The trust will remain in effect until there is no living animal covered by it, unless an earlier termination is provided for in the trust itself.
- The trustee is not allowed to use any portion of the principal or income of the pet trust for the trustee’s benefit or in any way that is not for the benefit of the animals covered by the trust.
- The creator of the trust has complete freedom to designate where any assets left in the trust upon its termination should go.
- The appropriate use of the trust funds can be enforced by a trust protector designated in the trust instrument, by any person having custody of an animal for which care is provided by the trust, by any beneficiary designated by the trust creator to receive assets at the termination of the trust, or, if none of the above, by an individual appointed by a court if someone makes an application to the court to review the use of the funds.
- If there is ever a situation in which a pet trust comes into effect but there is no trustee able or willing to serve, a court has the authority to designate a trustee and make other orders and determinations so that the intent of the creator of the pet trust will be carried out.
WHEN TO SET UP A PET TRUST
- Pet trusts can be set up at death, at disability, or immediately upon signing a trust instrument.
- Pet trusts are typically set up in a last will so that upon the death of the creator of the will, the pet trust is established and funded.
- However, pet trusts can also be established in a revocable living trust so that upon the disability of the creator of the revocable living trust, a pet trust will be established to provide for continuity of care of the pet or pets.
- Additionally, at any other time, any individual can set up a stand-alone pet trust to establish a trustee and fund a trust for the benefit of a pet.
Pre and Post Nuptial Agreements in Colorado
What is a Marital Agreement?
Pre- and postnuptial agreements (marital agreements) are important tools for couples to manage their assets and avoid conflict, both before and during their marriage and as part of the process of separating if the marriage ends. Prenuptial agreements are contracts executed prior to marriage and post-nuptial agreements are contracts made between the spouses during the marriage, that allow the parties to agree to and delineate the division of assets should a legal separation, divorce or death occur. These agreements are legally binding contracts which can protect both parties by creating a plan that if conscionable will be enforceable and predictable – thereby taking the potential conflict out of the difficult process of separating.
Every couple should consider a marital agreement as a potential tool to enable them to plan for the future, protect their assets and avoid conflict. Couples who do not have a marital agreement are subject to the provisions of the Colorado Uniform Dissolution of Marriage Act, which will determine their rights in the case of separation or divorce; and the Colorado Probate Code, which will determine the rights of the surviving spouse and other heirs, upon death if proper estate planning has not been completed.
How Colorado Law Works for Couples without a Marital Agreement
Individuals that are married and living in Colorado have statutory rights if the marriage terminates by divorce. Colorado law defines two types of property that can exist during the marriage. Separate property is the property owned prior to the marriage, and all property received by gift or inheritance during the marriage. Marital property includes all property earned by either spouse during the marriage, including deferred compensation; and all income and appreciation on separate property, whether realized or not – regardless of how the property is titled.
When a couple divorces in Colorado, each party keeps his or her separate property – if it was kept separate during the marriage and not co-mingled with marital property. If the parties cannot reach an agreement about the division of property during a divorce, the court is directed to divide the marital property in the proportion that it deems just after considering all relevant factors.
In addition to dividing marital property, a divorce court can award maintenance if it finds that one of the parties lacks sufficient income or property to provide for his or her reasonable needs. The amount and length of a maintenance order is determined by the court’s just determination after considering all relevant factors. Colorado courts have been unpredictable in awarding maintenance and thus it could have a significant financial impact on both parties.
Why Should Couples Consider Marital Agreements
Marital agreements can be used to define the parties’ rights in regards to the appreciation of separate property and all marital property accrued during the marriage. Couples who have children from previous marriages are able to provide for these children and protect their inheritance in the event of a divorce from a subsequent spouse. If one of the spouses owns a business, a marital agreement can ensure that the new spouse does not become entangled in the company should a separation occur.
Marital agreements identify, define, and resolve legitimate issues related to the couples’ finances, estate plans and business interests – while the parties are free of the emotional turmoil created during a separation process. Advantages of premarital agreements for both parties include:
Avoiding litigation costs
Protecting against fears of family members such as children from previous marriages
Protecting family assets
Protecting business assets
Protecting against creditors
Predetermined and thus predictable disposition of property
Contents of a Colorado Prenuptial Agreement
A marital agreement may address the following issues:
1. Spousal Maintenance: whether it is waived, set at a predetermined amount, based on years of marriage, etc.
2. Division of property and debts: whether assets acquired after the marriage are kept separate; whether future appreciation on existing assets are separate property; how to apportion pension funds, retirement benefits or other intangible assets.
3. Inheritance: a spouse may agree to waive his or ability to take an elective share of the estate thereby protecting children from a previous marriages’ legacy.
4. Rights and obligations under insurance policies, employee benefit plans, and other assets such as these.
5. Waiver of Rights Upon Death: a common provision in prenuptial or postnuptial agreements designed to prevent probate laws or prior wills from trumping the terms of the prenuptial or postnuptial agreement.
6. Alternative Dispute Resolution: a provision requiring the complaining party to mediate or arbitrate any dispute and preventing him or her from filing a costly lawsuit.
7. Attorney’s fees: who pays for attorney’s fees if the parties are unable to abide by the terms of the agreement.
If the parties have children during the marriage, a marital agreement cannot legally bind either party to agreements made regarding child support, physical custody, parenting time and decision-making authority. The parties may agree on proposed terms for these issues but these terms would be subject to the court’s later approval.
What does a Marital Agreement do?
A marital agreement allows the engaged or married couple to negotiate around Colorado law in order to define separate property and marital property. By means of a marital agreement you can define separate property to include all income from and appreciation on your separate property. You can also protect your earned income by defining that as separate property, so that assets purchased or investments made with your earned income will remain your separate property upon divorce. Thus, by altering the definitions of separate property and marital property from those provided by statute, you can protect not only the core of your separate property which you amassed prior to your marriage, but also the earnings from and appreciation on that property. If you wish to restrict your spouse’s rights upon divorce to your earned income, including retirement benefits, you can do that as well.
Spouses can waive their rights to maintenance payments in a marital agreement or they can agree to a certain amount of maintenance to be paid to the less wealthy spouse in the event of a divorce. However, if at the time of a divorce, the court determines that the spousal maintenance terms in the agreement are unconscionable, the court can render that portion of the prenuptial null and void.
Finally, a marital agreement can allow couples to determine what rights a surviving spouse will have upon the first spouse’s death. For example, in many marital agreements, each spouse waives his or her right to reject the terms of the others’ will and elect to take up to half of the estate outright (depending on the length of the marriage). Such a waiver ensures that the estate plan of the first spouse to die will be honored by the surviving spouse.
Why Couples Choose to Alter Spousal Rights Provided by Law.
