It is said that we all have a will- we either choose to create one or the Colorado laws of intestate succession apply. Intestate succession is the statutory method of distributing an estate’s assets that are not disposed of by a will. Property may pass by intestate succession where: the decedent dies without a will, the decedent’s will is denied probate due to improper execution, or the decedent’s will does not dispose of all of his property resulting in a partial intestacy (usually because the will contains no residuary clause). If a person dies without a valid will their survivors will face a complicated, time-consuming, and expensive legal process. With an intestate estate, the probate court must step in to divide up the estate using legal defaults that give property to surviving relatives. Therefore, intestacy may mean that people who would never have been chosen to receive property will in fact be entitled to a portion of the estate. Additionally, state intestacy laws only recognize relatives, so close friends or charities that the deceased favored do not receive anything. If no relatives are found, the estate typically goes to the state government. When made aware of the consequences of intestacy, most people prefer to leave instructions throut a Last Will or Revocable Living Trust rather than subject their survivors and property to government-mandated division.
Probate is the judicial distribution of property after death. When an individual dies owning property in his or her name, that property generally must go through probate. Probate is a legal procedure that establishes ownership of property in others. The probate system is designed to ensure the validity of a will, to give notice to all possible claimants of property, and to resolve ownership disputes and rights. Probate courts also distribute property not covered by a will (intestate estates) according to legal defaults. Procedurally, the probate court first establishes whether the deceased left a valid will. If so, the probate process guides the division of property in accordance with the will’s provisions. If the estate is intestate or if a will is found to be invalid, the probate division applies state laws to divide up the estate. The probate court then approves of the distribution, thereby finalizing the transfers of ownership. While making a will does not prevent the need for probate, a carefully drafted will minimizes the time a personal representative spends in court and speeds up the distribution of property to survivors. A properly drafted will also waives the personal representative's duties of posting a bond, which can save an estate hundreds if not thousands of dollars. Furthermore, the probate process in Colorado is relatively fast, relatively inexpensive, and is mostly private.
Probate assets are those assets in the decedent's sole name at death or otherwise owned solely by the decedent and which contain no provision for automatic succession of ownership at death. The probate process only controls the disposition of probate assets. A few examples of probate assets include: a bank account in the sole name of the decedent, the death benefit of a life insurance policy where the decedent's estate is the named beneficiary, real estate titled in the sole name of the decedent or real estate held by the decedent as a tenant in common, investment accounts (stocks, bonds, mutual funds) where the decedent is the sole owner and no beneficiary is named (or the named beneficiary has predeceased the decedent), and retirement accounts where no beneficiary has been named (or the named beneficiary has predeceased the decedent). At death, probate assets are transferred through the Probate Court according to the decedent's Will, and if there is no Will, according to state intestacy statutes.
Non-Probate assets are those assets which pass to beneficiaries under an instrument other than a will. Therefore, probate is not required for the property to change hands upon death. Examples of Non-Probate assets include:
Upon the decedent's death, these assets will automatically pass to the named beneficiaries or survivor without court supervision. This is called passing "outside of the will" or passing "by operation of law". Therefore, the provisions in a will do not control the distribution of non-probate assets. The transfer of non-probate assets typically require the beneficiary to present a death certificate and an affidavit.
Because the provisions in a will have no bearing over the distribution of non-probate assets to your beneficiaries. This should be taken into account when you are creating your will so that your overall estate plan accomplishes your ultimate goals. As you are creating your will, you should also take steps to make sure that your non-probate property will pass according to your wishes. For bank accounts, investment accounts, life insurance policies, annuities, retirement accounts, and other T.O.D. and P.O.D. contracts, you should obtain copies of the documentation which shows how the asset is titled and who is named as the beneficiary. The beneficiary designations should reflect your wishes, while taking into account their impact on your overall estate plan. If necessary, beneficiary designations should be changed by requesting the appropriate forms with the person/entity responsible for managing the asset (i.e., banker, employer, financial advisor, or insurance agent). Successor beneficiaries should also be named in the event that your primary beneficiary predeceases you. Beneficiary designations can typically designate that the asset be divided into fractional shares (i.e., a life insurance death benefit could pay each of your three children 1/3). For real estate, you should obtain a copy of the deed(s) and make certain that the asset is properly titled. If not, you should seek the advice of an attorney to help you re-title the asset. If you do not have the real estate deed in your possession, you should obtain a copy from the county register of deeds office in the county where the real estate is located. All non-probate assets should be properly titled and all beneficiary designations should be updated to reflect your wishes. Additionally, you should review and update beneficiary designations if your circumstances or desires change. Failure to plan for the distribution of non-probate assets can have devastating consequences regarding taxation, equitable distribution, and family strife. Due to complex state and federal gift taxes, income taxes, and estate taxes, a CPA should be consulted anytime you are shifting or re-titling assets.
