Getting Your Property To The Right People, At The Right Time

Estate planning, without concerning yourself with estate taxes, involves making certain that your property will pass to the right persons, at the right time. ("Property" is used generically, and refers to cash, stocks, bonds, etc., as well as to real property). Generally, how you hold title to your property will determine how that property will pass upon death. Typically, property will pass one of three ways: (i) by contract; (ii) by operation of law; or (iii) through probate.

Property passing by contract. If you have contract rights which obligate another to distribute property to your designated beneficiary, such property will pass pursuant to that contract. For example, a life insurance policy is a contract by which the insurance company is obligated to pay your death benefit proceeds to your designated beneficiary.

Property passing by operation of law. If two people own property as joint tenants, with rights of survivorship, upon the death of one joint owner, the surviving joint owner will own the subject property, individually. No overt act is required of the surviving joint tenant for him/her to be the sole owner of the property; the decedent's interest in the property is said to have passed to the surviving joint tenant, by operation of law.

Property passing through probate. All property owned in your own name alone, for which you have no ability to identify an at-death beneficiary, will pass pursuant to your Will or, if you don't have a will, pursuant to the laws of intestate succession of your state of residency. Property so passing is said to pass through probate. For example, a piece of land titled only in your name will pass via probate, to the person identified in your will or to the person identified under state law.

The following table will assist in determining how your property will pass:

• IF PROPERTY IS OWNED:
• IT WILL PASS:
• In Your Name Alone
• As Part of Your Probate Estate
• By You and Another Person or Other Persons as Tenants in Common
• Only Your Proportionate Share Passes As Part of Your Probate Estate
• By You and Another Person or Other Persons as Joint Tenants With Rights of Survivorship
• The Entire Property Passes By Operation of Law to the Surviving Joint Tenant(s)
• In Your Name Alone but for which You Have Made a Beneficiary or Pay On Death (POD) Designation
• To the Named Beneficiary or Beneficiaries
• In a Trust
• Pursuant to the Trust Document

The Probate Process

"Probate" has come to refer to the legal process of gathering a deceased person's property, paying her debts (including estate taxes), and distributing whatever is left to the decedent's beneficiaries. If a person has a Will, the beneficiaries of her property passing through her probate estate typically will be identified in such document. If a person dies without a Will, the beneficiaries of her property passing through probate will be determined by the laws of the state in which she resided at the time of death. Simply put, such laws cause the property passing through probate to be distributed as the State Legislature thinks the decedent would want her property to pass if she had written a will. (See article entitled DISTRIBUTION OF THE PROBATE ESTATE IF THERE IS NO WILL for a discussion of the rules applicable in Colorado.)

Managing the Probate Estate

The person responsible for overseeing your estate during the probate process - i.e., the person who will gather your assets, make sure your debts are paid, and distribute your property - is called your "executor" or "personal representative." You may designate the person who will serve in that capacity under your Will. If you die without a Will, state law will generally identify the persons who shall be given preference to serve. For example, Colorado law gives preference to serve as your personal representative to the following persons, in the order listed: (i) the decedent's surviving spouse; (ii) any other person entitled to property passing through the decedent's estate; and (iii) any of the decedent's creditors (if no one else qualifies to act within 45 days after the decedent's death). Clearly, it would be best to identify who will manage your probate estate and the only way to do so is to create a Will.

Property Passing to Disabled Beneficiaries

A minor child is deemed to be under a "disability" with respect to the management of her property and is referred to as a "protected person." Generally, if property passes to a protected person (pursuant to the laws of intestacy, by beneficiary designation, or otherwise) a conservator will have to be appointed to manage such property until the protected person is no longer "disabled." If a minor child is disabled because of age, then this will occur upon the child attaining the age of majority. A Court may appoint to serve as conservator of a protected person's estate: (i) an individual twenty-one years of age or older; (ii) a trust company, or (iii) a bank with general power to serve as trustee.

Colorado law provide a list of persons who are entitled to be considered for appointment as conservator of a protected person's estate, as follows:

1. A nominee of the protected person if the protected person is fourteen or more years of age and has, in the opinion of the court, sufficient mental capacity to make an intelligent choice;
2. The spouse of the protected person (if the spouse is not also a "protected person");
3. A parent of the protected person (if the decedent was divorced, this could include the decedent's ex-spouse);
4. Any relative of the protected person with whom the protected person has resided for more than six months; and
5. A person nominated by the person who is caring for the protected person or paying benefits to the protected person (this could be the spouse of the decedent's ex-spouse, in the case of property passing to the decedent's descendants under the laws of intestacy).

Typically, a conservator will be required to report to the Court each year and render an accounting of how, why and where she spent the money necessary for the proper care of the protected person. Further, a conservator also will be required to provide to the Court a Performance Bond to guarantee that she exercises proper judgment in handling, investing and spending the property of the protected person.

A protected person will have the right to demand and receive a complete accounting from the conservator of all of the financial actions the conservator made with the protected person's property during the entire period of the conservatorship as soon as the protected person attains the age of majority. Moreover, when a minor child attains the age of majority, she will have an absolute right to withdraw and spend all of her inheritance (which was previously held by the Conservator) without input from anyone.

Costs of Dying

The "costs of dying" include:

1. Transfer Costs - probate and administration expenses including court costs, attorney fees, accounting fees, appraisal fees, etc.
2. Lack of Liquidity - If the estate doesn't have enough liquid assets with which to pay estate obligations, the personal representative may be forced to sacrifice property or business interests at fire sale prices. This may cause the heirs to suffer financial shock, as well as emotional devastation.
3. Improper Disposition of Assets - Some heirs inherit the wrong asset or the right asset in the wrong form or at the wrong time. The beneficiary may not be accustomed to managing large sums of money and may end up losing substantial amounts due to carelessness, ignorance or misguided advice.
4. Death Taxes (also known as estate taxes, transfer taxes, inheritance taxes) - depending upon the size of your taxable estate, the applicable tax rate starts at 37% and grows to 55%.

With proper estate planning most, if not all, of these "costs" can be avoided. (See article entitled Planning to Avoid Death Taxes.)