In the past few years, inflation has surged. From groceries to gas, the cost of goods and services has increased in virtually every area of life. As the cost of living has skyrocketed, your income may not have kept pace with rising prices. This is of critical importance for those who are in the process of creating an estate plan, as the value of today’s dollar is almost certainly going to be worth less in the future. In response to inflationary concerns, the Internal Revenue Service (IRS) has increased its inflation adjustment from 2023. As a result, you may owe less in taxes from your income in 2024.

How Does the Inflation Adjustment Lower My Taxes?

The IRS applies inflation adjustments to income tax brackets. Typically, the more you earn, the more you pay in taxes as a percentage of your income. A person who earns $40,000 per year will pay a lower percentage of their income than someone who earns $400,000. Next year, your taxes may be lower due to the rise of the minimum income that falls within each tax bracket range. For example, if you are single and earned $45,000 in 2023, you will pay 22% in federal income taxes this spring. After the newest adjustment, you will only owe 12% of your income earned in 2024. As the income that qualifies under each tax bracket increases, your taxes will decrease because you will fall into a lower tax bracket. However, this projection assumes that your salary will hold steady between 2023 and 2024. If you received a salary increase to account for inflation, you may fall within the same tax bracket as the year before. In this scenario, your taxes may not be lower in 2024.

As inflation has risen, many Americans are all too familiar with the increased cost of living. However, one overlooked effect of inflation is the rate at which estates and gifts are taxed. Estate taxes, gift taxes, and the valuation of real property in a decedent’s estate can all depend on IRS adjustments for inflation. As a result, the ultimate tax rate on your estate may rise or fall with inflation, leading to unpredictability for your beneficiaries. Fortunately, you can apply several tax strategies to protect your estate from fluctuations in the tax rate.

How Can I Use Tax Laws to Plan My Estate?

A recent Forbes article highlights several provisions in tax law that can help you with estate planning during inflation. First, take advantage of the increased lifetime gift tax exemption and generation-skipping transfer (GST) tax exemption. The lifetime gift tax exemption allows you to give away a large monetary amount in gifts throughout your lifetime without triggering taxation. The GST tax applies to inheritances that “skip” a generation (i.e., from your children to your grandchildren). The exemption allows you to set aside nontaxable gifts to benefit a grandchild, such as college tuition. In response to rising inflation, the IRS has increased the lifetime gift and GST tax exemption amounts. As a result, a higher monetary amount is now exempted from gift and GST taxes. To take advantage of these exceptions, you may consider giving a gift to your beneficiaries while they are still alive to reap the benefits of the increased exemptions.

When you are choosing a trustee to handle your estate, a professional may be the best option. Professional trustees are experts in managing trusts, and they have no conflicts of interest with your beneficiaries. However, not all professional trustees are alike. They can take the form of banks, trust companies, or private professional fiduciaries. They also vary in the type and quality of service they provide. If you are choosing between professional trustees, there are a few factors you should consider before making your final decision.

First, consider the size of your trust. In a recent Wall Street Journal article, Braverman Law Group’s Managing Attorney, Diedre Wachbrit Braverman, explained why the size of the trust can determine the most appropriate trustee. As she noted in the article, banks are more suitable for large trusts. However, they may not offer trustee services for small to medium-sized trusts. For mid-sized estates in the $1 million to $5 million range, a trust company or private professional fiduciary may be the best choice. Finally, private professional fiduciaries are appropriate for smaller trusts due to their more manageable cost.

Second, evaluate the professional trustee’s fee structure. As Attorney Braverman noted in the article, banks and trust companies tend to charge between 0.5% and 2% of the overall value of the trust. This fee covers services such as filing tax returns, accounting for funds withdrawn from or added to the trust, investing funds, and communicating with beneficiaries. In the alternative, banks and trust companies may charge a fixed minimum fee rather than a percentage, which usually ranges from $2,500 to $5,000. Conversely, private professional fiduciaries charge an hourly rate, usually around $150 per hour. They will also charge the trust for third-party investment management expenses. Professional fiduciaries’ fees are typically lower than those of an institutional trustee, such as a bank. Additionally, professional trustees often maintain relationships with service providers, such as realtors, that can lead to significantly lower rates for these services.

