Category Archives: PauperPlanning

Self-Proved Will

Several of the estate planning documents require witnesses to be valid, or, at least, fully effective – the Will, the Medical Power of Attorney and the Living Will. Having witnesses for a Will is not vital, though, it can save headaches down the road.

A Will does not need to be witnessed in Colorado to be valid. A recent change in the law allowed Wills to be valid merely by having the testator’s/testatrix’s signature notarized. However, by executing a Will in this fashion, it may also be “self-proved.” By attesting to a self-proving affidavit contained in a Will, there is a rebuttable presumption that the Will was executed correctly. The presumption is rebuttable, but the burden is then on anyone attacking the authenticity and validity of the document.

A notarized Will is valid, but is not given the same rebuttable presumption. This small provision at the end of a Will is easy to include and execute and can prove very useful if the Will is ever challenge. Make sure that any Will you sign has a self-proving affidavit. However, in a pinch, a notarized Will will work and is better than no Will at all.

Easement Basics

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A client recently contacted me regarding the drafting of an easement between him and his neighbor. Easements are not that uncommon and help establish and clarify rights of the parties. It is a way to avoid conflicts in the future and ensure that certain parties will have the agreed upon rights even after an owner sells their property.

An easement is the nonpossessory right of one party to enter upon and use land in the possession of another for a specific purpose, and it obligates the possessor not to interfere with the uses authorized. Matoush v. Lovingood, 177 P.3d 1262, 1264 n. 2 (Colo. 2008). Easements come in several types depending on the parties involved. An easement appurtenant involves a servient estate (land that bears the easement) and a dominate estate (the land that is benefitted by an estate). An easement appurtenant runs with the land and will continue to burden the servient estate and will benefit the owner of the dominate estate. An easement in gross involves a servient estate that bears the easement and an individual with the right to use the servient estate that does not depend on the individual’s ownership of a particular property.

An easement can be created by a written agreement, conveyance by deed, recorded declaration, estoppel, implication, necessity or prescription. However, most people will create easements by written agreement.

A written agreement is the most common way that an easement is created between two landowners. The written agreement will detail the parameters of the easement but should also consider the following: 1) frequency and intended use; 2) whether other uses may be allowed; 3) limitations on allowed uses; 4) duration or expiration of the easement; 5) maintenance responsibilities and expectations; 6) liens against the property; 7) insuring the property. The parties should discuss and have each of these items contained in the written agreement. The written agreement should state that the easement will run with the land and should be recorded to give subsequent purchasers notice.

An easement granted by a written agreement can be terminated by a voluntary release, abandonment, merger, or adverse possession. A voluntary release occurs when a written agreement releases the servient estate of the easement or when the agreed upon event or time limit is reached. An easement can be released by abandonment if it is no longer used by the dominant estate. Merger occurs when a single owner comes to own both the servient and the dominate estates – nullifying the need for a continued easement. Adverse possession is rare, but can occur if the owner of the servient estate continuously uses the easement in a manner that is incompatible with the easement holder’s rights.

One of the issues that typically goes unnoticed is the involvement of a lender. Granting an easement will typically result in a default of most mortgages and deeds of trust. Obtaining a lender’s permission may be a barrier to completing the easement and the risk of default by pursuing the easement without permission should be sufficient to deter most people. In addition to the lender’s permission, the parties should also seek the lender’s agreement to subordinate their lien on the property. Otherwise, if the lien is not subordinate to the easement, the easement will be wiped out in any future foreclosure action by the lender. This is true with any liens on the property where foreclosure is a possibility. It is important to understand what needs to happen to create an effective easement.

Patrick Curnalia is an estate and tax planning attorney with Curnalia Law, LLC. Patrick has worked with many clients to help them achieve their planning goals. Our firm services the entire Denver area and is located near the Denver Tech Center. Find out more about how our firm can help you by visiting our website at www.curnalialaw.com.

Asset Sale v. Stock Sale

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I recently finished helping a client sell their business – a small printing business with a few assets. My client had already employed the services of a broker to assist with the deal – a sale to a another print shop looking to expand into the Denver market – and my services were primarily to review existing documents and make necessary changes or draft additional required documents.