Couples choose to alter their statutory rights for a number of reasons. Some people simply wish to have certainty as to property rights and maintenance payments upon a potential divorce. By entering into a marital agreement, they eliminate much of the financial uncertainty associated with a divorce. A fairly negotiated marital agreement can provide some assurance to the wealthier spouse as to the extent of the financial impact of a divorce and provide the less wealthy spouse with some guarantee to his or her entitlement to property distribution and maintenance.
People who have children from a previous marriage may wish to protect their assets for these children’s benefit. A marital agreement that addresses the rights of a surviving spouse can protect the deceased spouse’s estate for the benefit of children from a previous marriage as well.
Sometimes parents encourage their adult children to enter into a marital agreement in order to protect assets owned by the child that were accumulated by previous generations. Usually, a wealthy family wants to ensure that assets that have been gifted to adult children do not become vulnerable to the spouse in a divorce situation.
Enforceability of a Marital Agreement.
Colorado adopted the Colorado Marital Agreement Act in 1986. This statute allows the waiver of statutory property and maintenance rights of spouses either before or during a marriage. Thus, the general statutory rule is that marital agreements are valid and binding contracts. However, one party can have the agreement voided if he or she did not sign it voluntarily or if the other party did not provide a fair and reasonable disclosure of his or her property and financial obligations.
When one spouse challenges the validity of a prenuptial, the court will look at several factors to determine whether the agreement should be enforced. The two most important factors the court considers are the adequacy of the financial disclosure and whether either party was under duress when signing the agreement. Full and complete disclosure of all assets is required prior to the signing of the prenuptial agreement because a party cannot knowingly waive rights unless he or she has sufficient information about the potential value of those rights. Duress is reviewed as a question of fact and the court may consider factors such as the timing of the agreement (i.e., was the spouse forced to sign it right before the wedding, etc.) and whether each spouse had
independent counsel. It is extremely important that both parties have their own legal adviser during the preparation and execution of a marital agreement.
Asset Protection- Irrevocable Trusts and Marital Agreements
Asset Protection- Irrevocable Trusts and Marital Agreements a Brief Overview
When I tell people that I am an estate planning attorney, they often ask about trust planning and wonder if they "need a trust." If a person is engaged in a high risk activity, where they risk having creditor's come after them I explore irrevocable trusts and marital agreements with them as a way to protect their assets.
Irrevocable trusts can provide asset protection by protecting the assets in the trust from the liabilities of trust beneficiaries and the trust creator (or settlor). Assets placed in an irrevocable trust are protected from the liabilities of the beneficiaries if the beneficiaries do not have a certain and defined interest in the trust (the beneficiaries interest is contingent on a future event or subject to the discretion of the trustee); or the trust agreement includes a spendthrift provision which prevents creditors from making claims against the beneficiaries’ interest in the trust and prevents the beneficiaries from transferring or pledging their interests. If the trust language includes these provisions, the only time assets would become subject to the beneficiaries' creditors is after the assets are distributed from the trust to the beneficiary. As long as the trust assets are retained in the trust they are protected and can continue to provide for and benefit the beneficiaries beyond the reach of their creditors.
The irrevocable nature of a trust can also limit the reach of the trust settlor's creditors. Since the trust is “irrevocable” the settlor cannot change his mind and either terminate the trust or take back the trust assets. Upon transfer into the trust, the settlor has no power or authority to change the terms of the trust, use the trust assets or derive any benefit from the trust except as provided in the trust agreement. As a result, in the absence of fraud, generally the creditors of a settlor cannot reach an asset within an irrevocable trust. However, if the settlor retains any interest in the trust or the power to change the trust terms or dispositions, the settlor’s creditors may be able to reach the trust assets to the extent of the settlor’s retained power or interest.
Off-Shore Trusts
Sounding quite glamorous and mysterious, off-shore trusts are trusts established outside the United States in a foreign jurisdiction. These trusts attempt to provide the settlor asset protection, while still allowing the settlor control of the trust and the benefit of the trust assets. Often the asset protection is derived from the fact that it is a difficult undertaking for a creditor to not only obtain a judgment against the settlor’s assets in a foreign jurisdiction but then also to collect against those assets. In fact, some foreign jurisdictions implemented laws to make this process difficult for creditors to thereby encourage settlors to establish trusts in their jurisdictions (i.e., the Bahamas and the Cook Islands). However, some of the same aspects that make these trusts unattractive to creditors also create risk for the settlor, as the assets are located in a foreign country and are subject to foreign laws and regulations. The viability of off-shore trusts has been further eroded by increased reporting requirements for offshore trusts and holdings since 9/11 and recent court rulings such as the Anderson case, wherein the court held that the debtors could be jailed for failing to make assets held in an offshore trust available to the Anderson’s creditors.
Self-Settled Spendthrift Trusts
A self-settled spendthrift trusts (“SSST”) is a form of irrevocable trust that offers greater creditor protection to the settlor while not requiring the settlor to give up absolute control and benefit from the trust assets. Under a SSST, the settlor can be a beneficiary of the trust and can retain certain controls and authorities within the trust, such as the ability to direct investments or change the trust beneficiaries. Once an asset is transferred to the trust, a creditor of the settlor has a limited period of time within which to challenge the transfer as an attempt to avoid a debt and assert a claim against the asset. If the creditor does not make a claim within the proscribed time period, the asset is protected. Even if the settlor later incurs a debt to the creditor, the creditor cannot reach the asset if the claim is not asserted within the proscribed time period. The SSST is now authorized in Alaska, Delaware and Nevada.
Marital Agreements: Separation of Assets Between Spouses
A final technique asset protection technique that may be considered is the separation of assets and potential liabilities between spouses. It may be possible to isolate the risks of one spouse (i.e., liabilities through a job or profession) to only that spouse’s separate assets, thereby gaining asset protection for the other spouse’s separate assets. To achieve this separation, a written agreement between the spouses (a pre- or post-nuptial agreement) that clearly defines the separate property of each spouse is required. Maintaining the separation of assets requires diligent management of assets and resources during the marriage to ensure that no marital property is created. This technique would also only be effective to the extent that in the event of a creditor claim, the debtor spouse can show that the liability was incurred by the one spouse individually and not through a marital undertaking. This type of asset protection planning also has additional ramifications. In the event of divorce, the marital agreement would apply. In addition, this technique could have estate tax consequences. Careful planning is suggested when using this strategy.
Conclusion
When considering taking steps to protect your assets, it is important to keep in mind that no asset protection technique will shield assets from a creditor if the transfer is made in attempt to defraud or hide assets from a creditor with a potential claim. In fact, such attempts may only compound the problem by turning a financial liability into a criminal liability.
