Chapter 39 - § 39.2 • COLORADO STRATEGIES

• Jurisdiction: Colorado

§ 39.2 • COLORADO STRATEGIES

§ 39.2.1—Insurance

Obtaining liability insurance is often the most cost-effective strategy for asset protection. General liability insurance for a business and/or umbrella insurance for an individual can cover a multitude of potential creditor issues. However, it is important to read each insurance policy carefully and understand the limitations to coverage. For example, many Colorado insurance providers use standard language for their intentional injury exclusion clauses (e.g., exclusions for bodily injury that is "expected or intended by the insured"). See, e.g., Colo. Farm Bureau Mut. Ins. Co. v. Snowbarger, 934 P.2d 909 (Colo. App. 1997). Also, coverage for "bodily injury, sickness, or disease" is typically limited to physical injury, which excludes claims for purely non-physical or emotional harm, Nat'l Cas. Co. v. Great Southwest Fire Ins. Co., 833 P.2d 741 (Colo. 1992), and coverage for property damage is typically limited to actual tangible property, which excludes claims for economic loss, such as a mere investment. See, e.g., Lamar Truck Plaza, Inc. v. Sentry Ins., 757 P.2d 1143 (Colo. App. 1998).

Practice Pointer
Some practitioners recommend that a client obtain umbrella insurance coverage in an amount equal to the value of the client's gross estate for estate tax purposes.

§ 39.2.2—Titling and Gifts

In certain situations, merely re-titling assets can be an easy and effective asset protection technique. However, re-titling may need to be reported as a gift by the donor on an applicable U.S. Gift Tax Return (Form 709; see "Who Must File" on the Instructions (2021)), and any re-titling of assets should only be completed after careful consideration of the client's estate planning objectives.

Re-titling assets in the name of the lower-credit-risk spouse can protect those assets from the creditors of the higher-credit-risk spouse. In most instances, a spouse is not liable to pay any indebtedness contracted solely by the other spouse.² Re-titling assets in this manner, however, does not protect the assets from any creditors of the lower-credit-risk spouse and could impact property rights in the event of divorce.

Real property titled in joint tenancy with rights of survivorship is specifically exempt from creditor claims and from the statutory allowances that are typically available in probate. C.R.S. § 15-15-103(1)(b)(I). Also, Colorado's joint tenancy statute expressly provides that the filing of a petition in bankruptcy by a joint tenant will not sever the joint tenancy. C.R.S. § 38-31-101(5)(b). Assuming no other facts establish a severance of the joint tenancy, the interest of a bankrupt joint tenant should terminate on death under this statute regardless of a pending bankruptcy case. See, by analogy, Park State Bank v. McLean, 660 P.2d 13 (Colo. App. 1982).

§ 39.2.3—Disclaimers

A person with creditor concerns may want to refuse assets that would otherwise pass to him or her in order to prevent creditors from reaching those assets. The general rule is that a person who makes a qualified disclaimer with respect to an interest in property shall be treated as if such property was never transferred to such person. Matter of Estate of Colacci, 549 P.2d 1096 (Colo. App. 1976).

For federal transfer tax purposes, a "qualified disclaimer" is:

• An irrevocable and unqualified refusal by a person to accept an interest in property;
• In writing;
• Delivered to the transferor of the interest, his or her legal representative, the holder of legal title to the property to which the interest relates, or the person in possession of such property no later than nine months after the date on which the transfer creating the interest in the person making the disclaimer is made;
• Where the person making the disclaimer has not accepted the interest or any of its benefits; and
• As a result of the disclaimer, the interest passes without any direction on the part of the person making the disclaimer to a person other than the person making the disclaimer.

I.R.C. § 2518(b); see also Treas. Reg. § 25.2518-2.

In 2011, Colorado adopted the Uniform Disclaimer of Property Interests Act, which provides the state law requirements for a valid disclaimer. C.R.S. §§ 15-11-1201, et seq. Meeting the requirements for a qualified disclaimer under federal law will typically meet the requirements under Colorado law. C.R.S. § 15-11-1214. However, there may be additional Colorado requirements in some cases (e.g., a disclaimer of an interest in Colorado real property must be recorded in the applicable office of the clerk and recorder, C.R.S. § 15-11-1212(15)).

Practice Pointer
Under Colorado law, an agent's power to disclaim on behalf of the principal must be expressly provided in the power of attorney instrument. C.R.S. § 15-14-724(1)(h).

For federal transfer tax purposes, a disclaimer of an undivided portion of an interest in property is treated as a qualified disclaimer if the undivided portion: (1) consists of a fraction or percentage of each and every substantial interest in the property, and (2) extends over the entire term of the disclaimant's interest in the property. Treas. Reg. § 25.2518-3(b). The Treasury Regulations also specifically sanction a formula disclaimer. Treas. Reg. § 25.2518-3(d), Ex. 20. Colorado law also expressly provides for other forms of partial disclaimers (which may not meet the requirements of a qualified disclaimer for federal transfer tax purposes). C.R.S. § 15-11-1205(4).

Although a qualified disclaimer can generally prevent the disclaimant's creditors from reaching the disclaimed assets, two exceptions...