As with most transactions, the first document I reviewed was the letter of intent, which expresses the intent of the parties to enter into an agreement and provide for a basis for some of the more material provisions of the eventual contract. In the letter of intent, the broker had set up the sale as an asset sale as opposed to a stock sale. As the attorney for the seller, I highly recommended that this structure be reconsidered, particularly, because my client was structured as an S Corporation.

A asset sale and stock sale look very similar when the transaction is completed – the seller receives the proceeds of the sale and the buyer receives all of the assets of the business. With an asset sale, the business sells to the buyer, all of the assets of the company, the company calculates gain and distributes the sale proceeds to the seller. The seller recognizes gain as calculated and passed through from the entity level (due to the S Corporation being a disregarded entity for tax purposes).

A stock purchase works a little differently. With a stock purchase, the individual shareholder(s) sell their interest in the company to the buyer. The buyer assumes control of all assets by virtue of their ownership of the company itself.

By looking closely at what is actually transferred, it is easy to see how the structure can benefit one party over the other. With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business. The buyer is merely stepping into the shoes of the previous owner and the business continues on. Whereas, the purchase of assets does not inherently include any liabilities other than those attached to the individual assets. The seller continues to be the owner of an asset-less entity until the entity itself is dissolved.

Less clear to people, is the tax ramifications of both transactions. With a stock sale, the owner is treated as making a disposition of a capital asset and any proceeds will receive capital gain treatment, generally taxed at 0 – 23.8%, but dependent on the owner’s income.

The calculation of the asset sale is different. The assets will likely receive capital gains treatment, but could also be subject to depreciation recapture. Business assets or expenses for which no deduction in full can be taken are typically allowed to be depreciated over a number of years, depending on the asset’s category according to IRS tables. This depreciation allows the business owner to take a deduction each year against income of the business. The depreciation is intended to correlate with the useful life of the asset. If an asset is to be depreciated over 5 years according to IRS tables, the IRS’s view of the useful life of the asset is 5 years, after which, the asset is likely obsolete or of little to no value.

However, in situations where an asset sells for more than its depreciated value the gain attributable to the sale will be taxed at ordinary income rates instead of capital gain rates due to the depreciation recapture. While the seller is at a tax disadvantage by possible receiving ordinary income instead of capital gains, the buyer is able to allocate the purchase price to specific assets and receive a step-up in basis. This step-up in basis allows the buyer to “re-depreciate” the same asset – a boon for the buyer. Had the buyer completed a stock sale, the basis of the assets would have remained the same without the aforementioned step-up.

Each situation is different, but with my client, it made more sense to structure the transaction as a stock sale than an asset purchase. There are elections that can be made, particularly with the sale of an S Corporation, that allow some of the benefits of both an asset sale and a stock sale to be utilized. These elections require the cooperation of the parties but can help equalize the benefits between buyer and seller to some degree.

Intestate Succession – Where does everything go without a Will?

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One of the purposes of a Will is to direct the disposition of a person’s assets. When a person dies with a valid Will directing the disposition of their assets, they have died testate. However, all too often, people die without first implementing the necessary estate plan – including a Will. When a person dies without a valid Will, the person has died intestate. In these instances, the state laws of intestate succession dictate how a person’s property will pass to that person’s heirs.

Each state is different and the laws of intestacy will be determined based on where the property is located. For instance, a person who resided in Colorado will follow Colorado law for any real property and personal property located in Colorado, but will have to follow the laws of any other state where they may have property located, such as an out-of-state vacation home.

My practice is located in Colorado and this post will focus on Colorado intestate succession. If you have any questions about intestate succession in another state, I recommend contacting the state bar of the state to get in touch with a local probate attorney. The information you obtain may be the motivation that a parent, spouse or friend may need to begin their own estate plan. As you will see, the laws of intestacy are not always in line with how someone would actually want their estate distributed.

In Colorado, the share of the spouse is determined first. C.R.S. 15-11-102. Most clients I have discussed this issue with believe that a spouse will receive everything in the absence of a Will, but this is not correct. A surviving spouse will only receive the entire estate of their deceased spouse if either a) all of the deceased spouse descendants (children, grandchildren, etc.) are also descendants of the surviving spouse (no step-children) or b) the deceased spouse had no surviving descendants or surviving parents. In all other scenarios, Colorado intestate succession contemplates a division of the estate between a surviving spouse and either a parent or a child.

