Trusts in Colorado are used for asset protection, tax minimization, to avoid probate and accomplish larger estate planning goals. A trust attorney will guide you on whether an irrevocable or revocable trust is best for your family. You may accomplish such goals during your lifetime, or for after to help family or charity. A family trust also provides a good opportunity to teach younger family members about business and responsibility. These are things a Colorado will cannot do.
How to Set Up a Trust in Colorado
There are two steps involved in setting up a trust. Most people get the first step right, but then fail to perform the second step of funding the trust properly. Both steps need to be completed properly in order for the trust to achieve the objectives for which it was created.
The first step in setting up a trust involves drafting and signing a trust agreement. A trust agreement is essentially a legal document that specifies:
- Who is creating the trust;
- Who will manage the trust;
- Who will benefit from the trust assets; and
- When and under what conditions distributions from the trust will be made.
That being said, the person creating the trust is referred to as the settlor or grantor. The person, persons, or entities given the authority to manage the trust is referred to as the trustee. And those who are entitled to benefit from the trust assets are referred to as trust beneficiaries.
Setting up a trust to achieve your goals does not have to be difficult, but it is definitely not a "do it yourself" job. With the right advice and an experienced Colorado trust attorney, you should be able to achieve your estate planning goals with a minimal amount of effort.
Who Uses Trusts?
There are many different reasons why you might want to set up a trust, for instance:
- To Protect Their Privacy;
- Protect Assets From Creditors;
- To provide for minor children and those who lack the ability to manage money and assets on their own;
- Minimize Avoidable Taxes;
- To dictate when and how your assets are to be distributed to others;
- Plan for Incapacitation;
- To provide for a charity.
- Avoid Probate; and
- Minimize the Financial Effects of Divorce.
These are just some of the many reasons why you might want to set up a trust. Other reasons include, Medicaid spend down avoidance, federal estate tax avoidance, and more.
A common example of someone who would use a trust is a parent who wants to protect their child from making bad decisions with money received as an inheritance. Assume your 18-year-old daughter asked you for $20,000. Even if you have the money to spare, would you give it to her? Without any questions? Most parents would want to know that the money would be put to good use, and not squandered on parties, alcohol, or drugs.
Whenever you leave money to your loved ones in your will, you are giving away a lump sum of cash with no strings or conditions attached. If you are concerned about how that money will be spent, creating a trust to distribute the money over time or when they reach a certain age will allow you to control how it is used and prevent bad decisions, even after you are no longer around.
The foundation of most estate plans is a revocable trust, irrevocable trust, or both. These are used in conjunction with a Pour-Over Will, Durable Powers of Attorney, Advance Health Care Directives, and other documents to ensure your end of life wishes are respected while efficiently transferring your assets. The goal of using trusts in estate planning is to avoid probate, maintain privacy, avoid family infighting, minimize taxes and legal expenses, and to provide peace of mind that your wishes will be carried out after your passing.
While many people think that putting in place an estate plan is a long a complicated process, setting up an estate plan should actually require minimal effort. The mistake many people make is believing that the first estate plan they make will be their last. Because they want their estate plan to last forever, they try to make it account for everything that might happen in the future. This leads to overly complex estate plans and high legal bills, when the reality is that most people will have multiple estate plans over the course of their life. For instance, you can make a simple estate plan when you are single with no children, change you plan when you get married, change you plan when you have children, and change you plan again with you have grandchildren. Trying to build a plan that can address all of these situations is possible, but will be very expensive to create and complicated to administer. The goal then should not be to try to predict everything that might happen in the future, but to create a flexible, low cost, plan that can adapt to changes in your life.
Many mistakenly believe that trusts are solely a tool for estate planning. While trusts are an integral part of estate planning, the privacy and flexibility of trusts allows them to serve many other purposes. For example, trusts can allow for anonymous ownership of assets, minimizing taxes, protecting assets from creditors, transferring land without filing a deed, and minimizing the amount owed in a divorce settlement. Trust law rewards those who plan ahead and it will probably be too late to achieve your goals if you wait until there is a problem to form a trust.
The Uniform Trust Code
Over the years, the problem that most states, like Colorado, have had with trusts is a lack of detailed law dealing with their governance. When there are not detailed laws, courts will rely on "common law" that has been created from hundreds of years of court cases, sometimes going back to English court cases from before America even existed. To address this lack of clear law, The Uniform Laws Commission created the Uniform Trust Code as a basis for states to either clarify existing trust law or create new trust laws where none existed.
The Uniform Trust Code, commonly known as the UTC, is one of many model laws or uniform laws in the US. Together with common law, the UTC is one of the primary sources of trust law in the country.
