Understanding a Living Trust

tienne • September 29, 2022

You may have heard that you should get a revocable living trust. But what is that? Frequently people talk about trusts as though they are thing, like a box, that you can put assets into. You may have heard, for example, that you should put your house into a trust. But a trust is not a thing. It’s a relationship. There are three people involved:
  1. The person making the trust. There are several different terms to describe this person: the “ grantor ,” the “ settlor ,” the “ trustor ,” or the “ trustmaker .” Each of these terms describe the same thing – a person who owns property and wants to control how that property will be managed if they can’t do it themselves, either because they have become incapacitated or because they have died. This person writes their instructions down in a “trust agreement.” Then they hand the property they want controlled by those instructions and the instructions to the second person in this relationship.
  2. The person managing the trust. The person put in charge of managing the trust is the “ trustee .” The trustee’s job is to follow the instructions given to them by the person who created the trust. If the trustmaker told the trustee to give the trustmaker’s kid all the assets in the trust when that kid turns 21, the trustee has to do it, even if he thinks that doing so is a terrible idea. The trustee is a fiduciary for the beneficiaries of the trust, meaning that he or she has to proactively manage the trust assets in the best interest of the people who are ultimately to receive those assets. The trustee has a duty of loyalty to all trust beneficiaries, meaning that he must put their interests ahead of his own. He cannot, for example, use their money in a way that will benefit him. He also has a duty to treat all the beneficiaries equally. He can’t manage the trust in a way that benefits one beneficiary at the expense of another.
  3. The person entitled to receive something from the trust. A person who is entitled to receive anything from a trust is called a “ beneficiary .” This could be one particular item, or it could be everything in the trust. It could be an income stream for a certain period of time, or it could be the amount left over after income has been paid to someone else for a period of time. It could be an outright distribution, with no restrictions, or it could be held under the ongoing supervision of a trustee who gets to decide if and when the beneficiary receives assets. As long as the trustmaker’s instructions don’t violate public policy (requiring a beneficiary to divorce his spouse, for example, before he can get anything from the trust), the trustmaker has wide latitude to decide what restrictions to put on the distribution of trust assets to a beneficiary.

Although each of these roles is legally distinct from the others, one person can fill multiple roles. Or multiple people can fill one role. In fact, when you set up a revocable living trust, you initially fill all three roles. It is also common for people to set up trusts that name their children as the trust’s beneficiaries, and for one of those children to also become the trustee after the trustmaker has passed away.

why would you set up a trust?

So, why would you do this? Because a trust allows you to separate ownership of your assets from control over the assets, and doing that creates all kind of opportunities that you don’t have if your assets are simply titled in your name. The primary reason people set up revocable living trusts is so that their assets can be managed for themselves and their beneficiaries without court involvement. If all your assets are titled to you, and you suddenly can’t do things like write checks, file tax returns, sign real estate closing documents, or make investment decisions, somebody (usually a family member) has to get authorization from a court do those things for you.
If, however, you were holding your assets as trustee of your trust, the person you named to be your “successor trustee” in your trust agreement simply steps in and starts managing the trust assets the moment you can’t do it. No court authorization would be needed because, on paper, those assets weren’t yours. You were simply managing them as the trustee.
We frequently describe this as setting up a little company for your personal stuff. Think about Apple Computer, for example. At one point, Steve Jobs was running Apple as its CEO. Sadly, he developed cancer and became too sick to do the job. When that happened, one of Apple’s other officers, Tim Cook, had to step in and start running Apple. When that became necessary, Mr. Cook was able to take over immediately. He didn’t have to wait for a court to transfer all the assets from Mr. Jobs to him. They weren’t Mr. Jobs’s assets. They were Apple’s. Mr. Jobs was just running Apple. Transferring your assets from yourself to yourself as trustee of your trust can provide you with the same convenience.

Separating Ownership from control

Another common reason that people set up trusts is because they want to give assets to people who might benefit from letting someone else control those assets for them. There are situations where you have to do this. If you are directing the distribution of assets to someone who is currently 5 years old, for example, you have to give control of those assets to a responsible adult. The best way to do that is giving those assets to the adult as the trustee for the 5-year-old beneficiary.
Another common situation in which people want to use trusts is when they want to encourage a beneficiary to make certain decisions. They might, for example, instruct the trustee not to distribute assets until the beneficiary has successfully completed rehab, or held a job for a certain period of time. This can provide an option for giving assets to someone that otherwise might have to be disinherited (something that we often discourage). 