It is also important to keep in mind that much like an estate plan, an asset protection plan must be carefully considered and tailored to meet each person’s individual circumstances. With many life-legal planning techniques available and a myriad of ways to apply them, asset protection planning should only be done with the guidance of experienced professionals who can correctly analyze your situation and help you formulate a plan to best meet your needs.
Estate Planning Must Dos Before Summer Vacation
Get your estate planning done so that you can enjoy your vacation knowing your life legal plan is in place!
Summer is fast approaching and most of us have already made plans for our vacations, whether it be a trip home to see family, a trip to an exotic country, or camping in our own home state.
Understandably, most of us put more time into planning our adventures then we do in our estate planning. Its a lot more fun! I can’t tell you how many times clients have reached out just before they take off for a big trip with what I now call the “estate planning itch." Their bags are almost packed, house sitter on board, etc., then the phone call:
“We are leaving next week and are wondering about an estate plan – can you help us quickly get this done.”
Estate planning is a daunting topic to think about. What if something were to happen and one of your family members were to get seriously injured on the trip? What if catastrophe struck? It’s natural to shelve these thoughts and also natural to have them “itch” a little bit. Why not be proactive and address this now. Estate planning itself, is actually not that daunting and can be an important tool in not only getting your affairs in order but also in understanding where you are right now in terms of your life planning. In just a few conversations I can help you sort out and complete your estate planning and almost always clients inform me that it was much easier than they had imagined with great relief.
Here are seven estate planning tasks that you might want to take care of before you go anywhere this summer. That way wherever you go you won’t have to worry about the inevitable estate planning itch.
1. Make a Will
Have you been putting off making a will? Perhaps you don’t think you need one-you do. Or perhaps you don’t think you have enough assets to require one-you still do. These are a few of the many common excuses that could cause turmoil and uncertainty for your family and loved ones were something unforeseen happen to you or a loved one.
Another misunderstanding is that a will is not necessary because the state makes a will for you. True, (these “wills” are actually called intestacy statutes), leaving your final wishes up to the state is fool hardy. The state decides based on order of relation and not on individual and personal circumstances.
I’m not even going to try to touch the tip of the iceberg with reasons for why you need a will. The point is, making a will before you go on your summer holiday will let you rest easier while you’re on vacation knowing your life plan is in place.
2. Check Beneficiary Designations
Almost always, a will is not enough to distribute your assets. Some of your largest assets, such as your IRAs, 401(k) plans or life insurance will be distributed outside of your estate to your named contractual beneficiaries.
Each major financial account lets you designate a beneficiary. Usually you’ll designate the beneficiary on the spot and in a rush while setting up your account. Sometimes your snap decision will be the right one but other times, you might be making your assets more available to certain people than you’d like. For example, do you want your 18-year-old child to have access to your entire retirement savings? Are you certain s/he will spend that large sum of money in the way you’d like him/her to?
It’s worth revisiting who your beneficiaries are in case something happens to you before you travel. This can be achieved via a simple phone call to your agent or representative.
3. If You Have Children, Please Name a Guardian or Guardians
Regardless of whether or not you make a will, you should always name a guardian (or guardians) for your children.
It’s devastating to think about something happening to you before your children grow up, but it’s important to name the friends or relatives who can take care of your children according to your values and beliefs. In Colorado, you can name a guardian to take care of the children and a guardian to take care of the finances if that is appropriate. If you do not name a guardian it will be up to the Court and relatives to decide who will care for your children.
You can also create a Pet Trust to care for any animals that you have, providing funds for their care.
4. Complete your Medical Power of Attorney/Living Will
Sometimes, catastrophe doesn’t mean death. Sometimes, a person is left incapacitated and unable to make decisions about his/her healthcare (being in a coma or otherwise unable to communicate). Who would make the decisions for you if you were incapacitated? If you don't name an agent your loved ones will have to resort to the Court in order to speak to medical personnel on your behalf.
Signing a medical power of attorney and living will also allows you to specify what type of medical treatment you want and don’t want if you are unable to communicate your wishes.
Why is this necessary? Because without this, your family will have to resort to the the court, who will then appoint a guardian to make those decisions for you. That’s costly both in terms of finances and emotional trauma to your loved ones; and you risk that your wishes won’t be adhered to.
5. Make a General Power of Attorney
Your health care power of attorney allows other people to help make medical decisions for you if you’re incapacitated, in conjunction with the wishes you can specify in a living will. A durable general power of attorney is equally important. This person makes decisions about what happens with your assets and other interests when you are unable to manage them yourself. Again, if you don't name an agent your loved one's will have to petition the court to appoint a conservator for you.
6. If your estate plan is complete
Review your fiduciary and beneficiary designations and update them if needed. Are your choices still appropriate? If not make the changes now.
7. If you have children over 18
Once your minor child turns 18, you need to be named as their agent in powers of attorney in order to speak to medical personnel and/or banking and financial institutions, etc. Whether your child is going off to college or you are just simply trying to schedule a vaccine for travel, it’s important to have these documents in place so that you can be there for them if needed.
Your Summer Vacation Awaits You….
Think about how good it would feel to have these legal documents completed. Although chances are good that nothing will happen to you or your loved ones, you don’t want to take the risk that your life plan will be decided by someone other than yourself.
Hoping that your family makes many happy memories this summer!
Medical Power of Attorney - Choosing Your Agent
In completing your POAs its important to choose an appropriate agent. Here are five criteria to think about in relation to choosing an agent for your medical power of attorney.
1. Personal belief: Since the concept of withholding artificial-life support runs contrary to the teachings of some religions and is a very personal decision, it is helpful to find a healthcare agent who understands your feelings in this regard and whose own beliefs are not contrary to your own.
2. Communication: It is important to choose someone you are comfortable speaking with about your health care wishes and it should be clear to you that not only do they understand them but they will be able to communicate these to your health care providers and family members if necessary.
3. Practical reality: Its critical that the person you choose is willing to accept responsibility and agree to act as your agent - "ready and able to serve".
4. Voice: In choosing an agent be sure that they will be able to speak up and stand firm on your behalf - even if faced with physicians who are advising otherwise or other close family members who disagree.
5. Availability: Make sure this person is likely to be accessible and capable of serving as your agent well into the future.
Revocable Living Trusts In Your Estate Plan
Estate Planning: The Use of a Last Will versus a Revocable Living Trust
Many clients come in asking about setting up a Trust rather then a Will for their estate planning. Trusts are very trendy right now, especially in states like California where the probate process is expensive and complicated.
Each of these estate-planning tools has pros and cons. The following information is meant to make sure you understand the differences and enable you to make an informed decision about which estate-planning method is right for you.
When a Last Will is used, it does not become an effective document until death. A Last Will requires the property of the decedent to go through the probate process prior to being distributed. Probate is the process by which a Last Will is presented to the court, the court authorizes the representative of the estate to take possession of the decedent’s assets, the creditors of the decedent are notified, and, approximately four months later, the representative pays the creditors and then distributes the assets to the intended beneficiaries.
