Colorado Family Trusts – What you Need to Know
Although many people have heard the term family trust before, it’s common for those same people to struggle defining exactly what a family trust is. This article sheds light on what family trusts are, what it takes to set one up, the different trusts that exist, and some benefits to creating one.
What Is a Family Trust in Colorado?
A family trust is not actually a type of trust, it’s more of a general term. The name simply speaks to the goal that the trust sets out to accomplish. Therefore, a family trust is set up by an individual who would like their family members to receive benefits either during the individual’s lifetime or after their death.
What Does It Take To Set Up a Trust in Colorado?
Trusts are significant to one’s estate planning options and are suitable for a variety of situations, including for any individual who has wealth to protect or bequeath. Preparing a document that assigns a trustee and a beneficiary is the first step to creating a family trust. The grantor, typically a parent or grandparent, is the person who creates the trust and puts their assets into it. During the creation of a trust, the grantor assigns and names a trustee and beneficiaries. The grantor then lists or funds the trust with investments, property, or other belongings that will be distributed after their death.
The trustee assigned is an individual or a company whose responsibility is to supervise the execution of the trust on behalf of the grantor. A beneficiary is the recipient of the assets in the trust and given to them by the grantor. The beneficiary is typically a family member, but there are certain situations where the beneficiary is an unrelated person, or even a charity.
Also outlined in the trust document are detailed instructions for the trustee on how to properly execute the details of the trust according to the grantor’s wishes. Because every estate is different and some are more complex than others, it is best to work with a Colorado estate planning attorney whose expertise is to help create these documents alongside the grantor so that nothing gets missed or misinterpreted after an individual’s passing.
Once the trust is set up and the proper documents are in place, the assets outlined have to then be transferred into the family trust in Colorado. All this means is that the assets need to be formally re-titled to make them trust-owned rather than individually-owned. This entails reaching out to entities such as banks and other financial institutions to complete required paperwork in order to reassign the assets to the trust. Depending on the type of asset and trust, it may make sense to name the trust as the beneficiary of an asset rather than re-titling, and it is important to understand the implications of these options.
What Are the Types of Trusts in Colorado?
The following types of trusts in Colorado can all be made into family trusts:
- Revocable Trust
- Irrevocable Trust
- Inter Vivos Trust/Living Trust
- Testamentary Trust
- Marital Trust
Colorado Revocable Trust
A revocable trust is the most common type of trust in estate planning. It is typically chosen so that the property can be managed to the grantor’s benefit. In most cases, the grantor keeps certain rights over the trust during his or her lifetime. The grantor can make alterations or even revoke the trust after its creation if they wish to do so and have the requisite capacity. When a grantor dies, the trust acts like a will, and the property is distributed to the beneficiaries as directed by the trust agreement or a Colorado beneficiary deed. Although a revocable trust is created prior to the grantor’s death, once they die, it becomes irrevocable.
Colorado Irrevocable Trust
An irrevocable trust can be created during the grantor’s life and can become effective during the grantor’s life or at their time of death. Once the trust is signed or becomes effective, the grantor may not make any changes or even revoke the trust except in specific circumstances, which must still often be approved by a Colorado probate court. However, the trustee assigned to the execution of the trust may have the power to do so in certain situations. People choose to create irrevocable trusts for a variety of reasons. These include to provide minor beneficiaries with financial management, to protect a beneficiary from out-of-control spending habits, to provide oversight for a beneficiary with substance abuse issues, to support a disabled beneficiary so they are still eligible to receive public benefits available to them, etc.
Colorado Inter Vivos Trust/Colorado Revocable Living Trust
An inter vivos trust, sometimes referred to as a Colorado revocable living trust, is made and takes effect while the grantor is alive and well and can be made revocable or irrevocable. The duration and administration of this trust is determined at the time of its creation and can be implemented during or after the grantor’s lifetime. The most common examples of an inter vivos trust are when a grantor creates a revocable trust for the grantor’s own benefit during his or her lifetime, or when a parent sets up a college education fund for a child or children.
You may have heard the term Colorado asset protection trust before and wondered how it compared to a living trust. While their benefits are similar in that they can protect your assets from creditors, Colorado doesn’t really recognize or authorize Colorado asset protections trusts. Due to this, it makes more sense to select the living trust route, which is revocable unlike an asset protection trust, to protect your assets.
Colorado Testamentary Trust
Opposite to an inter vivos trust is a testamentary trust and is outlined in the documents that make up a grantor’s last will and testament. Because a Colorado testamentary trust does not become accessible until the death of the grantor, it is naturally classified as irrevocable, since the grantor is no longer alive to agree or disagree to any proposed changes. Once the grantor is deceased, the will with the testamentary trust typically goes through a Colorado probate court to first ensure its legitimacy. Once it’s been accepted by the court as valid, the personal representative (executor) then follows the instructions laid out in the will to distribute funds or assets to the trustee for the benefit of assigned beneficiaries.
Colorado Marital Trust
Also known as an “A” trust, a marital trust ensures that the grantor’s assets are passed on to a surviving spouse upon the death of the grantor. Once both have passed, the trust is then transferred to the designated beneficiaries.
What Is the Benefit of a Colorado Family Trust?
A family trust may be implemented for several reasons, but the four below are some of the most common:
Colorado Probate Avoidance
When a person dies, their beneficiaries do not have immediate access to their inheritance. A probate estate must be opened if the person who died owned any real property individually, or had other assets in his or her name individually (without a joint owner or beneficiary designation) with a total value above a certain dollar limit ($70,000 in 2021). In that case, a probate court has to first review the grantor’s will, if any, and appoint a personal representative (executor) before the executor can proceed with the probate process and ultimately distribute estate assets. However, a family trust grants ownership rights over the assets outlined within it and are not considered owned by the grantor’s estate for probate purposes. Because of this, they are not subject to the Colorado probate process, which can save time and money.
Reduce Colorado Tax Burdens
Certain types of family trusts allow a grantor’s income to be distributed to family members who fall into a lower income tax bracket. Because of this, the income then gets taxed at a lower rate. By distributing income in this way, the entire family’s tax burden is reduced and allows for more of the wealth to be available.
Protect Your Family’s Privacy
Upon death, a will gets lodged with the court and becomes public record. This includes the identities of the beneficiaries. The executor also may be required to file documents listing assets and debts of the estate and how they are distributed. However, an established family trust comes with privacy, even after the grantor is deceased. Information on assets held in a family trust, including how they are distributed, is not accessible to the public.
Keep Your Assets out of Creditor’s Hands
Creditors may make claims for payment after a grantor’s passing. However, a properly-structured family trust can provide protection for the beneficiaries from creditors, including when bankruptcy proceedings or a lawsuit are at play, as well as protection in the event of a beneficiary’s divorce.
Where Do I Begin to Set up a Family Trust in Colorado?
The best place to begin setting up a family trust in Colorado is to schedule a consultation with Brestel Bucar and speak with one of our estate planning professionals. Because a family trust can be set up for a variety of reasons, the type of trust you decide to create will be based on your specific needs. An estate planning professional can help you navigate the options available to determine whether or not a family trust is right for you.
At Brestel Bucar, we help clients plan for the future to protect their hard-earned property, as well as their beneficiaries. Contact us to schedule a meeting with a member of our legal team today.