When planning your estate in Colorado, you may contemplate the best estate planning tool for meeting your needs: a trust or will. While there is overlap between trusts and wills, there are significant differences. The truth is that you can have both a trust and a will in Colorado but understanding what each does – and doesn’t do – is vital to creating an effective and reliable estate plan. A financial advisor with estate planning expertise can help give you peace of mind as you make vital decisions surrounding your assets and property.
What Is a Trust?
A trust is a legal entity that owns and controls assets on behalf of the trustor or grantor – the person who creates the trust. This legal agreement requires a trustee to act as a fiduciary to manage the assets according to the terms specified by the trustor. Trusts can be structured in different ways and can stipulate exactly how and when the assets pass to the beneficiaries.
Trusts come in several variations, each with unique purposes, benefits and uses. For example, living trusts allow you to control your assets during your lifetime and distribute the remainder after death without going through probate. Testamentary trusts, on the other hand, are created through a will and become effective upon your death. These trusts are used to manage and distribute assets according to your wishes after death.
Meanwhile, trusts can either be revocable or irrevocable. The former can be altered or canceled by the trustor during their lifetime, offering flexibility and control over the assets. If a trust is irrevocable, it cannot be amended or terminated without the permission of the beneficiaries. Additionally, once assets are transferred into an irrevocable trust, the original owner can’t remove them from the trust. This might be beneficial for someone who wants to secure assets for their children and simultaneously reduce the size of their taxable estate.
What Is a Will?
A will, also known as a last testament, is a legal document that outlines how an individual’s property should be distributed after their death and appoints a person or entity to manage the property until its final distribution. A will not only ensures the proper allocation of one’s assets but also helps provide for the care of loved ones after one’s demise. Therefore, it is important for everyone, regardless of age or wealth, to understand the concept of a will and its implications.
One of the key components of a will is the testator – the individual who creates the will. The testator’s assets, which may range from real estate to personal belongings and financial investments, are distributed to the beneficiaries named in the will. These beneficiaries can be individuals (such as family members or friends) or organizations like charities. The executor, another critical component of a will, is the individual entrusted with the responsibility of carrying out the terms of the will. If the testator has minor children, the will may also appoint a guardian to take care of them.
About Probate in Colorado
In Colorado, as in most states, probate is a legal process that occurs after a person’s death. It involves settling the deceased person’s estate and distributing their assets.
According to the Denver Bar Association, probate typically takes at least six months in Colorado. However, not all estates as subject to this legal process. Small states worth up to a certain amount ($80,000 in 2023) that do not include any real estate may qualify for an exemption.
Estates that end up going through probate in Colorado will be subject to one of two variations of the process: formal probate or informal probate.
Formal probate is a structured, court-supervised process for more complex estates. It involves extensive documentation and court appearances. This method is typically necessary when there are disputes over the will’s validity, significant creditor claims or no will at all. While it offers legal protection and thorough oversight, it can be time-consuming and costly due to attorney fees and court expenses.
On the other hand, informal probate is a streamlined option for handling straightforward estates with clear-cut wills and minimal disputes. It may not require court appearances in some cases. The court’s role is limited, mainly to approving the appointment of a personal representative (executor) and ensuring assets are distributed correctly.
Both forms of probate in the state do require an application or petition to be filed with the district court. An application for informal probate costs $199 and a petition for formal probate costs the same. While these fees may be waived, it’s important to note that they do not cover the potential legal fees charged by attorneys.
Pros and Cons of Trusts
Living trusts, in particular, are a favored tool for estate planning in Colorado, mainly due to their ability to circumvent probate. By avoiding probate, the surviving family of a person who dies can save time and money, as well as keep the estate out of the public record.
Meanwhile, irrevocable trusts can protect assets from creditors and legal claims. This can be particularly beneficial for safeguarding family wealth. They can also help Colorado estates avoid the federal estate tax. While this tax only applies to estates worth more than $13.61 million in 2024, these estates can pay rates of 18% to 40% on assets that exceed this limit. However, assets that are transferred to an irrevocable trust are no longer part of a person’s estate and are not subject to the estate tax.
But trusts also come with certain drawbacks. They can be complex and expensive to establish and maintain. Setting up a trust involves drafting a legal document and transferring assets into the trust, a process that typically necessitates hiring an attorney. Moreover, trusts require ongoing management, which can be burdensome.
Lastly, trusts do not account for the care and guardianship of children who are minors. If a Colorado resident has minor children and they want to appoint someone to be their guardian, they’ll need to do so in their will – not their trust.
Pros and Cons of Wills
Wills, by comparison, offer simplicity, lower initial costs and straightforward execution. The process of creating a will can be simpler and less costly compared to a trust. It can be done with the help of an attorney or even through an online program.
As mentioned above, a will can also appoint a guardian to take care of minor children if their parent dies. Additionally, unlike a trust, a will can also spell out a person’s desired funeral arrangements.
However, the main disadvantage of a will is the requirement to go through probate. This process can be lengthy, costly and public. Probate can potentially lead to family disputes if disagreements arise about asset distribution.
Which Should You Choose?
When it comes to choosing between a trust and a will in Colorado, you need to consider a variety of factors. This includes your financial situation, the size of your estate and privacy concerns. You may find trusts more cost-effective for larger estates, while smaller estates might not warrant the cost of establishing a trust and simply stick with a will
Deciding to create a trust may hinge on your desire to avoid probate. Probate takes at least six months and can cost thousands of dollars. This can significantly diminish the assets left for the beneficiaries
Privacy is also a key concern, as wills become part of the public record during probate, while trusts remain confidential. Another factor that may lead you to create a trust is the potential for family disputes, which could play out in probate and delay the process further.
However, it’s important to note that you should still create a will, especially if you have minor children or assets that are not covered by the trust.
Bottom Line
The choice between a trust and a will is a deeply personal decision that depends on your unique circumstances, financial situation and personal preferences. By understanding the pros and cons of each option and reflecting on the factors discussed above, you can make an informed decision that best suits your estate planning needs.
Tips for Estate Planning
- For those with a considerable amount of wealth, gifting assets to family members, friends and causes that are near and dear to you while you’re alive is a strategic way to lower the value of your estate and potentially avoid estate taxes. In 2024, you can give up to $18,000 to as many individuals as you wish. However, if a gift exceeds this annual exclusion, the portion that’s over the annual cap counts against your lifetime exemption limit ($13.61 million in 2024). For example, if you gave someone $20,000, the gift would reduce your lifetime exemption limit by $2,000.
- A financial advisor with estate planning experience can be a valuable resource as you craft your own estate plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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