When a Revocable Living Trust is used, the assets titled in the name of the trust are not part of the decedent’s estate, and do not need to go through the probate process. As soon as the individual who set up the trust dies, the alternate trustee named in the trust is entitled to take control of the assets without any court involvement. Importantly, this process also happens when the person who set up the trust becomes incapacitated.
Colorado has an informal probate process. The probate court is minimally involved with the process, and thus most probates here are both inexpensive and efficient. However, as noted above it does take about four months to complete the process. In a Revocable Living Trust based plan, the immediate ability of the alternate trustee to access the assets in the trust upon the incapacity or death of the settlor of the trust is definitely an advantage if time is a consideration.
If you choose to use a revocable-living trust based estate plan, your personal residence, vacation home, and investment accounts and other types of property are usually transferred into the name of the trust, requiring retitling of these assets, but tax advantaged retirement accounts are usually not. This process of retitling the assets is one of the two disadvantages of using a Revocable Living Trust when compared to a Last Will-based estate plan. The second disadvantage to the Revocable Living Trust is that it is typically more expensive than a Last Will based plan.
I generally recommend a Last Will based estate plan here in Colorado because of our informal probate process. I recommend a Revocable Living Trust based plan to my clients who meet any of the following criteria:
➢ complex asset management needs or diverse types of investment assets since Revocable Living Trusts provide a very strong asset management tool;
➢ property outside the state of Colorado (since such property can be placed in the Trust, no additional probate proceeding will need to be opened in the other states);
➢ the need for privacy (Wills are filed at death and become pseudo-public documents) or the wish that their at-death disposition not be public; and
➢ impending disability (at the disability of the individual, the alternate trustee will be able to take control of the assets in the trust).
Feel free to call or email me if you have further questions regarding the differences between these two types of plans.
Colorado Advance Directives and Do Not Resuscitate Orders FAQs
Medical Power of Attorneys, Living Wills, DNRs, CPR Directives. Many clients want to make sure their medical choices are adhered to if they are unable to speak for themselves. To help them understand the basics - what are these documents and what do they do - I have written a brief summary, below. I strongly recommend that all of my clients, friends, and family have these documents completed so that their choices are honored about the care and control of their health care treatment if they cannot speak for themselves. This also avoids the terrible and onerous burden of having their close family members or friends have to go to court to obtain an order allowing them access to the care and treatment of their loved ones, should something happen, if these documents are not complete.
What is an advance directive?
An advance directive tells your doctor what kind of care you would like to have if you become unable to make medical decisions (for example, if you are in a coma). If you are admitted to the hospital, the hospital staff will probably talk to you about advance directives. If you are not hospitalized these documents are still important to have on hand.
A good advance directive describes the kind of treatment you would want depending on how sick you are. For example, the directives would describe what kind of care you want if you have an terminal condition or illness that you are unlikely to recover from, or if you are permanently unconscious. Advance directives usually tell your doctor that you don’t want certain kinds of treatment. However, they can also say that you want a certain treatment no matter how ill you are.
Colorado’s advanced directives are called Medical Powers of Attorney. The signer is making statements in advance about his or her preferences for medical care should he or she be unable to speak for themselves.
What is a medical power of attorney?
A medical power of attorney (POA) for health care states whom you have chosen to make health care decisions for you by allowing you to name an agent to step into your shoes and also allows you to express legally binding decisions about end of life choices. It usually becomes active any time you are unconscious or unable to make medical decisions. A POA is legally binding, so long as the named agent is present. If the agent is not present then the medical personnel will look to the language and wishes expressed in the living will and most likely adhere to the wishes expressed therein.
What is a living will?
A living will is another type of advance directive. It is a written, legal document that describes the kind of medical treatments or life-sustaining treatments you would want if you were seriously or terminally ill.
If your agent for medical power of attorney is not available to speak on your behalf the medical personnel will generally adhere to the wishes expressed in a living will, so long as it is properly executed per Colorado statute.
What is a do not resuscitate order?
A do not resuscitate (DNR) order is another kind of advance directive. A DNR is a request not to have cardiopulmonary resuscitation (CPR) if your heart stops or if you stop breathing. Unless given other instructions, hospital staff will try to help any patient whose heart has stopped or who has stopped breathing. You can use an advance directive form or tell your doctor that you do not want to be resuscitated. Your doctor will put the DNR order in your medical chart. You both must sign this form in advance.
A medical ID allows you to communicate your choice when you cannot speak for yourself. A DNR request is usually made by the patient via a valid form, bracelet or agent named in the medical power of attorney, and allows the medical teams taking care of them to honor and adhere to the patient’s wishes.
In Colorado, CPR and advanced cardiac life support (ACLS) will not be performed if a valid written DNR order or CPR directive form is present. In Colorado, it is typical for emergency medical services personnel who are presented with a valid DNR form, signed by your doctor, or who identify a standard DNR bracelet on you, to comply with the DNR order.
Advanced Directives are an important part of your life planning necessities.
What is a CPR Directive
A CPR directive is similar to a DNR order. The Colorado CPR directive must be signed by both the individual and his/her physician. CPR directives must be immediately visible to emergency personnel. At home, the best locations are right by the front door, on the refrigerator, or by the bedside of a home-bound individual.
For more active clients with strong feelings about CPR directives, I recommend a special no-CPR bracelet or necklace that can be purchased from the Award and Sign Connection or MedicAlert Foundation.
Should you complete your advance directives?
By completing your advance directives, you are making your preferences about your medical care known before its too late. This will spare your loved ones the stress of trying to make decisions about your care and you receiving care against your wishes or beliefs. Any person 18 years of age or older can and should prepare their advance directives. Parents who send their children off to college should make sure the kids have medical POAs completed, so that should something happen they can make medical decisions for their children without having to get a court order for guardianship or conservatorship – same with adults with elderly parents, spouses, and single people.
Review your estate plan to make sure it still fits your life plan.
Many clients have an estate plan in place - but for these documents to really serve the purposes they were created for they sometimes need to be updated as life circumstances change and time marches on.
Periodically reviewing your plan estate plan ensures it accurately reflects your current life plan - both your present needs and your goals going forward. Make sure you review and update your estate plan if your personal or financial situation changes or if a number of years have gone by and for instance your minor children now have children of their own.
Some of the most important triggers for updating your estate plan include:
Divorce. Once your divorce is finalized, your plan should be revised as quickly as possible to reflect your current situation. In addition, you can take steps to protect your heirs from potential future relationships that might impact their legacy unintentionally.
Re-Marriage. If you and your new spouse both have children from a previous marriage or relationship, working with an estate planning attorney is essential to navigate the complexities of providing for the children of both parents.
