What is the Estate Tax?
The Estate Tax is a tax on the Decedent's assets being transferred to others upon death.
An Estate is required to file an Estate Tax Return if its taxable assets are greater than the Exempt Amount, even if it has enough deductions to avoid paying tax.
Will I Have to Pay Estate Taxes When I Die?
The Estate Tax Exemption increases each year for cost of living. The Exemption amount for 2022 is just over $12 million.
If a couple has combined assets valued at greater than the Exempt Amount, and most of their assets are held in joint names, they will most likely not be eligible to take advantage of the full amount of Exemption allowed. This is because when the first Spouse dies, all assets will pass automatically to the Surviving Spouse, who will later die with assets valued greater than the Exempt Amount (see above), thus resulting in an Estate Tax on the excess amount.
Such clients should consult with an Attorney to determine how to best structure their assets and Estate Planning documents in order to take advantage of the Exempt Amount both when the first Spouse dies, and again when the second Spouse dies, thus giving them the maximum total allowable Exemption.
If a single person has assets greater than the Exempt Amount, he/she should consult with an Attorney regarding how to shelter some of his/her assets from Estate Taxes.
Estate Tax Planning can be accomplished either through the use of Testamentary Trusts (trusts created under a Will) or Inter-vivos Trusts (trusts created separately from a Will).
Do I Need a Will?
We recommend that everyone have a Will, no matter how much or little they own, because it is a way in which the client can specify who should get what, and who should be in charge of making sure everything is handled properly. Even if the client has a Revocable Trust (see below), a Will is necessary to handle any assets that are not titled properly in the Trust at the time of death.
If you do not have a Will, the State of Colorado will create one for you. You should at least investigate who would be entitled to receive your assets and who would be entitled to be in charge of handling your Estate under that state-created scheme, to be sure that it is agreeable to you.
When a person dies with a valid Will, the probate proceedings are much smoother and usually less expensive than when they die without a Will.
Certainly, if you have children who are minors (under the age of eighteen), you should have a Will, possibly with a Testamentary Trust included, to make provisions for the care and custody of minor children.
What is a Testamentary Trust?
A Testamentary Trust is one that is provided for under a Will. It will not be created until the person who wrote the Will has died.
Testamentary Trusts are used to provide for management of assets for minor children, disabled relatives, or any other person that the person writing the Will wants to make provisions for but feels they cannot handle an inheritance properly by themselves.
Testamentary Trusts are also used in order to take advantage of the Estate Tax Exemption when a person dies. This is called "Estate Tax Planning".
What is a Revocable Trust and Do I Need One?
A "Revocable Trust" is also known as a "Revocable Living Trust" or a "Living Trust".
This type of Trust is "living", which means that it is set up during the lifetime of the person who creates it, as opposed to a Testamentary Trust which is set up upon that person’s death. It is "revocable", which means that the person who creates it can change the terms of the Trust or end the Trust entirely, at any time, for any reason, since the funds are theirs to do with what they please during their lifetime.
The person setting up the Trust is called the Settlor. Usually that person is also the Trustee (the person who handles or manages the Trust's assets) and the Beneficiary (the person who receives the benefit of the Trust - Trust funds are used for that person's support or benefit).
Whether or not a client needs a Revocable Trust depends on his/her specific assets and personal situation. Revocable Trusts are recommended whenever the client owns real property located outside of Colorado.
What is an Irrevocable Trust?
An Irrevocable Trust is one that cannot be changed after it is set up. These Trusts are usually set up during the lifetime of the Settlor, but for the benefit of someone else, such as his/her Spouse and/or children.
Usually, these Trusts are set up to avoid Estate Taxes or other types of taxes. They can also be set up in order to take care of a beneficiary who is incapacitated. There are several types of Trusts available. Please consult with an Attorney for more information.
Can I Write My Own Estate Planning documents?
We do not recommend that clients write their own Estate Planning documents. Although they may be valid, there are often problems with the interpretation of the language in the documents, because the average person does not have a working knowledge of the legal interpretation of otherwise normal words.
It is best to have your Estate Planning documents written by an experienced Attorney who can state your wishes in a manner that will not be disputed. In addition, an Attorney should keep notes as to their conversations with clients, which can be used to clarify any questions that may arise in the future.