Perils of Avoiding Probate

By James R. Wade, Esq.

In states (unlike Colorado) where estate settlement costs are high and the system of estate administration is slow, there are various methods properly used to have assets pass outside of the probate system.  In Colorado, however, these methods may be counterproductive.

In some states, revocable trusts are often used as a will substitute to avoid probate.  In Colorado, however, our system of informal probate, unsupervised administration, and informal closing effectively removes the court from estate administration and makes probate estate administration as efficient as use of a revocable trust at death. 

There are disadvantages to revocable trusts including the following:

1.    Loss of statutory homestead exemption for residential real estate placed in a revocable trust (our Court of Appeals ruled that the exemption was intended to benefit people and not trusts);

2.    Loss of short four-month period for creditors to file claims in a probate estate after death;

3.    Risk of having to file trust income tax returns prior to death;

4.    Post-death complications in not being able to utilize income tax and distribution planning (trusts generally can only utilize a calendar year for income tax purposes; post-death a trust can file a special election under the Internal Revenue Code to be taxed as if it were a probate estate so as to get the benefits of selecting a non-calendar year); and

5.    The early costs of setting up the trust and funding it (the ultimate net cost should be about the same).

POD (payable on death) bank accounts and TOD (transfer on death) security accounts are authorized by statute and are sometimes promoted by financial institutions as a short-cut way to avoid probate.  Again, probate cost avoidance is not applicable in Colorado, and there is a real risk that use of these accounts may end up distorting the primary estate plan provided in the will.  Assume you have your estate under your will pass in equal shares to your three children.  Having no POD or TOD designations will accomplish this.  If, however, these kinds of accounts are used to designate a particular child as recipient of a particular account or accounts there must be constant surveillance as to the value and titling of each account to keep your overall estate in balance.

An aside: Adding a family member’s name to an asset as joint tenant (again to avoid probate at death) may be unwise.  Such action with respect to real estate and securities creates an irrevocable, completed gift for transfer tax purposes and may require the filing of a gift tax return.  It may also subject the assets to the creditors of the child whose name is added.  This may not be the case with bank accounts, but those accounts provide their own problems.  Assume again that your will names your three children as equal beneficiaries of your estate.  Assume you add the name of one of your children to your bank account, at least in part to have a second signature to write checks to pay bills.  Assume there is $20,000 in your account at the time of your death.  Does the child whose name was added as joint tenant get the full $20,000 by survivorship or should the amount pass as part of your estate in equal thirds?  The easy solution to this problem is to add the child to your account by using the bank’s power of attorney or agency account registration form (rather than using the joint tenancy registration form).  In this way the child can still write checks to pay bills without distorting the estate plan. 

As additional aside: A revocable trust funded only with real estate outside of Colorado may be appropriate to avoid ancillary probate and administration.  At death the trustee is directed to distribute the real estate pursuant to the will of the person who created the trust. 

Considering Charitable Giving

Josie M. Faix, Esq.

Co-creator of the long-running television show The Simpsons, Sam Simon, was diagnosed with terminal colorectal cancer in 2012.  Mr. Simon has used his grim news as a catalyst to increase his own charitable giving, and to encourage others to do so.  He started the Sam Simpson Foundation in 2002 to benefit and protect stray-dogs from being euthanized.  Since then he has given to countless organizations that care for animals, people, and the environment.  Realizing he has a short time left, he has spoken publicly about his desire to give his estate to charity and the good his fortune will do for the causes he cares about.  To read an interview with Sam Simon about his charitable works, visit Sam Simon.

You don’t have to be dying or extremely wealthy to give more thought to your own charitable intent.  There are tax-wise ways to give to your favorite causes and programs, including use of appreciated stock, retirement accounts, donor advised funds and private foundations.  Give us a call to discuss charitable giving generally, and its coordination with your estate plan.

Recipient of IRA Subject to Transferee Liability for Taxes

By Laurie A. Hunter, Esq.

In U.S. v. Mangiardi, (DC FL 07/19/2013) 112 AFTR 2d 2013-5108, the district court refused to dismiss a transferee liability action brought by the IRS against a decedent’s daughter who received funds from his IRA after his death. The gross estate consisted primarily of $4.5 million in a revocable trust and $4 million in an IRA. Tax due was $2.4 million after audit (actually reduced by $200,000!), but the estate requested and received extensions of time to pay, arguing that the securities had greatly depressed values due to the recession. In fact, the decedent’s daughters engaged in active trading of the securities and paid themselves hundreds of thousands of dollars in fees. The IRS levied for the unpaid taxes; the probate estate is insolvent. The IRA was distributed to decedent’s nine children as named beneficiaries. The Court noted that if the estate tax is not paid after notice and demand, a lien (which lasts for 10 years) arises automatically against all property in the estate. In addition, a "transferee of property" in the estate has personal liability to the extent of the value of the property received. The Court agreed with the IRS that the transferee liability suit can be brought within the 10-year time period of the lien against the transferor, and was not limited to the three-year plus one statute of limitations in Code section 6901 that concerns transferee liability. Point to remember: recipients of assets on death are liable for taxes if unpaid by the estate.