The UTC is a model law, so it is not exactly law. As a model law, it is essentially a proposal that each state has to choose to adopt or not. However, the UTC has gained a considerable amount of support and as of this writing has been adopted by 33 states, including Colorado.
Bear in mind, each of these 33 states may have enacted a slightly different versions of the UTC. But, because the goal is to create similar, consistent laws across the country instead of a patchwork, the trust laws of these 33 states are virtually the same.
So, by and large, the Colorado Uniform Trust Code (which was adopted in 2018) and the uniform trust codes of the other 32 states who have adopted the UTC are the same.
How Trusts Work
Like a limited liability company or corporation, a trust is a legal entity created by a contractual agreement. A trust is different from other legal entities because it does not need approved by or registered with the government. Because no registration is required you may form an anonymous trust to protect your privacy.
While this secrecy is important to many people, to others, a more important feature of trusts is their ability divide the ownership, control, and benefit of an asset into three separate parts. Because trusts have the ability to split title to assets and carry out the grantor's specific instructions long after the grantor has passed away, trust are very flexible.
In the most familiar form of trust, rather than giving money to your loved ones directly, you set up a trust and put the money in the trust. As part of setting up the trust, you appoint someone, called a trustee, to oversee the trust. Nobody but the trustee will have access to the funds. Furthermore, the trustee will only be allowed to distribute the funds to your loved ones according to specific guidelines that YOU established when you created the trust. Depending on the type of trust you form, you may be able to take the money out of the trust, revoke the trust, or change the trust so that the money goes to someone else.
Therefore, the three roles in every trust are the person who puts the assets in the trust and makes the trust rules, the grantor; the person who manages the trust and follows the rules, the trustee; and the person who benefits from the trust, the beneficiary. Because your loved one is not the owner of the money in the trust and does not manage the trust assets, the beneficiary cannot use the trust assets to pay creditor's claims, settle lawsuits, and pay an ex-spouse in divorce proceedings. If the beneficiary owes anyone money, they will have to wait for the trustee to give the money to the beneficiary before they can make a claim.
Revocable vs. Irrevocable Trusts
Though trusts can be set up to fulfill a variety of different purposes, including asset protection, qualifying for Medicaid, and providing for children and loved ones with special needs. While there are many types of trusts, at the highest level all trusts can be separated into two basic types:
- Revocable Trusts and
- Irrevocable Trusts.
A revocable trust is one that can be revoked or amended at any time during the lifetime of the person who set it up, the grantor. Two common examples of revocable trusts are living trusts and land trusts. While revocable trusts don't generally provide the benefit of asset protection, they do provide privacy, allow you to easily transfer ownership of assets, and will help you avoid probate on your death. Revocable trusts can make asset management easier because they allow for the consistent management of your assets during three phases:
- While you are alive and well;
- When you are alive but incapacitated; and
- After you die.
A typical revocable trust would name you as the trustee when you are alive and well, name a friend or spouse as trustee if you are incapacitated, and name a professional trust company as trustee after you die. Without a revocable trust, you could only hope that someone would step in to manage your assets if you were incapacitated or died. Even if someone did step in to manage your assets, they would need to obtain an order from a court to do so. While you are alive and well, and if you are not incapacitated, the primary advantage of using a revocable trust is that it can enable your estate to avoid probate.
In most revocable living trusts, the settlor also acts as the trustee while he or she is alive and able, and will specify who will step into that role when he or she dies or becomes incapacitated. Depending on why an irrevocable trust is being formed, the trustee may be the settlor or the trustee may be an independent trustee or entity, such as a private trust company.
Another kind of trust is an irrevocable trust and, as the name implies, is one that you cannot revoke or amend once it is established. Irrevocable trusts are not as common as revocable trusts, but can be just as advantageous to your overall estate plan because in addition to all of the benefits of a revocable trust, irrevocable trusts provide asset protection. When you place assets in an irrevocable trust, you are no longer the owner of the assets, the trust is. While you are no longer the owner of the assets in the trust, you can still exercise control over the assets. Depending on how the trust is written, you may be able to change beneficiaries at anytime for any reason. You may also be able to act as your own trustee or appoint and remove other trustees at your discretion.
- Asset Protection Trust: This type of trust specifically used to shelter assets from creditors of all types. An asset protection trust can protect you from lawsuits, creditors, divorces, the government and plain bad luck. Typically, assets cannot be seized until after the expiration of a period specified by law.