Birth or Adoption of Children. In addition to providing for your children’s financial future, any good estate plan will also allow you to appoint a legal guardian (both for finances and physical care) in the event you and your spouse die or are incapacitated. The guardian designation should be updated as needed depending on circumstances and should always reflect the best interests of the child/children NOW.
Illness or Injury. If you or one of your family members becomes seriously ill, you may want to consider changing your plan to reflect increased needs and or the creation of trusts for special needs, etc.
Changes in Tax Laws. Tax laws are constantly changing and can dramatically affect your estate plan. An estate lawyer can help ensure that your plan takes advantage of new legislation and makes sure you have a viable, current asset protection plan in place so that your estate avoids taxes as much as possible.
Inheritance. If you receive a large inheritance, this could shift your estate planning considerably. The increased value of your estate may cause you to change how your assets are distributed upon your death, as you might want or need to add trusts for your beneficiaries and or more charitable contributions or both.
These are just a few examples of when a meeting with your estate planning attorney is in order to make sure your estate plan meets your life plan. I am happy to discuss my client's current plans with them any time they feel the need for such a review: and always available to review a new client's "old plan" as part of my complimentary initial consultation.
Estate Planning and Personal Effects
Who gets mom's wedding ring?! When clients hire me to create their estate planning documents, we have a thorough conversation about their assets, how they are held, and to whom they want them to go to. This conversation is focused primarily on the large assets, such as the family home, retirement accounts, insurance policies, other properties and investment accounts. Part of the initial estate planning process is to really look at these and then clearly designate beneficiaries.
Inevitably during this discussion, the client’s personal effects come up. In Colorado, personal effects, such as grandmother’s antique ring, grandfather’s favorite chair, mom’s jewelry, dad’s watch, etc., can be designated in a separate Memorandum of Personal Effects that is incorporated into the Will by reference. This allows my clients to keep a running inventory of bequests and beneficiaries for personal times that can be changed over time.
I provide this memorandum as part of the estate planning notebook I create for my clients. The Memorandum, referenced in the Will, is binding and it simply has to be dated and signed. This allows the personal representative or family members peace of mind and ease. It avoids the stress and conflict of having to figure out who gets what. An analogy I recently read about in the New York Times is that without this Memorandum, its like waking up to a house full of kids on Christmas morning and having no name tags on any of the wrapped gifts – chaos! To read this article click here.
The article, references a workbook called Who Gets Grandma’s Yellow Pie Plate, by Marlene Stum. She says that the process starts with recognizing that dividing up a loved ones’ belongings is laden with emotions and can be a real mine field for family members and friends. The workbook helps sort out the process by helping people:
- Determine what you want to accomplish, decide what's fair to your family.
- Understand belongings have different meanings to different individuals.
- Consider distribution options and consequences
- Agree to manage conflicts if they arise.
To learn more about this workbook, click here.
In representing my probate clients, I have seen sibling relationships torn apart because they don’t agree about how to divide up the personal property of the deceased. My clients that are appointed as personal representatives really struggle, during a time of personal grieving, to try to figure out how to divvy up personal effects fairly, without hurt feelings.
All of this can be avoided with an estate plan that provides for a Memorandum of Personal Effects. I advise my clients to use this Memorandum as a living, breathing document that they can continue to add to and change as time goes by. So when a loved one expresses a sentimental attachment to a certain item, my client can simply add that to their Memorandum and know that that beneficiary will receive that heirloom.
Writing a "last" letter when your healthy
I recently read an article in the New York Times that I thought was important. I work in estate planning and so I meet with people all the time to discuss their end of life wishes in regards to both the care and control of their body should they become incapacitated and who they want to inherit their estate when they die. Inevitably, as we discuss these important issues, we end up talking about and exploring their own views on both death and family. I feel very blessed to participate in these conversations as I learn so much about life and the myriad of ways that it unfolds. What is always apparent and such a constant teaching for me is that each of us is unique and all of us are full of love. Sometimes the decisions are clear and easy and sometimes my client's really struggle with filling in the "estate planning blanks" such as who they would like to serve as their personal representative, who they would like to serve as their agent for their medical power of attorney, etc. Once my services are complete, I advise my clients about how to let their loved ones know where their documents are and to make sure their agents understand their wishes by having conversations with them about the documents that I have prepared. The one thing that I am missing in these conversations because it is not a "legal issue" is that other conversation: what is left unsaid that you would like to to say to your loved ones. In this article from the New York Times, I learned that there is a letter writing project that encourages people to write to their loved ones. The template allows people to complete seven life review tasks: acknowledging important people in our lives; remembering treasured moments; apologizing to those we may have hurt; forgiving those who have hurt us; and saying “thank you,” “I love you” and “goodbye.”
Here is the link to the article in the Times. Here is the link to a template for people who are seriously ill. Here is a link for healthy people who want to leave a letter for their loved ones.
What a great gift both for the letter writer and the recipients - I intend to tell my clients about this from now on - this is an idea worth sharing!
Beneficiary Deeds In Colorado - Avoid Probate for Small Estates
Beneficiary deeds can help avoid the need to probate small estates. Under Colorado’s simplified probate process, Colorado's probate code allows the beneficiaries of an estate to collect the estate assets by using a small estate affidavit, rather than a going through a full probate procedure, if the estate consists only of personal property with a value not exceeding $64,000.00 in 2016.
No such procedure is available in Colorado to clear title to real property at death. However, if a beneficiary deed has been filed prior to the death of the property owner, marketable title to the beneficiary can be transferred after death, without the need for probate administration. The beneficiary deed transfers the property outside of the estate and the value is not included in the estate.
Colorado’s beneficiary deed statute carefully defines the interest of the beneficiary in order to protect the rights of other parties interested in the property. First, during the lifetime of the owner who grants the beneficiary deed, the beneficiary has no legal right or interest to the property whatsoever, and the owner retains full power and authority with respect to the property without the need to notify or obtain the consent of beneficiary for any purpose. The beneficiary deed also provides an alternative method to transfer real property to an owner's trust at death, avoiding issues with lenders that might occur when mortgaged property is transferred to a trust during an owner's lifetime.
Under Colorado’s beneficiary deed law, the beneficiary deed must be recorded before the death of the owner. If not recorded before the death of the grantor, the property will then eschew to the deceased’s estate. A beneficiary deed can be revoked during the owner's lifetime by recording a revocation of the deed, or by recording another beneficiary deed executed after the revoked deed. A subsequent beneficiary deed revokes all beneficiary designations in their entirety, even if the subsequent deed doesn't convey the owner's entire interest in the property. At the owner's death, the most recently executed beneficiary deed or revocation of all beneficiary deeds or revocations recorded before the owner's death controls. It is important to note that if there is an effective beneficiary deed in place at the owner's death, the owner's Last Will does not control disposition of the real property, regardless of the date of the Last Will.
