ADVICE ABOUT YOUR WILL AND RELATED DOCUMENTS
(Revised as of 1/4/09)
THIS DOCUMENT PROVIDES ONLY GENERAL GUIDANCE AND IS NOT INTENDED
TO BE A SUBSTITUTE FOR THE ADVICE OF A QUALIFIED ATTORNEY.
DO I NEED A WILL?
It depends. If you die without a Will, your property will pass in accordance with a statutory scheme. For example, if you are married, your entire estate will generally pass to your spouse. If that's not what you want, you need a Will. Here's another example. Suppose you are single and have no children. In that case, your estate would pass to your parents if they were still living. If that's not your intent, you need a Will. It is not true that your estate goes to the state if you die without a Will; that generally happens only if you have no living relatives at all.
If you have children, you need a Will to appoint a guardian for your children in the event you die before your children reach legal age.
A Will can be used to accomplish many other objectives. These might include expressing your wishes for your pets, making charitable gifts, or establishing a trust in the event your children are orphaned by your death.
I'VE HEARD PEOPLE CAN AVOID PROBATE BY PUTTING SOME OR ALL OF THEIR ASSETS IN A LIVING TRUST. IS THIS TRUE?
Sometimes, but in many cases it's not worth the effort. Everyone wants to "avoid probate," but very few know what probate is. Probate is simply the legal process by whichyour Will is verified, your creditors are notified of your death, and the state collects any inheritance or estate tax due. The probate process is very simple in Colorado. (In Colorado, there is no inheritance tax if the net value of the estate is less than $3,500,000.00 for the year 2009. By the way, a living trust may help you “avoid probate,” but it won’t save you any taxes).
You may avoid probate by transferring some or all of your property to an Inter Vivos Trust, but your life becomes a fiction. For example, John Smith's home is no longer owned by John Smith; it is owned by a separate entity -- the John Smith Trust. Some trusts must file a separate tax return each year.
Yet another problem arises if you transfer your real estate to a living trust: you have transferred your property and you therefore may need to purchase a new title insurance policy or obtain an endorsement, but the lawyers selling living trusts seldom think about this.
Lawyers have made a lot of money drafting Living Trusts, but there are easier and cheaper ways to avoid probate.
The most obvious way to avoid probate is to hold property in joint tenancy with right of survivorship. Such property automatically passes to the survivor when the joint owner dies. Most married couples own their homes in this fashion.
NOTE: While joint tenancy may be a good way to avoid probate, it may not always be good estate planning. With couples wealthy enough to worry about the federal estate tax (see below), it is frequently advisable to make sure the value of each spouse's estate is roughly equal. To accomplish this, it may be necessary for one spouse to hold title to an asset rather than for both spouses to hold it in joint tenancy.
Another way to avoid probate is to make sure you designate specific beneficiaries on any life insurance policies you own rather than simply directing the insurance company to pay the money to "my estate" or "by law." If you designate your estate as the beneficiary, the people you want to receive the money won't get it until the probate court approves. If you designate specific individuals, the insurance company generally pays the money directly to the beneficiaries as soon as it receives a copy of the death certificate, unless the beneficiaries are minors.
Still another way to avoid probate is for a parent facing imminent death to transfer property to children before death; however, doing so may cause more problems than it creates. An ailing parent who does this may save a few hundred dollars in probate costs only to find that he/she has created a tremendous capital gains problem for the child. Consult an attorney before making this type of gift.
WHAT CAN I DO TO MAKE SURE MY LOVED ONES ARE NOT BURDENED WITH MY DEBTS AFTER I DIE?
First, no law requires your loved ones to pay debts that were solely yours, though they may have a legal obligation if they were a co-debtor or guarantor. (Note: funeral homes are likely to require loved ones to promise to pay the funeral/burial expenses).
As an example, assume a single or widowed man owns three “assets” on the date of his death – a home owned in joint tenancy with his son, an insurance policy with the son as the beneficiary, and an old Volkswagen. Let’s assume this man holds five credit cards (only in his name) at the time of his death, each with a balance due of $5,000.00.
When our hypothetical man dies, his house automatically passes to his son, so the creditors have no claim to it. (I am assuming the home was placed in joint tenancy before the man incurred the credit card debt. If he placed the home in joint tenancy after incurring the debt, the creditors may be able to argue that he did so with the intent to defraud his creditors).
When our hypothetical man dies, the insurance company has a contractual duty to pay the benefit to his son. Again, the creditors have no claim to that money.
So the only asset the creditors can legitimately claim is the Volkswagen, but the reality is that none of them are likely to bother because it will not be cost effective for them to pursue the matter.
Summary: the assets of a decedent may pass by (1) form of ownership, such as joint tenancy; (2) contract, such as insurance; or (3) probate. But unsecured creditors can only go after probate assets, and many times will not do so because it will not be cost effective. They will simply write off the decedent’s debt, which is one reason the rest of us all pay high interest rates on our credit cards.