The surviving spouse is entitled to the first $300,000 and ¾ of any amounts above $300,000 of the deceased spouse’s estate if the deceased spouse died with no living descendants but was survived by at least one parent. In this instance, the parent(s) would receive the remaining ¼ of any amount above $300,000 in the estate. This is primarily a concern for younger childless couples who have not planned properly. If a life insurance policy designates the estate as a beneficiary instead of the spouse, the influx of cash at death could result in a portion of the proceeds being distributed to the deceased spouse’s parent(s) instead of the surviving spouse.

The amounts to the surviving spouse are further reduced depending on the relationship between the surviving spouse and the deceased spouse’s descendants and if the surviving spouse has any descendants not related to the deceased spouse (step-children from either spouse). The surviving spouse will receive the first $250,000 plus ½ of the remaining estate if all the descendants of the deceased spouse were also descendants of the surviving spouse, but the surviving spouse also had one or more descendants not a descendant of the deceased spouse. Lastly, the surviving spouse is entitled to the first $150,000 plus ½ of the remaining estate if the deceased spouse has one or more descendants who are not also descendants of the surviving spouse.

After the surviving spouse’s share has been determined, or if the decedent was unmarried at the time of his or her death, the remaining amounts are distributed to the heirs of the decedent in the following order:

- To the decedent’s descendants;

- To the decedent’s parent(s);

- To the descendants of the decedent’s parents (brothers, sisters, nieces, nephews);

- To the decedent’s grandparents;

- To the descendants of the decedent’s grandparents (aunts, uncles, cousins);

- To the State of Colorado

C.R.S. 15-11-103.

The State of Colorado believes that the laws of intestate succession closely mirror the desires of the typical Coloradan. However, every estate plan I have ever drafted has looked vastly different than the state’s proposed distributive scheme. Most people have specific items that they would like distributed to certain people and the best way to ensure that those types of bequests are fulfilled is to draft a Will. What is even less clear is how to distribute tangible property. The formulas seem to work with money, but when real or personal property is involved, it can become very problematic.

Along with a Will, an estate planning attorney can discuss and draft necessary documents to make sure that nearly all contingencies have been accounted for both at death and incapacity and avoid many of these situations.

Where should I keep my Estate Plan documents?

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Your estate plan documents should be kept in a safe place as the originals may be necessary. A copy of a Will can often be probated, but it is not without its costs and headaches. Preserving the original documents is very important.

A common recommendation is to keep your estate planning documents in a safe deposit box. This is an excellent place to keep you documents; however, you need to be very careful that someone will have access to the safe deposit box in the event of your death or incapacity. The Will will be necessary for your personal representative to be appointed after your death and your financial and medical powers of attorney will be necessary if you become incapacitated.

By having a third party as signatory on the safe deposit box, you can ensure that your estate plan documents will be accessible before they are needed. Choosing a signatory is very important because they will have access to all the contents of the safe deposit box. A good rule of thumb is that if you trust someone to be your financial power of attorney, they should probably also be trusted as a signatory of your safe deposit box – the fact is that they will have virtually unfettered access to your finances upon your incapacity anyways, so if there is any doubt as to their credibility you should reconsider their nomination in the first place. The same could be true for the person you appoint as personal representative of your estate.

If you do not have a safe deposit box for you estate planning documents, you should find a secure place in your home. The best alternative would be a safe that is attached to the structure of the house. Smaller, unsecured safes provide little protection from burglaries and thefts as they are targets of any thieves looking for valuables.

Another alternative may be to simply have your attorney hold on to your estate plan documents. Attorneys may provide this service for free or a nominal storage fee. However, keep in mind that an attorney may have the same fire and vandalism issues in their office. Most importantly, an attorney may have a set file retention policy that requires files to be returned or destroyed after a certain amount of time. A verbal agreement made with the attorney may not be remembered in 5-10 years when the attorney cleans out the old files and either a) attempts but cannot locate the client or b) simply destroys the documents.

Regardless of how the estate plan documents are stored, always make sure that someone knows where they are and/or who to contact to access the documents. If documents are unknown to your friends and loved ones, your entire estate may be distributed according to the laws of intestacy, which are typically substantially different that the intent of the decedent.