An owner of an interest in real property in joint tenancy may execute and record a beneficiary deed, but the deed is only effective if the joint tenant-owner is the last joint tenant to die of all the joint tenants. If the joint tenant-grantor is not the last joint tenant to die, the beneficiary deed is not effective at his or her death, and the grantee-beneficiary does not become a joint tenant with the surviving joint tenants. The law specifically provides that a beneficiary deed does not sever a joint tenancy.
The grantee-beneficiary named on a beneficiary deed effective at an owner's death does not immediately receive marketable title. The grantee-beneficiary's interest is subject to all conveyances, encumbrances, assignments, contracts, mortgages, liens and other interests affecting title to the property, regardless of when they were created, as long as notice of the interest is recorded within four months after the owner's death. After this four-month period, the grantee-beneficiary can pass marketable title to a purchaser of the property. However, the grantee-beneficiary may remain accountable for the proceeds of the property to persons interested the owner's probate estate for up to three years. If the probate assets are insufficient to cover claims by creditors, by a surviving spouse or children for statutory allowances, or a Medicaid recovery claim, the personal representative may bring a proceeding against the grantee-beneficiary to recover a share of the equity in the property, to the extent necessary to discharge the claims. The personal representative must begin such a proceeding within one year after the death of the deceased owner. Other persons whose claims against the grantee-beneficiary might be brought as late as three years after the owner's death can be barred earlier, if the owner's death certificate is recorded in the real property records.
The beneficiary deed statute specifically provides that a person cannot qualify for Medicaid assistance if the person has a beneficiary deed in effect. To ensure that a revocation can be made should a person require Medicaid assistance, any person executing a beneficiary deed should also execute a power of attorney specifically authorizing an agent to execute and record a revocation of any beneficiary deed, if necessary for purposes of qualifying for Medicaid.
Shimer Law can answer your questions about the possibility of using a beneficiary deed in your estate planning to avoid probate and ensure that your real property passes as you intend it to.
Disclaimer -- Content is general information only. Information is not provided as advice for a specific matter, nor does its publication create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.
Estate Planning is Life Planning!
Having an estate plan in place is an important part of your life plan - if not for you, for your loved ones!
Regardless of whether a loved one in your family is facing a debilitating disease such as Alzheimer’s, ideally you should have your legal planning in place for such an event – thereby taking one less major stressor off the table should something occur. Legal life planning should include: Estate planning documents including Last Will, Powers of Attorney and Living Will. If you have already completed these documents then it is important to review existing legal documents and make necessary updates. This allows you and your family to:
- Make legal plans for finances and property
- Put plans in place for enacting your future health care and long-term care preferences
- Name another person to make decisions on your behalf when you no longer can
At a minimum your estate planning documents should include:
General durable power of attorney . The power of attorney allows you (the principal) to name another individual (called an attorney-in-fact or agent) to make financial and other decisions when you are no longer able. A successor agent or agents should also be named in case the original agent you choose is unavailable or unwilling to serve. Power of attorney does not give the person you appoint (agent) the authority to override your decision making. You maintain the right to make your own decisions, as long as you have legal capacity. A durable power of attorney for finances/property allows you to designate another person to make decisions about your finances, such as income, assets and investments, when you can longer do so.
Power of attorney for health care. A power of attorney for health care allows you to name a health care agent to make health care decisions on your behalf when you are no longer able.
Health decisions covered by the power of attorney for health care include:
- Doctors and other health care providers
- Types of treatments
- Care facilities
- End-of-life care decisions, such as the use of feeding tubes
- Do not resuscitate (DNR) orders
Discuss your wishes regarding care with your chosen agent early and often to make sure that this person understands your wishes and is willing and able to act on your behalf when the times comes.
Living will . A living will, a type of advance directive, expresses your wishes for what medical treatment you want, or do not want, near end of life, such as life-prolonging treatments. In Colorado, this document should be respected and adhered to by medical personnel so long as it has been signed in front of two witnesses and notarized. It is a document you should prepare and sign before any disease such as Alzheimer’s progresses.
Last Will and Testament. Your Last Will and Testament provides information about how your estate will be distributed upon death. In your will, you may name a personal representative, the person who will manage your estate, and beneficiaries, the person(s) who will receive the assets in the estate.
Demystifying Trusts
Planning our estate with Wills and Trusts.
I can’t tell you how many times I get calls from people who want to create a trust of some kind as a part of their estate plan. There are many types of trusts and they all serve different purposes. I have created a summary of the most common types of trusts and what they are used for as a basic guideline to help dispel some of the myths around “trusts” and how they are used. There are many different asset protection tools available, including LLCs and family partnerships and so trusts are an important vehicle but not the only way to protect assets. As an estate planning tool, trusts are an important planning technique but not always either necessary or advisable. If you are curious about trusts and how they are used, I hope the summary below gives you some helpful information.
First, there are revocable trusts and irrevocable trust. Revocable living trusts are generally used as part of an overall estate plan and are important planning tools in Colorado when a client has assets in multiple states or a very complex asset structure, has an imminent disability that would require a successor trustee to be able to step in seamlessly, or has a need for privacy. While probate avoidance is important in some jurisdictions, Colorado has an informal and relatively simple probate process that can make the expense of trust set up contraindicative for simple estates. Revocable living trusts do not shelter assets from the creditors of the settlor and become irrevocable upon the death of the settlor.
An irrevocable trust cannot be modified or revoked after it is created. Examples of these are Irrevocable Life Insurance Trusts (ILIT) or Asset Protection Trusts, which can be set up in jurisdictions such as Nevada or the Cook Islands that have trust protection laws. ILITs are generally used as an estate planning technique for those who find themselves in the position of having taxable estates ($5.43 million in 2015) and Asset Protection Trusts are used to make sure that future creditors can never access the Trust to satisfy a judgment against the settlor.
Charitable Remainder Trusts are set up to benefit a nonprofit organization. These are used as an estate planning technique and can help avoid the estate being taxed and gift tax implications. The settlor receives benefits during his or her life and also receives the intangible benefit of being recognized by the charity beneficiary during his or her life.
Special Needs Trusts are set up for people who are disabled and receiving government benefits. The disabled beneficiary cannot control the amount or frequency of the trust distributions and cannot revoke the trust. Parents of a disabled child can establish a special needs trust as part of their estate plan and not worry that their child will be prevented form receiving necessary benefits when they are not their to care for their child.
There are many other types of trusts, including Spend Thrift Trusts which are created to protect a beneficiaries’ interests from creditors, Tax By-Pass Trusts, Totten Trusts, etc. If you are curious about whether a trust might be an important tool to manage your assets, I would be happy to discuss the various types and how they might or might not be applicable to your situation.