CAUTION: If you are a survivor of the decedent, don’t volunteer or promise to pay his or her debts before consulting an attorney. You may not have a legal duty to do so, but once you make a promise to do so or if you continue making payments on behalf of the deceased, you may become obligated to pay those debts.
CAN YOU EXPLAIN ESTATE AND INHERITANCE TAXES?
The Federal Estate Tax
The only estate tax is the federal estate tax. Under the current law any estate with a net value, including life insurance proceeds, above $3,500,000.00 is taxed. In other words, the first $3,500,000.00 is exempt from the tax. As the law now stands the estate tax is repealed on January 1, 2010, BUT it automatically goes back into effect on December 31, 2010, unless Congress acts prior to that date.
In addition to the $3,500,000.00 exemption, there is also a provision known as the unlimited marital deduction, which provides that there is no tax on an estate that passes to the decedent's spouse. This is true even if the estate of the deceased's spouse exceeds $3,500,000.00.
This creates an interesting situation for couples where the net value of the estate of one spouse exceeds $3,500,000.00. Suppose each spouse has an estate worth $3,500,000.00. When the husband dies, his estate passes tax-free to the surviving spouse who now has an estate worth $7,000,000.00. But when the surviving spouse dies, her estate exceeds the $3,500,000.00 exemption and her estate will pay estate taxes. The first spouse wasted his federal exemption by passing his estate to his wife because all transfers to a spouse are tax-free.
To avoid this situation, many couples with estates of this size execute what are known as “disclaimer Wills.” If we continue with this example, suppose the husband's Will leaves his estate to his wife, but provides that any sums renounced or "disclaimed" by his wife shall go to a trust which allows his wife to live off the income of the trust for the rest of her life, with the corpus of the trust to pass to their children when the surviving spouse dies. When the husband dies, the wife disclaims or renounces her husband's gift to her. The $3,500,000.00 of the husband passes to the trust tax-free because it is not large enough to be taxed. When the surviving spouse dies, her estate also passes tax-free to the children because it is not large enough to be taxed either. This couple has saved several hundred thousand dollars in estate taxes by some simple estate planning.
Inheritance taxes are creatures of state law. Colorado follows the federal estate tax scheme, so in Colorado there is no inheritance tax if the decedent's estate is valued at less than $3,500,000.00. As the law now stands the estate tax is repealed on January 1, 2010, BUT it automatically goes back into effect on December 31, 2010, unless Congress acts prior to that date.
WHY SHOULD I WORRY ABOUT ESTATE TAXES? DON’T THE 2001 CHANGES TO THE TAX LAWS REPEAL THE ESTATE TAX?
There are two reasons you must still consider the estate tax. First, you may die before the tax is repealed in 2010, so if there is a chance the value of your estate may exceed the applicable exemption amount, you should plan for the estate tax. Second, although the 2001 changes to the tax laws repeal the estate tax as of January 1, 2010, the estate tax automatically goes back into effect on December 31, 2010, unless Congress acts prior to that time. In other words, as things stand now, the estate of a person who dies in 2010 will not have to pay the estate tax, but the estate of a person who dies in 2011 could be subject to an estate tax. Crazy? Yes, but the 2001 Congress drafted the law this way so it would not have to show the true cost of repealing the estate tax.
With the nation’s current financial problems, our belief is the Congress will keep the estate tax in some form, at least for the very wealthy.
MAY I NAME MORE THAN ONE PERSON AS MY PERSONAL REPRESENTATIVE (EXECUTOR), TRUSTEE, GUARDIAN, CONSERVATOR, OR AGENT UNDER POWER OF ATTORNEY?
You may, but I advise against doing so because it creates a situation ripe for conflicts. Suppose you name your two children under a medical power of attorney and one child wants to terminate all life support while the other child does not. Such a dispute would have to be resolved by a court. Naming more than one person to perform any of these duties is generally not a good idea.
WHAT DO “PER STIRPES” AND “PER CAPITA” MEAN?
These terms are frequently used in Wills. “Per stirpes” means by the stem, and “per capita” means by the head. A bequest may be per stirpes or per capita. Here’s an example. Assume your will provides that one million dollars shall be split equally between your three sons -- Tom, Dick, and Harry. Assume also that each of them has two children of their own. Now, suppose Tom dies before you. If your gift is “per stirpes,” Tom’s two children will split his 1/3 share of the original gift. If your gift is “per capita,” Dick, Harry, and Tom’s two children will each get 25% of the original gift. Unless otherwise instructed by you, I draft all my Wills so that all gifts are per stripes.