- Special Needs Trust: This type of trust is used to provide care to an individual with special needs without disqualifying them from receiving government benefits. In order to qualify for government assistance programs, an individual must have little to no assets in there name. An special needs trust allows an individual to benefit from the trust assets and receive government provided benefits.
- Family Trust: A family trust may be revocable or irrevocable, depending upon your goals. The primary motivations for setting up a family trust are to avoiding probate, minimizing estate taxes, and protecting assets from bad decisions or irresponsible behavior of future generations.
To learn more about revocable and irrevocable trusts in Colorado, as well as, how they can be used to help you achieve your estate planning goals, schedule a consultation with our experienced Colorado estate planning attorneys through the contact link on our website.
Asset Protection Trusts
Trust law isolates ownership, control, and the benefits of an asset from each other. In practical terms this means you can benefit from an asset and control it, without directly owning it. This division of ownership prevents your personal creditors from seizing assets held in trust. There are three parts to a trust:
- Settlor or Grantor: This is the person who creates the trust and puts assets into it;
- Trustee: This is the person or company that manages the trust; and
- Beneficiaries: These are the people or entities that benefit from the assets held in trust.
A trustee administers the trust and controls the assets and a party of your choosing benefits from them. Domestic asset protection trusts creates a barrier between you and your assets that prevents your assets from being distributed to creditors. This barrier can create sufficient reasonable doubt in a creditor's mind as to whether they will be able to get to your assets. Many times, an asset protection trust will deter creditor claims altogether, but it may also give you a stronger position at the bargaining table and at the very least, a trust will buy you precious time to mount a stronger defense.
When you form the trust and are its beneficiary, the trust is called a self-settled trust.
Funding the trust
The vitally important second step in setting up a trust, that so many fail to perform properly, is referred to as funding the trust. What this means is to transfer ownership of the settlor's assets to the trust by modifying the deed for real estate or transferring the title of an investment or stock account so that it names the trust as the owner of the asset rather than the settlor.
Should you neglect to transfer ownership of any asset to your trust, that asset will need to go through probate after you die and before it can be transferred to your heirs. These "overlooked" assets are typically transferred with a pour over will which instructs the executor of your estate to transfer all assets into your trust. Because the pour over will is going will need to go through the probate process, this can be time-consuming and expensive and may result in a loss of privacy and possibly estate tax consequences.
Another way of setting up a trust is through your last will and testament. By including certain language in your will, you can create what is called a testamentary trust. This type of trust differs from others in that it is not formed or funded until after you pass away.
A testamentary trust is most often used to provide for minor children and/or to ensure that your heirs don't spend their entire inheritance all at once, by distributing the income or assets to them a little bit at a time, rather than in one lump sum.
Colorado Trust Law
That being said the history of trusts is interesting and goes back centuries. Hundreds of years ago, Franciscan monks were required to take a vow of poverty. So, if anyone wanted to donate money to them, they would have to donate the property to another person who would then own that property and provide for the Franciscan monks so that they could live a decent life and could support their churches.
Another point when trust history began to evolve was in England during the Crusades of the 12th century. At that time, a number of English monks traveled to the fight in this religious war in the Middle East. In doing so, these monks had to leave their farms and homesteads behind, which raised a question about who would take care of these farms while the knights were away.
So, the legal trust relationship was set up, so that even though the knights would continue to own the land, someone else could take possession of the land and make decisions regarding the operation and maintenance of the farm and other normal decisions that a knight would have made himself if he were there to do so.
A trust is a legal entity that is created to hold title to property for the benefit of others. When property is held by a trust, title to the property is split in two. The trustee holds legal title to the trust assets, and the beneficiary holds equitable title to the property.
This means that the trustee can only use the trust assets for the benefit of the people named as beneficiaries in the trust agreement, but never for his or her own benefit.
The beneficiaries equitable title to the trust assets means that they have the right to have the assets used for their benefit, in the manner specified by the grantor when he or she set up the trust.
Colorado Trust Attorney
While it is a good idea for you to learn as much as you can about trusts and other estate planning mechanisms, you can't expect to become an expert in the subject right away.
An experienced trust and estate planning attorney will have the knowledge and expertise needed to help identify the goals you want to accomplish and then set up and fund the trust that will help you accomplish your individual estate planning goals. To schedule a consultation with our experienced Colorado trust attorney, please use the contact link here.
In some trusts, one person possess all three, while in other trusts each is held by a separate person, multiple people, an entity, or multiple layers of entities. Ultimately, trusts provide flexibility to accomplish complex goals during your life and into future generations. While all of this may sound complicated, a qualified and experienced attorney can help you identify your goals and structure a trust that is right for you.