asset protection for beneficiaries

Finally, something that many people fail to appreciate is the protection that it can provide for beneficiaries, not just from their own ill-advised decisions, but from others as well. To be clear, placing assets into your own trust over which you maintain control does not provide you with asset protection. (You may find that disappointing, but keep in mind that if you are ever injured by someone else’s negligence, you wouldn’t want that person to be able to avoid compensating you by putting assets in a trust that they continue to control.)
Assets placed in a trust for you by someone else, however, can enjoy protection, but only in proportion to the restrictions that were placed on the beneficiary’s ability to access those assets. If you have said, for example, that your kids have to ask a trustee for money from your trust, those assets are going to be very difficult for any creditor your kid might pick up to access. If your kid is in a troubled marriage, or has a high liability career, you might want to give them protection by limiting their access to your trust. On paper, this can look punitive. They may, however, be thanking their lucky stars if they get into financial distress.
Setting up a revocable living trust requires lots of decisions. Those decisions can have consequences for decades. You should only set up a trust with the guidance of an expert, one that has experience seeing how these work after the trustmaker has passed away. 

what next?

If you think it might be time to think through your estate plan, you can:
  1.  Give us a call at 720-821-7604 to schedule a "Discovery Session" at which we can determine whether our firm would be a good fit for your needs. Or fill out our contact form to have us call you.
  2. Visit our estate planning page to learn more about how proactively thinking through your estate plan can protect you and your family, minimize hassle, lower the chance of family discord, and minimize or eliminate taxes.
  3. Learn more by reading our blog or watching our videos .

Consequences of Dying Without a Will in Colorado

February 12, 2025
Consequences of Dying Without a Will in Colorado

What Types of Assets Can Be Included in a Colorado Trust?

January 30, 2025
What Types of Assets Can Be Included in a Colorado Trust?

What is a Guardianship and When Do I Need One?

December 2, 2024
What is a Guardianship and When Do I Need One?

What Are the Required Documents to Create a Will in Colorado?

October 28, 2024
What Are the Required Documents to Create a Will in Colorado?