Talking to adult children about your estate plan
If you’ve done your estate planning and have adult children (single, married, divorced, with or without children), its important to let them know that you have taken care of this. It would be courteous to let your children know: Where your documents are located, both copies and originals.
Whom you have chosen as your fiduciaries, such as agents for powers of attorney, personal representative, and trustees.
It would also be helpful if you can convey to them your wishes should you become disabled.
You may wish to discuss the nuts and bolts of your plan in more detail with them, this is a personal matter, and you may decide to not disclose this at all.
However, it might be wise to discuss any areas that might cause conflict in the family up front and address this with the parties now to avoid future contention. If there are any anomalies in your estate plan, such as leaving money to a more distant relative or choosing to favor one beneficiary over others, it’s a good idea to talk about this – that way there will be no hurt feelings or surprises when the estate plan is implemented and you are unable to explain your reasons for the choices you have made.
Talking to elderly parents about estate planning
How to talk to your parents about their estate planning. Its an old adage and maybe even a cliche - we don't talk about whats in the Will and its not polite to bring up aging or death with our elderly loved ones. Yet it is important and necessary. You need to know if they have a plan and where the documents are kept in case something happens. Here are some guidelines to help navigate this awkward conversation with your parent or parents.
- Your intention. Make it clear that your intention in bringing this topic up is to understand their wishes so you can help make sure that they are carried out. If they don’t have a plan it is to encourage them to contact a professional who can help them implement one – tout suite.
- Their privacy. Your focus in this conversation is not to provide them with advice or haggle over the details of their arrangements, but to make sure that they have a plan and that you are able to locate it should something happen.
- Concerns that need to be addressed. This conversation is about them. Are they happy with the arrangements that they’ve made; is there potential for conflict amongst their chosen beneficiaries and if so how can this be averted; are they comfortable with the fiduciaries that they’ve chosen or does this need to be updated. If they don't have a plan why not, what are their fears or reasons for procrastinating and how can you and your siblings help.
- Include your own circumstances if applicable. If you are in a position where receiving money in trust is important or might be important in the future, convey this or other particular concerns to your parents.
- If you have siblings keep them in the loop by letting them know you are concerned and are addressing this with your parents.
Ways to break the ice include talking about:
- Planning gone awry. Talk to them about estate planning horror stories that you have heard on the news (a little celebrity gossip can’t help but break the ice, think Georgia O'Keeffe, Steig Larsson, Thomas Kincaid, etc. ) or through your own experience (your neighbor so and so…).
- Your own planning. If you’ve done your own estate planning it might be helpful to share with them your experience and what you have decided in regards to fiduciaries, etc., as a way of both breaking the ice and so that they know what your own plan entails and who has been designated to implement it.
If there is no planning in place:
- If your parents do not have estate planning in place encourage them to seek counsel and get it done. Many clients that I work with are so pleased to finally get this out of the way and express that this is something they have been thinking about for “a long time” and their relief and boost in confidence about the state of their affairs is palpable. Gently remind them about the added expense, stress and conflict caused to family members if a person dies without estate planning. I do not recommend putting pressure on them about this - ultimately its their estate and their responsibility but at least having this conversation in a gentle way might encourage them to tackle this task.
Seniors Getting Married - Estate Planning Considerations
Seniors getting married and estate planning.
People are getting married later in life. Marriages, with one or both spouses being seniors, retired, and having grown children, have become quite common. And while its fantastic to know that love can blossom at any age and usually children and grandchildren are happy that their parents have companions to spend their later years with, these marriages require unique estate planning considerations.
Estate planning for later life marriages is complicated for a number of reasons. These "senior" marriages can directly impact the inheritance of the children and other family members on both sides. Remarriages also can affect a spouse’s right to alimony payments from a prior spouse, retirement benefits, social security benefits, health insurance, and the spousal medical care obligations. Its important for both spouses to clearly address who their assets are intended to benefit, whether it’s the new spouse, the children and families or a trust – both while the spouses are alive, upon the death of one of them, and when both die.
Other considerations that should be addressed as a part of the estate planning process should include whether long-term care insurance is needed; should income and assets be blended or kept separate; how the primary residence is treated both during life, and upon the death of one spouse, and then both spouses; is a post or prenuptial agreement necessary or advisable as part of the estate planning process; how do the parties wish to pay for future medical expenses (for example, is it advisable to deplete the assets of one spouse first).
People in later year marriages also should consider the conflicts that could arise between the spouse and children should agents named for medical and general powers of attorney need to act. The best way to avoid this is to think these conflicts through in the planning phase and coordinate the choice of fiduciaries in the documents – with the fiduciaries having a clear understanding of the spouse’s agreements to the later life marriage concerns, as delineated above.
Intestate Rules for Non-Married Individuals In Colorado
Singles (aka non-married individuals) often procrastinate about estate planning. If you are one of my friends or colleagues who fall into this category here is a brief summary of who will inherit your assets should something happen to you. By taking the mystery out of what happens I am hoping to alleviate some of the worry and maybe even encourage some proactivity in this regard.
Colorado's intestacy rules are similar to the rules found in other states but don't provide for inheritances by remote relatives, such as distant cousins. State laws set the inheritance rules for the estate of a person who died intestate; however, these rules don't take the financial needs of his heirs into consideration.
If a non-married individual dies with children, their children inherit their estate. If a non-married individual dies with no children then surviving parents inherit his/her entire estate. If both parents are dead, the estate goes to the parents' surviving descendants: for example, the siblings of the deceased person. Surviving grandparents may inherit the estate if the parents have no surviving descendants. If both grandparents are dead, their surviving descendants inherit the estate. In cases where the deceased person's parents and grandparents left no surviving descendants, the estate may go to the state of Colorado.
Colorado's laws allow inheritances by a birth parent who adopted out the deceased person or any birth children the deceased person put up for adoption, but only to prevent the estate from going to Colorado because of a lack of heirs.
Not all property is subject to Colorado intestacy rules, some of it if properly designated/titled can pass out of these intestate rules. Money from retirement accounts, such as 401(k) accounts, and insurance plans go to the person named as the beneficiary on the account or plan paperwork. Property owned with another person as a joint tenant —the family home, for example—belongs to the surviving owner. Any property transferred to a living trust belongs to the trust and isn't subject to intestacy laws. Bank accounts that have another person designated to receive the funds if the account holder dies—known as "payable on death" accounts—pass to that designated person.
Estate Planning For Single People
Single people without children often avoid estate planning and the challenges associated with it, because of feeling overwhelmed or unsure. This is unfortunate because its even more critical for single people to plan ahead and name their fiduciaries and beneficiaries as there is no clear cut answer for their loved ones should something happen.
The following questions should be addressed:
To whom should I leave my assets?