Patrick Curnalia is an estate and tax planning attorney with Curnalia Law, LLC. Patrick has worked with many clients to help the machieve their planning goals. Our firm services the entire Denver area and is located near the Denver Tech Center. Find out more about how our firm can help you by visiting our website at www.curnalialaw.com.

Disability planning for financial matters

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Disability planning is essential for everyone. There are several techniques that range from relatively simple to complex, depending on the types of assets and protection required by the client. Each of the techniques will work to some degree, but also have some inherent shortcomings in certain situations. It is best to consult your attorney before implementing any of the following techniques.

First, lets identify what happens when no planning has been done and a person becomes incapacitated. Focusing just on the financial aspect, the incapacitated person will need a conservator appointed for them. The conservator is a fiduciary required to act in the incapacitated person’s best interest. The conservator may be required to report to the court on a periodic basis regarding the assets of the incapacitated person if there is any doubt as to the conservator’s intentions and legitimacy of his or her actions. The conservatorship can be costly and time consuming to set up. A conservatorship is also not ideal for emergency situations where quick actions are necessary.

A common situation is the incapacity of one spouse – leaving the other spouse to care for him or her. The easiest and most cost-effective way to prepare for this situation is the retitling of property into joint tenancy. Obviously, this will only work for property that can be titled jointly such as real property, bank accounts and vehicles, but it does work in a pinch and can be a saving grace when no other planning has been completed.

Another planning technique is to execute a Financial Durable Power of Attorney (or Financial POA) naming an agent to act on the incapacitated person’s behalf. The Financial Durable Power of Attorney is limited to financial matters so that a different person can be nominated as the incapacitated person’s Medical Power of Attorney to make medical decisions. Some clients prefer to have one person making financial decisions and another making medical decisions. The Financial Durable Power of Attorney is durable because it remains in effect even after the person executing the document has become incapacitated. Not to long ago, Colorado and other states had laws that nullified a person’s Financial Power of Attorney as soon as that person became incapacitated – completely defeating the purpose of the document. An estate planning lawyer can draft a Financial Durable Power of Attorney and should include this document in any estate plan drafted. If requested by itself, the document is fairly straightforward and should not cost very much to have drafted.

The most complicated disability plan will include a trust of some sort. Typically, revocable living trusts will be utilized because they allow the person who created the trust (the “Settlor”) to retain control of the assets during the Settlor’s lifetime. Property can go in and out of the trust at the Settlor’s discretion. However, once the Settlor becomes incapacitated, all of the property in the trust then comes under the control of the successor trustee of the trust. The trustee must follow the terms of the trust as written by the Settlor, but otherwise has the authority to care for all of the trust assets. A trust is a legal document that can be enforced and must be followed by the trustee. The terms of the trust can, and typically do, identify exactly how the property inside the trust is to be administered for the benefit of the Settlor and/or any other beneficiary of the trust. Each of the above options have their own advantages and disadvantages from cost to levels of protection. As with many things in life there is no one best answer, and client’s typically find that a combination of disability planning tools is necessary to meet their needs and adequately cover as many contingencies as possible.

What’s a “quick claim” deed?

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While working with a client on a recent trust issue, it became clear that property was going to need to be retitled into the name of the trust. When I explained the issue to my client, the response was, “Oh, we can just use a ‘quick claim’ deed, right?”

Unfortunately, no – Colorado has yet to recognize a “quick claim” deed, but you can often get away with using a quit claim deed. The mistaken terminology is quite common, however. The misnomer is likely the result of the relative ease and simplicity of the deed compared to a general or special warranty deed.

Regardless of how people term the deed, the quit claim deed can become quite useful in the estate planning process. For instance, a couple who recently married may consider executing a quit claim deed to add the non-homeowner spouse to the title of the home. By owning the property as joint tenants with right of survivorship, the couple may avoid, or greatly simplify, the probate process at the first spouse’s death – just by executing one, “quick” document. Other appropriate uses may include transfers into trust, gifting arrangements and asset protection.

All property transfers and estate planning techniques should be considered carefully and discussed with your attorney.

What is “pauper planning”?

