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by Osman Parvez
Over dinner at Tahona last night, a client pointed out that Realtors are often involved with people who are at a major life transition. Buying or selling a house is stressful not only because homes are expensive and require a long term financial commitment, but the transaction often occurs simultaneously with major life challenges such as the death of a loved one, health issues, a job transition, divorce, the birth of children, or retirement.
One of the surprises of this business is how often we become involved with family matters. A few weeks ago, I wasn't thinking about end of life when a friend called out of the blue. He's been dealing with some serious health issues and left a message asking for a referral to an attorney who could set up trusts for his infant daughter. Talk about a wake-up call.
For most people, death is not a very comfortable topic of discussion. In my own life, I've found being present with it helps create fuller, more satisfying experiences because I actually focus on the stuff that's important. The treadmill of never ending day to day tasks fades when I take a few minutes to consider the inevitable. I start making those phone calls to old friends, spending time with loved ones, and making sure that I've done the important things in life - now, not tomorrow.
To help my friend find an attorney, I reached out to my network for a referral. Coincidentally, I also noticed a continuing education seminar on trusts and estates was being offered this week, so I signed up. While I already had a basic knowledge of how trusts work to protect real estate asset transfers, I thought I should educate myself further.
I learned a lot more than I expected. If you're pondering setting up a will or a trust, here's a few things you might consider.
Why Plan Ahead? Estate planning is about minimizing the cost and difficulties involved with end of life. Done right, you can limit the involvement of government (probate), reduce (or even eliminating estate taxes), and dramatically cut the cost of lawyers, court fees, and even nursing home expenses.
Wills vs. Trusts As the saying goes,
if there's a will, there's a way but when it comes to end of life, having a will by itself means your estate will be sent to probate. With a will, the court first decides if it is valid and in Colorado, assigns a Personal Representative (in other states, this is often called the Executor) who signs over assets according to the dictates of the will. Probate also allows those who have claims (debts) owed a chance to get those debts filled before the assets are transferred.
According to the attorney teaching the seminar, it will take at least 4 months before title to the assets can be transferred and probate must be open for a minimum of 6 months. The family can use the asset during this time but they can't be transferred with clear title until after the waiting period expires.
As you might imagine, disgruntled family members and creditors can delay the process far beyond six months. The potential exists for the asset to be tied up for years. This is why it's preferable to avoid probate.
One way to avoid probate is the use of a trust. Unlike a will, trusts provide a curtain of privacy for the transfer of the assets. Wills are public, anyone can look them up. Trusts also have fewer time delays for the asset transfer and court costs are not as significant.
Trusts are legal entities that dictate who is in charge when you're gone and who gets your property. In that way, wills and trusts are very similar. Here's how they're different. Trusts are effectively entities like a small corporation. Owners, managers (trustees), and beneficiaries are key figures in the trust (and sometimes the same person). Trusts can be established while the owners and beneficiaries are living and which own your assets. When the owner dies, the successor trustee reads your instructions about where you want the assets to go and then executes your instructions. The process typically takes 4-6 weeks, rather than 6 months to 1 year (with a will).
Hello Uncle Sam Let's talk about estate taxes. The current estate tax is 35% with a $5,000,000 exemption. Next year, the estate tax will very likely go back to a $1,000,000 exemption and 55% tax rate. In Boulder, it's not uncommon for a house and life savings to exceed the $1,000,000 threshold (life insurance is subject to estate tax.)
Spouses have an exemption from estate taxes. When assets transfer to the spouse, a special tax rule, the so called “unlimited marital deduction” effectively defers estate tax until the 2nd death. Great for the spouse, but not so good for the children or other heirs because it “wastes” the first exemption.
As most Realtors know, when owners hold real estate as joint tenants, upon death 100% of the real estate transfers to the 2nd spouse and skips probate. This is why the vast majority of real estate titles are held as joint tenants. The problem is that the first exemption is wasted and here, a well designed trust provides a potential solution.
A common approach is to create a trust which splits into two upon the death of either spouse; the Decendents (dead person's) Trust and the Survivor's Trust. This structure preserves both exemptions from estate taxes and keeps the transfer of assets out of probate.
Take Home NotesHere's a few things you should know.
1. Probate is a state by state process. If assets are owned in multiple states, it opens up the possibility of multiple probate court processes each with court and attorney costs.
2. A well designed trust can prevent assets from being liquidated to provide end of life care. Nursing homes are typically $7,000 per month and the average stay is about 3 years, so you're looking at a cost of approximately $250,000. Specialized trusts can be created to protect 100% of the family's assets from being spent down before qualifying for Medicaid. p.s. If you are in your 50's or 60's, you should also consider looking into long term care insurance. This special type of insurance covers pays for care in nursing homes or sometimes even at at the patient's home.
3. The ex-spouses of your divorced children may end up with your life savings. Many states have laws which protect the inheritance rights of a spouse. In Colorado, the surviving spouse is entitled to 5% for each year of marriage up to 50%. Meanwhile, families are getting smaller, estates are much bigger, and the divorce rate is over 50%. You're not alone if you're concerned that a significant portion of your life savings may end up with the ex-spouses of your children. With some planning, inheritance can be structured in trusts not to individuals (children and grandchildren). This is another form of trust that gives children asset protection, shielding the asset in the event their children get divorced, are pursued by creditors, or find themselves in a lawsuit.
Just a reminder. I'm not an attorney and this article is not a replacement for legal advice. While the information provided above may be helpful, you should seek the counsel of a legal professional. ---
Note: Our goal is to provide exceptional service to our clients. The ideas and strategies in this blog post are the opinion of the writer at the time of publication. Silver Fern Homes recommends careful and complete due diligence before buying or selling real estate or other investments. Consult with your professional advisers before making financial decisions. This article is not intended as legal, tax, or investment advice. Silver Fern Homes will not be held liable for investment choices derived from this article.
by Dallice Tylee
We celebrated Dallice's birthday on our most recent visit. As usual, a quick phone call confirmed our dining preferences and booked a reservation for the ever popular Sunday brunch. 