WHAT SHOULD I DO WITH MY WILL?
a. Your Will should be placed in a location protected against fire, theft, damage, or other loss.
b. If you wish, some courts allow you to file your Will with the court in the county where you presently reside or in the county of your legal residence. If you file your Will with the Court and you subsequently move to a different county or state, you may go to the courthouse, pick up your Will, and take it with you. You may retrieve your Will from the Court at any time.
c. You may place your Will in a safety deposit box; however, I recommend against this because many financial institutions "freeze" access to such boxes upon death.
d. Do NOT assume that your attorney will keep copies of your Will and related documents. Attorneys are under no obligation to do so, and most will retain copies for only a limited period of time.
SHOULD I MAKE COPIES OF MY WILL?
You should make a copy of your Will for your personal representative ("executor"); however, be sure to write "COPY" on each page. Generally, a copy of a Will has no legal effect; only the original Will may be probated. Be sure to tell your spouse and/or your personal representative the location of the original Will.
WHEN SHOULD I HAVE MY WILL REVIEWED?
You should have your Will reviewed after any important changes in your family relations, such as your marriage or divorce, or the birth, adoption, or death of a family member. You should also have your Will reviewed if your financial situation changes significantly. Finally, you should consider making a new Will if you have given away property during your lifetime that your Will purports to leave to someone else.
As attorneys, it is simply not feasible for us to monitor the financial situation of all of our clients, nor is it feasible to advise all of our clients of any changes in the law after they have executed Wills and related documents; each client’s situation is different. Therefore, you must monitor your situation and call us if you have any questions or concerns.
SHOULD I MAKE A NEW WILL IF I MOVE TO ANOTHER STATE?
Not necessarily. The fact that you move to another state does NOT automatically invalidate your Will; however, you may wish to have your Will reviewed by an attorney licensed to practice law in your new state of residence.
HOW LONG DOES MY WILL REMAIN EFFECTIVE?
Your Will remains effective until destroyed by you or otherwise nullified by your actions.
WHAT IS THE PROPER WAY TO REVISE MY WILL?
Do NOT try to change your Will by crossing out or adding certain provisions. Because the law requires that Wills be witnessed in accordance with certain formalities, any marks on the original Will may invalidate it. If you want to revise your Will, please let us know. In that event, we will prepare a Codicil (amendment) to your Will or, if you desire extensive changes, an entirely new Will.
WHEN DOES MY WILL BECOME EFFECTIVE?
Your Will does not become effective until you die. Therefore, you may wish to purchase disability insurance and/or execute a Durable Power of Attorney so that funds will be available to your loved ones in the event circumstances other than death prevent you from transmitting funds to them. Ask us about this if you have questions.
CAN I INCLUDE ANYTHING IN MY WILL TO COMMUNICATE MY BELIEFS AND WISHES TO FAMILY AND FRIENDS?
Strictly speaking, your Will is a legal document and should not include these types of things. Some people are now preparing “ethical wills” for this purpose. These documents have no legal significance, but can be used to communicate your beliefs and wishes to surviving family members and friends. You may want to visit www.ethicalwill.com and/or www.personalhistorians.org.
WHAT ABOUT A LIVING WILL?
A "living Will" or Medical Power of Attorney lets you specify in advance what measures you want taken to preserve your life in the event you become severely ill. This document appoints some other person to make health care decisions for you in the event you are unable to make such decisions, and provides guidelines as to what you do and don't want done. A good living Will should specify your wishes regarding artificial nourishment, cardiopulmonary resuscitation, organ donation, and so forth. Colorado has enacted a number of statutes that authorize patients to execute "advance directives" or "declarations" in connection with various medical decisions. Our firm combines all these documents into one that we call "Declarations and Medical Power of Attorney."
NOTE: It is useless to include statements regarding your wishes as to health care in your Will -- A Will does not become effective until you die.
HOW CAN I BECOME AN ORGAN DONOR?
Organ and tissue donation is one of the most important bequests a person can make. There are many ways to become an organ donor. In Colorado a person may become an organ donor by electing to do so on his/her driver’s license or state identification card. You may also sign a declaration under the Uniform Anatomical Gift Act or one of the other advanced directive statutes. (I include this option when I draft a Declaration and Medical Power of Attorney.
It is not wise to use your Will as a method of becoming an organ donor. Wills are often not examined closely until days after death when organ or tissue recovery is no longer possible.
If you want to be an organ donor, you must decide whether you want your gift to include any organs and/or tissues or only certain ones. You must also decide whether to limit the purposes for which your organs/tissues may be used. Some people want to make their organs/tissues available for transplants or therapy, but not for education or research.
If you want to be an organ donor, make sure your loved ones know your intent. When family members do not know their loved one’s wishes, they sometimes withhold their consent. Quite often this means that the family overrides the wishes of the would-be donor. Informing family members of your wishes ahead of time also spares them the burden of making an intensely personal decision at an extremely emotional time or provoking a family disagreement at the time of death.