Adult children often want to ensure their parents are cared for and protected. If your parent is sick or elderly, you may have questions about the best way to protect their assets while they are alive. Consequently, you may decide to talk to your parent about initiating a trust and appointing a trustee to honor your parent’s wishes. To establish a living trust, your parent will need to appoint a trustee to manage the trust’s assets. Often, parents appoint their adult children as trustees. However, before accepting the role, it is important to be as informed as possible about the duties of a trustee. In some circumstances, working with a professional trustee may be the more appropriate course of action.

What Are Your Responsibilities as a Trustee?

As a trustee, you are primarily responsible for making financial decisions about your parent’s trust. To effectuate these decisions, you may invest part of the trust, handle businesses held in trust, or manage assets held in trust, such as property. Braverman Law Group’s Managing Attorney, Diedre Wachbrit Braverman, delineated additional responsibilities of a trustee in a recent Wall Street Journal article. As Attorney Braverman explained, trustees administer a trust by supervising and collaborating with financial professionals, such as accountants, financial advisors, property managers, and estate planning attorneys.

Additionally, you should be prepared to serve as a trustee for an extended period of time depending on the complexity of the trust. For example, if beneficiaries are minor children, they may not inherit money for several years. Accordingly, a trustee should expect to manage the trust for the requisite time period until minor beneficiaries are old enough to receive assets from the trust. Conversely, if a trustee can administer the entirety of a trust’s assets at once, the process may take less than a year. However, before stepping into the role of trustee, you should ensure you understand the level of commitment required to responsibly handle your parent’s assets.

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Choosing a trustee can be just as important as establishing a trust itself. Often, an individual will designate their child to help administer their plan for the trust. Clients may believe that appointing their child as a trustee will save them the expense of hiring a professional fiduciary. However, in some circumstances, the expense may be worthwhile. Before appointing your child as a trustee, you should consider the potential drawbacks of putting your child in charge of your life.

What Problems Can Arise When a Child Is a Trustee?

One major issue with appointing a child as a trustee is the inherent conflict of interest. A child trustee is also a likely beneficiary of your trust. While the trustee must be fair in administering the trust’s assets, a child trustee must balance that obligation with their own interests in the trust. Problems can occur even when the child trustee does not intend to prioritize their personal interests. The sheer potential for a conflict of interest may lead a child trustee to believe their decisions are fair when they are actually self-serving.

Additionally, if you have multiple children, appointing one child as a trustee can breed jealousy among siblings. Some clients wish to designate all of their children as co-beneficiaries to avoid this precise issue. However, appointing multiple child trustees can lead to problems with agreeing on the important decisions that the role of a trustee requires. In addition to these problems, biases may arise if a child must administer a parent’s assets to a stepparent beneficiary, with whom their relationship may be more fraught.

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When appointing a person to administer your trust, you may assume that a family member would be less expensive than using a professional trustee or executor. In reality, working with a professional could be more cost-effective in the long run. Many people believe that a professional trustee or executor’s services add no value, believing payments to the trustee will only serve to reduce the amount you can pass on to your beneficiaries. However, this assumption is mistaken. Hiring a professional may be the most financially sound option for several reasons.

First, professional trustees’ fees, when viewed as a percentage of the estate, are generally not high. For example, a professional trustee or executor may charge an hourly rate or a fee as a percentage of the estate. When considering the estate as whole, the extra percentage is often worth the assurance that your estate is in competent hands. Additionally, the fees usually amount to less than the amount an institutional trustee, such as a bank, would charge.

A professional trustee can also avoid or settle disputes between beneficiaries. If you appoint a family member to administer your trust, they may experience difficulties mediating between family members without damaging the familial relationship. If the family member is also a beneficiary, they may allow their personal interests to affect any disputes that arise. Conversely, a professional trustee has no personal relationship with your beneficiaries or any personal interest in your estate. Therefore, the professional can resolve conflicts with the impartiality required to handle your estate.

If a person has a will, their beneficiaries often need to go through probate proceedings to receive the property allotted to them in the will. In probate proceedings, a court appoints a personal representative to administer the person’s estate to the intended beneficiaries. As a result, before receiving a single asset, the beneficiaries must participate in a long, complex, and confusing process. Thankfully, Colorado provides a few steps people can take while they are alive to spare their beneficiaries from probate procedures.

How Can You Avoid Probate in Colorado?

One way to prevent your beneficiaries from going to probate court is by creating a living trust. This document allows you to designate a succeeding trustee to transfer assets to your beneficiaries after death. Colorado law allows you to make living trusts for nearly any type of asset, including houses and vehicles, as well as bank accounts. To make a living trust, you can transfer ownership of your property to yourself as the living trustee of your estate. Then, with the help of an attorney, you can create a document that designates another person to take over as trustee after death. That succeeding trustee can then transfer your property to the trust beneficiaries without going through probate court.

In the event that an individual does not leave a will to determine the division of their property and assets, their estate will go through the intestate succession process designated in their state. Intestate succession is a legal process that comes into play when someone passes away without leaving behind a valid will or other legally binding document dictating how their assets and property should be distributed. Instead, the distribution of assets is determined by the laws of intestacy in the state where the person passed away. The laws of intestacy establish a specific order of priority for the distribution of assets. Typically, a surviving spouse and children are given priority, followed by other close relatives, such as parents and siblings. If there are no surviving relatives, the assets may escheat to the state.

What is a Will?

A will is a legal document dedicated to establishing and coordinating a person’s wishes regarding the distribution of their assets and property as well as the care and guardians of their minor children after they pass. A will is the most established manner of ensuring that an individual’s wishes regarding each of those issues are accurately and dutifully carried out following their passing. Wills are helpful for reducing conflict between an individual’s heirs, making sure that the division of assets is a smooth process, and easing tension.

Navigating the Inclusion of Friends in Estate Planning

Passing assets to friends and non-family members can be surprisingly difficult for a number of reasons. The current estate planning landscape is heavily skewed toward the distribution of assets towards family members and traditional heirs and does not always provide a straightforward path for those without children or spouses. As a result, some organizations suggest avoiding using wills for such transfers of assets altogether and instead giving the assets to friends while still alive and sound of mind so that heirs and family members cannot challenge the transfer in the future.

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A will is a legal document dedicated to setting forth an individual’s wishes regarding the distribution of their property and assets as well as the care of their minor children. A will is the most established manner of ensuring that an individual’s wishes on those matters are accurately carried out. Wills are also helpful for an individual’s heirs, making sure that the division of assets is a smooth process.

What is Interstate Succession?

In Colorado, if you die without a will, your assets are distributed to your closest relatives under the Colorado interstate succession laws. In various states, the interstate succession process occurs when someone without a valid will or other legal declaration passes away. The court distributes their property according to the current state laws rather than a pre-existing plan prepared by the decedent or with input from those closest to them.

Which Assets Pass Through Interstate Succession?

In Colorado, the only assets that pass through probate are impacted by interstate succession laws. Subsequently, a large variety of valuable assets are not subject to interstate succession laws as they do not go through probate. Common examples of items that do not pass through probate and are not impacted by the interstate succession process include (1) property transferred to a living trust, (2) life insurance proceeds with named beneficiaries, (3) IRA, 401(k), and other retirement account funds with named beneficiaries, (4) securities held in transfer-on-death accounts, (5) real estate with a transfer-on-death deed, (6) vehicles with transfer-on-death registration, (7) payable-on-death bank accounts, or (8) property owned with someone else in joint tenancy or tenancy by the entirety. Such assets will pass to the surviving co-owner(s) or named beneficiaries regardless of the existence of the existence of a will. One exception to this rule is if no will exists, and the named beneficiaries are no longer alive to accept the assets, the property could end up being transferred according to the interstate succession process.

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Trusts are a growing tool when it comes to estate planning. As a result, trust usage is increasing throughout the nation. Trusts offer many benefits when it comes to asset distribution, but also have limitations that other estate planning methods don’t have. Trusts allow for great specificity regarding how, when, and to whom assets are distributed. Additionally, trusts come in a wide variety of categories and subcategories dedicated to particular estate planning goals, such as charitable giving or tax reduction.

A trust not only designates who may benefit from the funds or resources in the trust, but addresses situations of incapacity, such as strokes, dementia, or Alzheimer’s. Those at risk of such circumstances may want to consider utilizing trusts to ensure that their resources and funds are preserved, managed, and spent in a manner that conforms to their wishes while in the care of loved ones or healthcare professionals.

What are Irrevocable Trusts?

Irrevocable trusts are a specific type of trust that cannot be modified, amended, or terminated without the permission of the grantor’s beneficiary or by the order of a court. While the precise rules governing irrevocable trusts vary from state to state, the grantor, having essentially transferred full ownership of assets into the irrevocable trust, legally removes their rights of ownership to the assets and the trust in this process.

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