Generally, your Will only controls distribution of assets that are titled in your name alone at the time of your death. With that in mind, some people believe that placing all of their assets in joint tenancy with right of survivorship arrangements and payable on death (P.O.D.) accounts is an inexpensive way to avoid probate and the need to create a will. This type of “backyard” estate planning is never recommended, as there are numerous risks. First, if a married couple dies in a common accident then their spouse beneficiary is not alive to receive the property. Therefore, the property will end up passing according to state intestacy laws because the couple did not have a will in place. Likewise, if a non-spouse beneficiary predeceased the decedent, then state intestacy laws will control the distribution of property. Secondly, holding property jointly with a child gives the child an ownership interests in the entire property. So, if you have a joint bank account with your adult child, the child can exhaust all of the funds in the account. Also, the funds are subject to the child’s creditors. Thirdly, giving a joint ownership or full ownership rights to another can cause significant federal gift tax consequences. If ownership is transferred for less than fair market value, then a potentially taxable gift occurs. On the other hand, a properly drawn will names your personal representative, names your guardian, avoids costly court requirements, and disposes of property according to your wishes if your spouse or beneficiaries predecease you. A will based plan along with updated beneficiary designations on your right of survivorship and P.O.D. accounts is always the sensible choice. On the contrary, backyard estate planning offers very little (if any) reward and plenty of risks.
If a will is valid, it is effective until it is changed, revoked, destroyed, or invalidated by the writing of a new will. Changes or additions to an otherwise acceptable will can be most easily accomplished by adding a Codicil. A Codicil is a document amending the original will, with equally binding effect. Therefore, a Codicil must be executed in compliance with applicable law, using the same formality as the original will. Wills should not be changed by simply crossing out existing language or adding new provisions, because those changes do not comply with the formal requirements of will execution. If a change needs to be made to your will you should seek the advice of an attorney.
An outdated will may not achieve its original goals because its underlying assumptions may have changed. Additionally, changes in probate and tax law may change the effectiveness of certain provisions. If a will is based on outmoded circumstances, for example if a chosen devisee has died or has alienated the testator, the probate period may be extended as the court determines how to construe the old provisions. Wills should be reviewed at least every two (2) years, as well as upon major life changes such as births, adoptions, deaths, marriages, divorces, and major shifts in a testator's property. Because state law governs wills, if a testator moves to Colorado from another state, their will should be reviewed for compliance with Colorado’s laws. Additionally, wills with tax provisions may not accomplish your goals due to frequent changes in the federal estate tax laws. For example, a will with a martial formula clause which places the maximum amount allowable in a bypass trust and leaves the remainder outright to the surviving spouse may have worked well in the year it was drafted. However, with the increase in the federal estate tax exemptions, the same marital formula today may fully fund a bypass trust while leaving no assets passing to a surviving spouse outright. This could be devastating for a surviving spouse in need of cash.
A testator can revoke a will by: 1) creating a new will, or 2) by a physical act such as intentionally destroying, obliterating, burning, or tearing up the will. Changed circumstances may also revoke a will. A divorce, for example, revokes all provisions in a will in favor of the former spouse. However, the rest of the will remains valid and the will is read as if the former spouse predeceased the testator. Also, marriage plus the birth or adoption of a child revokes a pre-marital will. An attorney should be consulted when a testator desires to revoke their will.
Testamentary Trusts (trusts created at death) are often utilized to distribute property to minor children in an efficient manner or to make meaningful charitable gifts.
Real Estate (real property) is not typically mentioned in a will. If real estate is held jointly by husband and wife as joint tenants with right of survivorship, it will pass automatically to the surviving spouse by operation of law. Even if the will expresses something to the contrary, such property will pass automatically to the joint owner. However, property owned in the decedent’s name alone and property held in a tenancy in common without right of survivorship, are probate assets and are subject to the provisions in a will. Unless otherwise specified, real estate subject to the provisions in a will passes according to the remainder (residuary) clause in the will (which means the primary beneficiaries named in the will receive the property). If the real property is a probate asset and the testator wants the property to pass to the residuary beneficiaries, there is no reason to specify such in the will. However, if the testator wishes to distribute the real property in a pre-residuary clause in the will, this option is available.
A specific bequest is a statement in the Will that a certain asset or specific amount of money will be given to a beneficiary(ies). Specific bequests may be cash, motor vehicles (automobiles, tractors, recreational vehicles, etc.), stocks and bonds (assuming a beneficiary designation does not already control disposition by operation of law), and business interests (i.e., LLC membership interests or stock in a corporation). A specific bequest may be made to an individual or to a charitable organization. However, these bequests will be distributed first and may deplete your estate if there are not enough assets in the estate to make specific bequests and residuary distributions to your ultimate beneficiaries. Also, specific bequests lapse (become null and void) if the property given cannot be found at your death, which can make the probate process more complicated. Therefore, if you make specific bequests, only give property or amounts of cash that you are reasonably sure you will have when you die. If you make no specific bequests, all of the property will pass to your residuary beneficiaries.
Your residuary estate is whatever property remains after paying debts and expenses of administration, and distribution of any specific bequests. Your residuary estate may be left to individuals, charitable organizations, or both. Because many people do not make specific bequests, the residuary usually describes all the property in your estate left to your primary beneficiaries.