A sample letter to your family members on this topic might look like this:
Dear (family member):
I want you to know I have decided to become an organ/tissue donor upon my death, and have signed a legal document to that effect. I consider becoming an organ donor an important legacy of my life, as it will mean a better life or even life itself to those who receive my donations.
While your consent is not legally required for the donation to be effective, I want you to honor my wishes to be an organ/tissue donor by providing your consent if asked.
HOW CAN I GIVE INSTRUCTIONS REGARDING THE DISPOSITION OF MY LAST REMAINS, FUNERALS, ETC.?
There are two ways. First, you can give your instructions in a Last Letter of Instructions (see below). This is a good way to do it if you are sure your loved ones will follow your instructions. Colorado law also gives you the right to execute a legally binding Declaration concerning your last remains, by which you can state how you want your remains disposed of and what ceremonies, if any, you want.
WHAT IS A GENERAL POWER OF ATTORNEY?
A General Power of Attorney is a document appointing someone to transact business on your behalf. It may be drafted so that it becomes effective immediately or only after you become incapacitated. The purpose of the document is to prevent your loved ones from having to seek appointment of a guardian or conservator to keep your affairs in order while you are incapacitated.
It is dangerous to execute a General Power of Attorney that becomes effective immediately, particularly if you are granting the Power of Attorney to a spouse and your marriage is not stable or if you are granting the power to someone you don't know well. We have seen cases where the spouse granting the Power of Attorney comes home only to learn that the other spouse just used the Power of Attorney to buy a new car and has thus obligated to spouse granting the Power of Attorney to pay for the vehicle. We often draft our General Powers of Attorney so that they become effective only after two doctors certify that the person granting the power has become incapacitated.
WHAT IS A LAST LETTER OF INSTRUCTION?
A Last Letter of Instruction is a document without legal effect. Its purpose is to tell your survivors in an informal and personal way certain important things you would want them to know upon your death or in an emergency. When properly completed, your Last Letter of Instruction will name those persons most familiar with your property and state the location of your important papers. Some of the items you might include in your Last Letter of Instruction are:
a. The location of every copy of your Will and the original.
b. The name and address of the attorney who prepared the Will.
c. The location of your safety deposit box and the key to the box, the contents of the box, and who is authorized to enter the box.
d. The location of your important personal papers such as birth, adoption, marriage and divorce certificates, social security card, military records, and citizenship papers.
e. A list of your life insurance polices to include the name of the company, policy number, amount of the policy and name of the beneficiaries, as well as the location of the policy. Don't forget the name of the local agent.
f. A list of your medical or disability policies to include the name of the company, policy number, type of coverage, location of the policy, and the name of the local agent.
g. A list of your places of employment and any benefit plans to which you are entitled.
h. A list of the unions and fraternal organizations to which you belong and any organizational benefits to which you are entitled.
i. The location of your federal, state, and local tax returns for the last six years.
j. A list of all the securities and savings bonds you own and their location.
k. The location of all the real estate you own and the location of the deeds, mortgages, title insurance policies (or abstracts), tax receipts, surveys, and insurance policies relating to the real estate.
l. A list of the debts you owe and which are owed to you.
m. A list of the banks, savings and loans, or credit unions in which you have checking and/or savings accounts and the location of the passbooks or checkbooks.
n. A list of the credit cards and credit accounts which you possess.
o. A brief description and the location of tangible personal property such as household goods, jewelry, automobiles, and the location of any necessary bills of sale.
p. A list of the names, addresses, and telephone numbers of the relatives, friends, and acquaintances you would like notified of your death.
q. Although it may be rather morbid, a list of burial instructions and funeral arrangements you would like to have. In creating this list, consider: (1) the type and/or cost of the coffin in which you want to be buried; (2) what types of and how much you want spent on flowers, death notices in newspapers, and music at your funeral; (3) where you want your remains to be buried; (4) the cost of transporting your corpse, a cemetery plot and opening a grave; (5) whether you would prefer cremation of your remains before or after a formal funeral; and (5) whether you have donated your body or any parts to medical societies or organizations.
r. A list of other persons (names, addresses, and telephone numbers) that should be contacted, such as, but not limited to: your attorney, accountant, banker, broker, clergyman, doctor, employer, executor of your estate, insurance agent, etc.
s. Any passwords or PIN numbers necessary for your loved ones to gain access to computers, ATM’s, etc.
Many of these items you probably will have discussed with your survivors already. Nonetheless, and especially in the case of a surviving spouse, it is helpful to have this kind of Letter of Instruction since the grief and sorrow which surround the death of a loved one creates confusion and disarray. The steadying influence of a personal and loving letter of instruction to the surviving spouse will be a great value in helping him or her to make the right decisions after your death. Once you complete this Letter of Instruction, you should probably keep it in a safe place and inform your loved ones as to its location.