Probate in Colorado: A Guide for Families and Executors

October 1, 2024
Dealing with the death of a loved one is never easy, and navigating the legal process that follows can add stress during an already difficult time. In Colorado, probate is the legal process by which a deceased person’s estate is administered, their debts are paid, and their assets are distributed to beneficiaries. Whether you’re an executor, beneficiary, or family member, understanding how probate works in Colorado can help you anticipate the steps involved and your potential responsibilities. This blog post will provide an overview of the probate process in Colorado, outline when probate is necessary, and offer guidance on how to navigate the system effectively.  What is Probate? Probate is the legal process that occurs after someone dies to ensure their assets are distributed according to their will or, if there is no will, according to state law. The probate process includes validating the will, inventorying the deceased’s assets, paying off debts and taxes, and distributing the remaining assets to the rightful heirs. While probate is often associated with lengthy court proceedings, not all estates require formal probate. Colorado offers several options depending on the size and complexity of the estate, which can help simplify the process in many cases. When is Probate Necessary in Colorado? Probate is not always required in Colorado. Whether an estate must go through probate depends on the types and value of the deceased’s assets. Generally, probate is necessary if: The deceased owned real estate solely in their name. The deceased’s assets, such as bank accounts or investments, were not held in joint tenancy or designated to transfer on death. The deceased had personal property valued at over $74,000 (as of 2023). If an estate falls below this threshold and does not include real estate, the beneficiaries can often use a Small Estate Affidavit to claim the assets without going through probate. Types of Probate in Colorado Colorado has three main types of probate procedures: small estate procedures, informal probate, and formal probate. The type of probate required depends on the estate’s value and whether there are disputes among heirs or creditors. Small Estate Procedure (Collection by Affidavit) The small estate procedure can be used if the value of the deceased’s assets is less than $74,000 and does not include real estate. This process involves filling out a Small Estate Affidavit, which allows the heirs to collect and distribute the assets without opening a probate case in court. It is the simplest and fastest way to handle a small estate. Informal Probate Informal probate is used when there is a valid will and no disputes among heirs or creditors. The process is overseen by a court-appointed Personal Representative (executor), but there is minimal court supervision. Most of the process, such as distributing assets and paying debts, is handled by the Personal Representative, with only basic filings required with the court. Informal probate is less time-consuming and costly than formal probate. Formal Probate Formal probate is required when there are disputes regarding the will’s validity, disagreements among heirs, or if the estate is complex and needs court intervention. The process is supervised by the court, and all major decisions, such as approving the distribution of assets, must be approved by a judge. Formal probate can take much longer and involve more legal fees than informal probate. Steps in the Colorado Probate Process While the specific steps in probate can vary depending on the type of probate and the complexity of the estate, the general process in Colorado typically includes the following: Filing the Probate Petition The process begins with filing a Petition for Probate with the appropriate Colorado probate court. The petition is usually filed by the executor named in the will or an interested party if no will exists. Appointment of the Personal Representative The court will appoint a Personal Representative (executor) to manage the estate. If there is a valid will, the person named as executor is typically appointed. If no will exists, the court will appoint someone, usually a family member, to serve as the Personal Representative. Notice to Heirs and Creditors The Personal Representative must notify all potential heirs and creditors of the probate proceeding. This step is essential for providing an opportunity for interested parties to come forward and make claims against the estate. Inventory and Appraisal of Assets The Personal Representative must create an inventory of all the deceased’s assets and have them appraised if necessary. This inventory will include real estate, personal property, financial accounts, investments, and any other assets owned by the deceased. Paying Debts and Taxes Before distributing assets, the Personal Representative must pay off the deceased’s debts and any taxes owed. If the estate does not have enough assets to cover all debts, Colorado law dictates the order in which creditors are paid. Distribution of Assets Once all debts and taxes have been paid, the Personal Representative can distribute the remaining assets to the beneficiaries according to the will or, if no will exists, according to Colorado’s intestacy laws. Closing the Estate After all assets have been distributed and all required filings have been made with the court, the Personal Representative can file a Petition for Final Settlement to close the estate. Once approved, the Personal Representative’s responsibilities are complete. Challenges and Disputes in Colorado Probate Unfortunately, probate can sometimes become contentious, especially in cases involving high-value estates or when family members disagree on how assets should be distributed. Some common challenges in Colorado probate include: Will Contests Heirs or beneficiaries may challenge the validity of a will, claiming it was signed under duress, there was undue influence, or the deceased lacked the capacity to create the will. Will contests can significantly delay the probate process and require formal probate to resolve. Executor Misconduct If an executor is not fulfilling their duties or is mishandling estate assets, beneficiaries can file a complaint with the court and request the executor’s removal. Disputes Among Beneficiaries Disputes can arise over specific bequests, how assets are divided, or even the valuation of estate property. Mediation or formal court intervention may be necessary to resolve these disputes. How a Colorado Probate Attorney Can Help Navigating the probate process can be overwhelming, particularly when dealing with the emotional aftermath of losing a loved one. An experienced probate attorney can help in several ways: Guiding You Through the Process An attorney can explain the probate process, help you understand your rights and responsibilities, and ensure all legal requirements are met. Managing Court Filings and Deadlines Probate involves numerous legal documents and deadlines. An attorney can handle these tasks, ensuring that everything is filed correctly and on time. Resolving Disputes If disputes arise, an attorney can provide representation in negotiations, mediation, or court hearings to protect your interests and work toward a fair resolution. Minimizing Costs and Delays With the guidance of a skilled attorney, you can often minimize the time and expense associated with probate, helping ensure the process goes as smoothly as possible. How The McKenzie Law Firm, LLC Can Help At The McKenzie Law Firm, LLC, we understand the complexities of the probate process and are committed to helping families navigate it with compassion and expertise. Whether you’re an executor needing assistance with your duties or a family member looking to understand your rights, our experienced probate attorneys can provide the support you need. If you have questions about probate in Colorado or need legal assistance, contact us today to schedule a consultation. We are here to guide you through the process and ensure your loved one’s wishes are honored.

Understanding the Notice to Creditor Form in Colorado Probate: Pros and Cons

By Dan McKenzie • September 10, 2024
Explore the pros and cons of mailing Notice to Creditor forms in Colorado probate. Learn how this decision impacts estate administration and creditor claim periods.

Understanding Special Needs Trusts in Colorado

August 30, 2024
Understanding Special Needs Trusts in Colorado

Protecting Your Legacy: Beneficiary Deeds vs. Life Estates in Colorado

By Dan McKenzie • July 17, 2024
Explore the differences between beneficiary deeds and life estates in Colorado estate planning. Learn the pros and cons of each method for transferring property and avoiding probate, and discover when to use each option for your unique situation.

The Importance of Estate Planning in Colorado

July 16, 2024
The Importance of Estate Planning in Colorado

A Guide to Forming an LLC in Colorado

June 30, 2024
A Guide to Forming an LLC in Colorado
More Posts
Share by: