Estates
Wills, probate, and what passes outside it
Most of what a family asks a preparer after a death is not really a tax question. It is: what goes through probate, what does not, who is in charge, and what the will actually controls. Here are the plain answers, with the Colorado specifics.
Probate is the court-supervised process of collecting what the deceased owned in his or her own name, paying the bills, and handing out the rest. It is governed by state law, not federal tax law, and by itself it costs no tax. What surprises families is how much passes outside it — anything with a named beneficiary, a joint owner, a beneficiary deed or a trust — and that the will has no say over any of that. One caution: this is a tax preparer’s explanation, not legal advice. It is meant to start the conversation with your attorney in the right place; the documents themselves should be drafted by one.
What probate is
When someone dies owning property in his or her own name — a bank account, a brokerage account, a house, a car, the furniture — somebody has to be given legal authority to collect it, pay what is owed, and distribute what is left. That is probate. A court appoints a personal representative (the executor if named in a will, the administrator if there is no will), confirms the will is valid, oversees an inventory, gives creditors a window to make claims, and approves the final distribution. It typically takes six months to a year and costs attorney and representative fees.
For income tax purposes the probate estate is a separate taxpayer. If it earns $600 or more in a year while being settled — interest, dividends, rent, a gain on selling the house — it files Form 1041, and the state’s fiduciary return with it where the state has one. That part is covered in When a loved one dies.
Colorado uses the Uniform Probate Code, and most Colorado estates go through informal probate: the representative is appointed on an application, without a hearing, and administers the estate with little court involvement. Formal probate, with hearings, is for contested wills or complicated situations. Probate generally has to be opened within three years of the death.
What goes through probate, and what does not
| Goes through probate | Passes outside probate |
|---|---|
| Accounts and property in the deceased’s name alone | Property held in joint tenancy with right of survivorship — goes to the surviving owner |
| The deceased’s share of property held as tenants in common | Anything with a named beneficiary: life insurance, IRAs, 401(k)s, annuities, pensions |
| Cash, checks, personal property, vehicles | Bank and brokerage accounts with a payable-on-death or transfer-on-death designation |
| Real estate titled to the deceased alone, with no beneficiary deed | Real estate with a Colorado beneficiary deed recorded before death |
| Property left to the estate by someone else’s will | Anything already titled in a revocable living trust |
The right-hand column is the one that surprises families. The will has no say over any of it. If Dad’s will leaves everything equally to three children, but his IRA names only the oldest and his house is in joint tenancy with the youngest, the IRA goes to the oldest, the house goes to the youngest, and the will divides what is left — which may be very little. Beneficiary designations and titles override the will every time, and they are the thing most often left un-updated after a divorce or a death.
This cuts both ways. Used deliberately, the right-hand column is how most Colorado families avoid probate without a trust: a beneficiary on every account, a beneficiary deed on the house, and a will that only has to catch the car and the furniture. Used carelessly, it undoes a careful will.
For a small estate, Colorado lets the heirs collect personal property (not real estate) by a sworn small-estate affidavit without opening probate, if the total is under a threshold that is adjusted each year and currently sits in the low $80,000s.
Dying without a will
Without a valid will, Colorado’s intestacy statute writes one for you. The surviving spouse takes everything if all the children are also the spouse’s; the shares are divided when there are children from another relationship. With no spouse, the children inherit equally; with no children, the parents; then siblings; then further out. The state is the heir of last resort. A will lets you do what the statute cannot: leave something to a friend, a church or a step-child; leave unequal shares; name who should raise a minor child; and choose the person in charge.
A will must be in writing, signed, and witnessed by two people. Colorado also recognizes a holographic will — in the testator’s own handwriting, signed, no witnesses — which is better than nothing and worse than almost anything else. A will is changed by a codicil or replaced by a new will that says it revokes all earlier ones. Colorado permits a separate signed personal property memorandum, referred to in the will, listing who gets the watch, the ring, the gun collection — and it can be rewritten without redoing the will. Those items start more family fights than the money does.
Review the will when a child is born or adopted, when anyone named in it marries, divorces or dies, and when wealth changes substantially. In Colorado a divorce automatically revokes provisions in favor of the former spouse.
Choosing the executor
Being named executor is not an honor; it is a job — collect everything, pay everyone, distribute the rest, keep records, file the returns, under deadlines, usually without pay, with personal liability for mistakes. The person should be organized, available, on speaking terms with the family, and willing. An out-of-state executor is allowed in Colorado but adds friction. Always name a successor. For a large or complicated estate, or a family that does not get along, a bank trust department or a professional fiduciary earns its fee.
The executor need not be good with paperwork; the estate’s attorney and accountant do the technical work. What cannot be delegated is judgment and attention — and the executor is personally liable for the decedent’s and the estate’s unpaid taxes if the estate is distributed before they are paid. Two IRS forms protect the executor: Form 4810 forces the IRS to assess any tax on filed returns within 18 months, and Form 5495 requests a discharge from personal liability.
The revocable living trust and the pour-over will
A revocable living trust is a container you create during life, name yourself trustee of, and retitle your assets into. While you live, nothing changes: you control everything and report all the income on your own return (see Trusts and taxes). At death the successor trustee you named takes over without a court and distributes or holds the property under the trust’s terms. That is the probate avoidance everyone talks about. It also provides for incapacity and keeps the estate out of the public court file.
Two cautions. The trust only avoids probate for property actually titled in it; an unfunded trust — signed and put in a drawer while the house and accounts stayed in the owner’s name — is the most common failure a preparer sees. And a trust always comes with a pour-over will, a short will saying anything left outside the trust at death goes into it. The pour-over will still has to be probated if there is anything for it to catch, so the point is to leave it nothing to do.
The documents for while you are alive
- Durable (financial) power of attorney. Names someone to manage money, property and legal affairs if you cannot; without one, the family’s alternative is a court conservatorship. It ends at death, when the executor or trustee takes over. It does not let anyone deal with the IRS for you; that takes a separate Form 2848.
- Medical durable power of attorney. Names who makes health care decisions when you cannot.
- Living will (advance directive). Your own instructions on life-sustaining treatment when there is no reasonable expectation of recovery. Colorado recognizes it under its own statute; the form has to follow the statute to be honored.
- A letter of instruction. Not a legal document: where the documents are, who the advisors are, the account list, funeral wishes. Keep the original will where the executor can get to it — not only in a safe deposit box the executor may not be able to open.
Saying no to an inheritance: disclaimers
An heir can refuse an inheritance or a gift. Done correctly it is a qualified disclaimer: the law treats the property as never having passed to the person who refused it, and it goes to whoever is next in line under the will, the trust or the beneficiary form — with no gift from the disclaimant. Done incorrectly, the refusal is itself a gift from the heir. The rules are strict: the refusal must be in writing, delivered to the executor or trustee within nine months of the death (or of the heir’s twenty-first birthday, if later); the heir must not have accepted any benefit from the property first — not the dividends, not a month’s use of the house (paying the property taxes from your own pocket is not acceptance); and the property must pass without any direction from the person disclaiming, to someone other than that person, except that a surviving spouse may disclaim and still take as the next beneficiary. It can be partial.
Why anyone does it: a child who does not need the money disclaims so it passes to the grandchildren (mind the generation-skipping tax); a surviving spouse disclaims part of an estate so it funds the bypass trust the will provided for; a primary IRA beneficiary disclaims so the contingent beneficiary inherits the account directly. Colorado’s version is the Uniform Disclaimer of Property Interests Act, and the disclaimer must be valid under it as well. The decision has to be made before anything is touched, which is why a preparer raises it in the first conversation after a death rather than the last.
Where the tax questions come in
- How property passes decides its basis for the heir. Inherited property steps up to date-of-death value however it passes — but property given during life keeps the giver’s basis. Putting a child on the deed “to avoid probate” is a gift of half the house with the parent’s old basis; a Colorado beneficiary deed does the same job with a full step-up. See Inherited property and the step-up.
- Joint tenancy with someone other than a spouse puts the whole asset in the first owner’s taxable estate unless the survivor can prove contribution — rarely a tax problem under a $15 million exemption, but it strips the executor of assets to pay the bills.
- Who pays the income tax while the estate is open follows the will’s drafting. A beneficiary who receives only a specific dollar amount or a specific item gets no K-1 and carries out none of the estate’s income; the residuary beneficiaries carry it all.
- A surviving spouse who inherits everything may want the estate to file a Form 706 anyway, to lock in portability of the unused exemption. See Gift and estate taxes.
- The estate’s Form 1041, the decedent’s final 1040, and the ten-year clock on an inherited IRA are covered in When a loved one dies.
Behind the scenes
On nearly every estate a preparer asks three questions before anything else: who is the personal representative and are the letters from the court in hand; what passed by beneficiary or title and therefore never touched the estate; and what did each asset get valued at on the date of death. The answers decide who reports what income, which return it goes on, and the basis every heir carries for life. The most common thing a preparer finds is an unfunded trust; the second is a beneficiary form nobody updated.
The Colorado side
Colorado has no estate tax and no inheritance tax, so nothing on this page produces a tax owed to the state; the only Colorado filing is the fiduciary income tax return when an estate or trust earns income. Colorado’s informal probate, small-estate affidavit and beneficiary deed make avoiding or simplifying probate easier here than in many states, which is one reason a living trust is less often necessary in Colorado than the seminars suggest.
What to bring your preparer
- The death certificate and the court’s letters appointing the personal representative
- The will, and the trust document if there is one
- A list of every account and property, how each was titled, and any beneficiary or POD/TOD designation
- Date-of-death values: appraisal of the house, brokerage statements, account balances
- The deceased’s last filed return and any 1099s that arrive after death
- If a spouse died: whether a Form 706 was or will be filed for portability
Questions people ask
Does a will avoid probate?
No. A will is the instruction book for probate. What avoids probate is how assets are titled and who is named as beneficiary, or a funded living trust.
My mother added me to her checking account. Does that go through probate?
No — it is yours by survivorship the day she dies, whatever the will says. If she meant it only so you could pay her bills, a power of attorney would have done that without changing who inherits.
Do we need a lawyer for probate in Colorado?
Not legally for informal probate, and small, uncontested estates are sometimes handled by the family with the court’s forms. Most families with a house or any disagreement use one, and the estate pays the fee.
Is a living trust worth it in Colorado?
Sometimes. It is most useful for people with real estate in more than one state, for privacy, for incapacity planning, and for holding an inheritance for someone who should not receive it outright. For a Colorado homeowner with a house, some accounts and adult children, beneficiary deeds and POD designations do most of the same work for far less.
Who pays the income tax on the estate’s earnings?
The estate, on Form 1041, unless the income is distributed to the heirs in the same year, in which case it carries out to them on a K-1. The trustee has until 65 days into the next year to decide.
The will controls less than people think
Titles, beneficiary forms and a funded trust decide where most of an estate goes; the will catches what is left. Check the forms as often as the will.
Published by The Tax Shop, Lone Tree, Colorado
Charles Trautman, EA · taxshop.tax · 303-734-1040