Do I need to consider creating a trust to manage my assets now or for my chosen beneficiaries in the future?
Who should be my personal representatives and/or trustees?
Who should be my agents for my medical and financial powers of attorney?
If you are a single person without young children, you can leave your assets to whomever you choose, including but not limited to your partners, relatives, friends or charitable organizations. In Colorado, you can also create Pet Trusts and name trustees to care for your animals. If you do not have an estate plan in place, the state will dictate who will inherit your assets. A recent case in point, the author of the Girl With the Dragon Tattoo series, Stieg Larrsen did not have an estate plan and as a result, his estranged father and brother, whom he had not spoken to for over 20 years before his death inherited his entire estate and all royalties thereof while his long-time love and assistant, whom he had lived with for 20 years was cut off, receiving nothing.
Selection of the right personal representatives and trustees is also essential to successful estate and trust administration. Who do you trust to administer your estate, especially if your relatives live far away or are unfamiliar with your affairs? In addition, health care and financial powers of attorney are very important documents to have in place since you may need these agents to make crucial medical decisions on your behalf as well as control your financial matters if you are ever unable to do so on your own because of disability.
Estate planning for a single person often demands more attention to detail than estate planning for married persons or single persons with children or grandchildren - because there is no obvious answer. A Will is usually sufficient for unmarried persons with smaller estates, but a Living Trust may be a better option for persons with larger estates (click here to read about Living Trusts). Your estate planning documents should be reviewed regularly, particularly when there have been changes in the law or in your personal situation. As a single person, it is very important that you understand how your assets are currently held and how they will pass after your death.
Bonus children (also known as stepchildren) and estate planning
I have a dear friend who refers to her stepchildren as her bonus children and I think it is a beautiful way to describe a family with children from a former relationship and so I have adopted this term here. Many clients form new relationships with bonus children-- that is, a family where one or both spouses have children from a previous relationship. Estate planning for these families can present unique challenges. It’s challenging to combine the interests of a current spouse and any mutual children with the desire to provide for one's children of a previous relationship.
Hopefully, the children of the prior relationship are an integral and loving part of the new family relationship, looked upon and treated by both spouses as if mutual children. However, there may be estate-planning issues about the bonus children and the new spouse, which could raise a number of concerns. For example, usually spouses leave their assets to each other first and then the children after both spouses are deceased. If all assets are left to the new spouse, the prior children may not be provided for, as the deceased spouse would have wished, since there is no legal obligation to support stepchildren. In addition, the surviving spouse may, at his or her death, leave all the assets to a new partner or his or her own children, to the exclusion of the children of the first spouse to die. On the other hand, if assets are left for the prior children at the death of their parent, there may not be sufficient assets remaining to provide for the current spouse or family.
Even with a harmonious family with bonus children, lack of planning may lead to unforeseen difficulties. In cases where death occurs without a will or trust, statutory intestacy rules may remove from the current marriage up to one half of the deceased spouse's estate and give it to the children from the previous marriage, even if the prior children are all grown and in less need of the assets than the spouse and minor children of the current marriage. If the prior children are minors, an ex-spouse may gain control of the assets. Finally, there just may not be enough assets available to adequately provide for the needs of all the members of the family.
Estate planning is an excellent way to create clarity in the family of bonus-children partners – with the couple agreeing to and spelling out what goes to whom - when. At a minimum, each spouse should have a Will. Otherwise, assets may eventually (upon the death of the second spouse) be distributed in a manner contrary to what the parties intended (the old third-party interloper scenario comes to mind).
A more proactive approach is to use a trust to provide for the surviving spouse, and still protect a portion of the assets for the children of a prior marriage. This type of trust is known as a Qualified Terminable Interest Property (QTIP) trust. Property passing to a QTIP trust is eligible for the marital deduction, so the property is not taxed at the death of the deceased spouse, leaving the entire amount available for the surviving spouse’s support. Such a trust can generate income for the benefit of the surviving spouse during his or her lifetime. At the death of the surviving spouse, those assets could then be distributed among the mutual and/or prior children pursuant to the wishes of the previously deceased spouse.
If the children from the previous marriage are young, after the death of the surviving spouse, the assets from the QTIP Trust can be held in a further trust for the children, under the control of an independent trustee, to ensure that the assets do not fall under the control of an ex-spouse.
It is not uncommon for a client with a much younger spouse to create benefits for the children from the prior marriage by purchasing life insurance. In such a case, rather than requiring the children to wait many years until the death of their step-parent to receive benefits, the client purchases a life insurance policy that is made payable to the children so they receive those cash benefits immediately upon the client’s death. Having the policy owned by the children (or perhaps even better, by an Insurance Trust for their benefit) and funding the purchase over time by making gifts to the children or the Trust can even provide those benefits without any transfer tax!
Other techniques are also available to balance benefits passing to a new spouse with benefits for the children of a previous relationship. Marital agreements are important planning tools, and contractual agreements to name beneficiaries or make a will are also used to ensure long term planning for bonus children when as we all know we can’t predict our futures. With careful consideration, estate planning for the blended family can provide orderly, equitable and compassionate distribution of estate assets, while also minimizing or eliminating confusion or even animosity between the bonus family, both here and now; and upon the death of a spouse in relation to the surviving beneficiaries.
If you have questions about these estate planning tools give me a call or shoot me an email or if you have a friend with bonus children please share!
A few things to do before the New Year
Its a busy time of year. The holidays can seem like a mad dash. Shopping and attending festive events keeps us on our toes and if you are like me your "to-do" list seems to grow in length, despite all the lines I've already crossed off. Not to add pressure to your season of cheer but if you take the time to do these things now - you'll start the New Year ahead of the game! 1. Charitable donations — If you need a tax deduction in 2013, now’s the time to make that charitable contribution. Now is also the time to sort out clutter and get it your favorite charity thrift store. Save your receipts.
2. Annual exclusion gifts — An individual can give up to $14,000 per donee in 2013 without impacting his or her lifetime or estate exclusion. A married couple can give $28,000 per donee. Be careful if you use a check to make annual exclusion gifts because, unlike charitable donations, if the gift-check is cashed after Jan. 1, the date of the gift will not relate back to the date of its delivery. It will be deemed to be a gift given in 2014.
3. Review your testamentary documents. Is your estate plan still appropriate for your situation and are your fiduciary choices for personal representative and agents under your powers of attorney, legal guardian, and trustees still appropriate? If so great. If not the holidays are a time spent with family and friends - who might be a better choice?
4. Review beneficiary designations — Retirement plans and insurance policies are controlled by beneficiary designations, not your will or revocable trust. It is important to ensure that your beneficiary designations are consistent with the provisions of your will, and vice versa.
5. Update your important documents locator and contacts before you head off for that holiday trip.