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Pauper planning is more than just a catchy name for an estate planning blog – it is the idea that a person need not be of the wealthiest 1% of America to benefit from estate planning. Everyone, from the wealthiest of people to the young professional just starting out in life, can benefit from a properly crafted estate plan. I have found that most clients benefit from a discussion about the estate planning process and the documents involved. I think that is a fitting way to start this blog – by identifying some of the pieces of the typical estate plan and showing how they affect the typical family.

The basic documents that should be in every plan include a Will, Financial Power of Attorney, Medical Power of Attorney and Living Will. Trusts are common planning tools but their utility really depends on the types and location of assets and the ultimate goals of the client. The Will is the most common and known document of the bunch. This document identifies how property is to be passed and who is responsible for making this happen.

If someone dies without a Will, the laws of the state of the decedent’s domicile or location of property will dictate how the property is passed. Letting the state determine how your property passes after your death is called intestate succession. The laws of each state are different, but needless to say, a client will typically have much different ideas of how their property should be distributed at their death. A person’s Will ensures that everything they have amassed during their lifetime will be distributed according to their wishes. Almost as important as how property is distributed is nominating the personal representative who will do the actual work. Property that passes via a Will will need to be probated. Probate can become very complicated if the wrong person is put in charge of the process. In addition to nominating a personal representative, the Will also allows the nomination of a guardian and conservator of any minor children. All of these decisions can be left to the discretion of a judge and interpretation of state law if no Will exists.

The Financial Power of Attorney is a document that grants another person the authority to make financial decisions on behalf someone who has become incapacitated. Without the grant of this authority, a person would need to be appointed conservator of the incapacitated person in order for any financial decisions to be made on the incapacitated person’s behalf. This authority becomes very important if medical bills needs to be paid, mortgage payments become due or, possibly, a special needs trust needs to be created to collect insurance funds on behalf of the incapacitated person. The cost of drafting and executing a simple Financial Power of Attorney is much less than the time and cost of a drawn-out battle between the spouse, parents and adult children from a previous marriage to be appointed conservator. The issues with inter-family squabbles are present with medical decisions as well.

A Medical Power of Attorney identifies who is supposed to make medical decisions for a person after he or she becomes incapacitated. Financial decisions can cause problems, but decisions regarding whether someone lives or dies are a completely different animal. The simplest way to prevent any issues is to appoint a medical proxy to make decisions on your behalf.

Unfortunately, many people are misinformed as to the rights of spouses in Colorado regarding medical decisions for an incapacitated spouse. According to Colorado law (C.R.S. 15-18.5-103), a spouse will be consulted by the attending physician when no advanced directive (more on that later) and no Medical Power of Attorney has been appointed. However, the physician is also required to consult with any other “interested person” the physician can find. For the sake of this consultation, “‘interested persons’ means the patient’s spouse, either parent of the patient, any adult child, sibling, or grandchild of the patient, or any close friend of the patient. C.R.S. 15-18.5-103(3). Not only do each of these people have a say, but the decision has to be unanimous regarding the election of the incapacitated person’s healthcare proxy and any decision that the healthcare proxy makes on your behalf. In other words, the person’s health care is essentially under mob rule. How is a stalemate broken? By the courts of course! Who better to make these decisions than a judge who has never met the incapacitated person. Anyone wishing to be appointed as the healthcare proxy can file for guardianship, and it is up to the court to determine who is the best person for the job. It is easy to see how this process could become drawn out with hearings and appeals only to leave the incapacitated person in limbo – remember Terri Schiavo in Florida?

The last document, the Living Will, is similar to the Medical Power of Attorney. However, this document is typically only concerned with the advanced directives concerning life-sustaining procedures when the incapacitated person has been diagnosed with a terminal condition or is in a persistent vegetative state. These decisions can be made by the Medical Power of Attorney, but clients often feel better make these decisions for their designated agent.

All of these documents are an important part of anybody’s estate plan, and none of them are contingent upon the amount of a person’s assets. The millionaires in the world may have more complex estates that require additional considerations, but here is the proof that even the paupers need to adequately plan. Estate planning for most Americans is deciding who takes care of you, your property and, most importantly, your family when you cannot. Asking the State of Colorado to make those decisions is often times inadequate and results in something contrary to what the decedent/incapacitated person would have wanted. Do not leave anything to chance! Paupers unite, and start your planning!