Property distribution upon your death
Introduction
How your property is distributed upon your death depends on what you do. You can choose to do nothing. This will allow the state to make the decision for you. Options include the following:
- Drafting a will
- Using beneficiary or transfer-on-death (also referred to as beneficiary deeds) designations to transfer certain assets
- Joint tenancies
- Preparing a trust
What device you use to transfer your property will depend on your goals.
A few things before we get started.
Some terminology may be helpful.
Heirs, devisees and legatees, and beneficiaries are the people that may receive your property upon your death.
Your “heirs” are your relatives. They may include your spouse, your children (including adopted children), your siblings, your parents, etc. Essentially, anyone related to you by blood or marriage. Heirs will inherit your property if you don’t have a will and the property isn’t being passed under a trust or beneficiary designation. Many people gift their property to their heirs.
“Devisees” and “legatees” can be anyone, including heirs, to whom you gift your property by will. You may choose to gift certain property to a good friend or a non-relative caretaker.
“Beneficiaries” are the people that you may designate on certain assets to receive property. For example, a trust designates beneficiaries to receive property. You life insurance or IRA account may also appoint a beneficiary to receive the money. A beneficiary can be anyone. This person does not have to be a relative. A beneficiary will receive property under the designated instrument without having to go through probate.
“Testacy” is where your estate is distributed per the terms of your will. “Intestacy” is where your estate is distributed through the courts by the state laws because you did not have a will.
“Probate” is the process by which your property is distributed through the courts, either as testate or intestate property. Assets that are distributed through the courts are probate assets. Assets that are distributed outside of the courts, such as through a trust or a beneficiary deed, are non-probate assets.
Identifying your goals to distribute your property
Before you began planning how to distribute your property, you need to identify your goals. Many people have a difficult time deciding what they want to happen with their property when they pass. First, consider who are the people that mean the most to you. Married couples with children oftentimes leave property to their spouse, who will then leave it to their children. Some may leave property to both their spouse and children, with the remainder going to the children after their spouses passes. Unmarried people may leave property to a close sibling or nephew.
The picture can become complicated if you are remarried and have an ex-spouse who you have children with. You may want to leave property to your current spouse but also ensure that any property not used by the current spouse will be left to your children. This will dictate which tools are the best to use to accomplish those goals.
Other people feel very passionate about charities and want to ensure that a charity that means a lot to them receives property in addition to loved ones.
You should first decide to whom or what you would like to give your property. There is no right or wrong decision. It is your preference and could include relatives, pets, or charities.
Once you have decided who, you will want to decide what you want to leave each of your choices. Dividing your property requires potentially a number of choices. You can leave specific personal property to some people. For example, a guitar to a niece who is very musical or jewelry to a daughter. You can also leave a certain sum of money or an entire bank account to someone. In a will, you will frequently leave the residuary of your estate to someone. The residuary estate is what is left that wasn’t otherwise distributed in the will or in another instrument.
The choices you make will dictate what devises you need to distribute your estate. If you don’t want to make the decision at all, this is also your prerogative. You can do nothing and the state under the intestacy laws will distribute your assets for you.
The tools available to pass along your property
Beyond doing nothing, you have several choices for how you may distribute your property upon your death. These generally include wills, trusts, beneficiary designations and beneficiary or transfer-on-death deeds. Each is unique and will distribute estate a little differently.
Wills
Everyone ideally should have a will. In a will, you set forth the who you want to receive your assets. As stated above, you can be extremely specific or general. You should also gift someone the residuary of your estate.
A will must be probated. Thus, a will becomes public when the probate estate is filed. Until then, it can remain private. Because a will is probated, property distributed under a will must go through the courts. Although Colorado has streamlined the probate process to make it more efficient and move faster, it will still take time. In some states that don’t have a streamlined process, the process can take even longer.
Additionally, real property that is located in another state will have to be probated in that state. The Colorado courts cannot distribute property that is located in Kansas, for example. An ancillary probate procedure will have to be opened in that state.
Probate can be costly, especially if any of your heirs or devisees contest your will. Thus, probate isn’t always the ideal way to distribute property. But, having a will is important in the event that you don’t gift property through the other methods.
Trusts
Trusts are another way to distribute assets in your estate and in essence to allow you to control their distribution after your death. Unlike wills, which are generally fairly inexpensive to prepare, trusts are more complicated and are therefore more expensive to prepare. However, what you spend on the front end in preparing a trust can actually save you money if your assets don’t have to be distributed through the courts.
Trusts are frequently used to distribute assets to loved ones who you want to receive it later in life. For example, you may want to leave money to grandchildren who are young. The trust can allow it to be distributed once they are older. By preparing a trust, money can be put in the trust to be distributed for certain things such as education or at certain times. This allows you to decide the terms of distribution after you have passed.
Trusts are also used for the care of pets after your death. Money can be placed in a trust for a certain period of time to care for a pet after you die.
Unlike wills, trusts are private and can be kept private. This is an advantage over a will.
Beneficiary Designations
Many assets allow you to designate a beneficiary who will receive the asset upon your death. Unlike a trust, a beneficiary will receive the asset immediately upon your death. You can’t control when it will be distributed to the beneficiary. An asset with a beneficiary designation will also not go through probate. Unless, of course, it needs to be used to satisfy a creditor claim or an elective share of a spouse. Assets that generally have beneficiary designations are life insurance, retirement accounts and other financial accounts.
Beneficiary Deeds
Beneficiary deeds (also known as transfer-on-death deeds) are similar to beneficiary designations on certain assets, but in this instance you actually prepare a deed that is recorded with the asset. A beneficiary deed can be prepared and filed with the recorders office or department of motor vehicles that specifies who should receive the property upon your death. The property will immediately pass to the beneficiary and will avoid probate.
Beneficiary deeds are especially useful for people with out-of-state property. Instead of having to open an ancillary probate estate or to place the property in a trust, a beneficiary deed can be filed in the recorders office of the county where the property is located to allow the property to pass immediately upon your death.
Joint Tenants
Joint tenancy is a designation typically used with real property, but can also be used with other assets such as automobiles or bank accounts. Married couples frequently are joint tenants with the rights of survivorship on their home or other property they may have purchased during their marriage. In Colorado, joint tenants will receive the property from the other tenant upon the other tenant’s death. Thus, if you die, the joint tenant(s) of the property will receive it immediately without it having to go through probate.
A note of caution…
While generally the tools stated above will distribute your assets per your desires, you should keep the following in mind.
First, if you are married and you disinherit your spouse in a will, your spouse can reject your will. If he or she chooses to reject your will, he or she will take an elective share of your estate, which could be up to half of the marital estate depending on how long you were married. If your spouse chooses an elective share and there are insufficient assets in the probate estate, he or she may be able to gain access to assets that would be distributed outside of probate.
You can override your spouse’s ability to take an elective share through a marital agreement.
Second, if you have debts at the time of your death, creditors may open a probate estate to recover the debts you owe. As with a spouse, if your probate estate is insufficient to cover the debt, the creditors may be able to gain access to assets that will be distributed outside of the probate estate.
This article is meant to provide you a high level of many of the tools available to distribute your estate.