Tax Law ✦ Trusts & Estates
No Colorado Estate Tax. Plenty of Tax to Plan.
With no state estate tax and a federal exemption of $15 million per person, most Colorado families will never owe estate tax. What they will face is income tax on trusts, capital gains on inherited and gifted assets, and the administrative tax work that follows a death. North Star Law Firm plans for those, and the firm’s attorney co-authored Trusted, a working guide for the trustees who have to carry the plan out.
Overview
Where the tax actually is in a Colorado estate plan
Estate planning in Colorado starts from an advantage: no state estate, inheritance, or gift tax, and a federal exemption high enough that only large estates pay federal estate tax. The tax that remains is income tax. Trusts pay the top rate on retained income almost immediately, so the distribution decision each year is a tax decision. Assets held until death receive a basis step-up under I.R.C. § 1014; assets given away do not, so lifetime gifts of appreciated property can cost more than they save. And because Colorado is a separate-property state, only the deceased spouse’s share of jointly owned property steps up, which makes titling part of the plan. We draft and review trusts for their tax provisions, handle the fiduciary returns, and coordinate the state-law documents with Colorado-licensed counsel where required.
- Federal estate and gift tax planning for larger estates
- Grantor and non-grantor trust design, including intentionally defective grantor trusts
- Basis planning: what to hold, what to give, what to sell
- Fiduciary income tax (Forms 1041 and DR 0105) and distribution planning
- Trust residency planning for trusts with out-of-state ties
- Estate administration tax work: final returns, valuations, elections
- Trustee advice on tax, accounting, and distribution decisions
- Charitable and family business succession structures
Trust Taxation
Why the distribution decision is a tax decision
| Item | Rule | Planning point |
|---|---|---|
| Trust income retained | Taxed to the trust; top federal bracket reached at roughly $16,000 of income; Colorado flat rate on top | Distribute income to beneficiaries in lower brackets where the trust terms allow |
| Trust income distributed | Deducted by the trust, taxed to the beneficiary (distributable net income rules) | The 65-day election lets a trustee treat early-year distributions as prior-year |
| Capital gains in a trust | Usually taxed to the trust unless the instrument or state law allocates them to income | Drafting choice at formation; Colorado’s principal and income rules matter |
| Grantor trust | Income taxed to the grantor, not the trust | Lets assets grow inside the trust tax-free to the beneficiaries; a powerful federal estate tool |
| Basis at death | Stepped up to fair market value for assets in the decedent’s estate (§ 1014) | Separate-property state: only the decedent’s share of joint property steps up |
| Colorado fiduciary return | DR 0105 for resident trusts and trusts with Colorado-source income | Residency depends on administration and fiduciaries; plan it for out-of-state trustees |
The Attorney-CPA Difference
The person who drafts the trust also files its return.
Most trusts are drafted by a lawyer who never sees the Form 1041 and administered by an accountant who never reads the trust. Provisions that seemed harmless at signing, like a capital gains allocation or a discretionary distribution standard, become the tax problem years later. We do both jobs, and Phillip Zagotti co-authored Trusted, a practical guide written for the trustees who inherit these instruments. The plans we draft are the plans we know how to administer.
- Trusts reviewed for their tax provisions before signing
- Fiduciary returns prepared in-house with distribution planning each year
- Basis and titling planned for a separate-property state
- Valuation and estate administration handled by a forensic accountant
- Colorado-licensed counsel coordinated for state-law drafting and probate
Questions & Answers
Trust & Estate Tax Planning questions, answered
Does Colorado have an estate tax?
No. Colorado repealed its estate tax when the federal state death tax credit ended, and it has no inheritance or gift tax. Estate tax planning for a Colorado family is entirely about the federal exemption, which is $15 million per person for 2026 and indexed for inflation, so most Colorado estates face no estate tax at all and the planning turns to income tax basis, trust income tax, and asset protection.
If there’s no estate tax, why plan?
Three reasons. Income tax: assets held until death get a stepped-up basis, and assets given away during life do not, so the choice of what to give and what to keep is a capital gains decision. Trust taxation: a trust that accumulates income hits the top federal bracket at a few thousand dollars, and Colorado taxes it too, so distribution planning matters every year. Control and protection: a properly drafted trust keeps assets out of a beneficiary’s creditors’, spouse’s, or trustee’s mistakes.
Is Colorado a community property state for estate purposes?
No. Each spouse owns their separate property and their own share of jointly titled property, which affects how much gets a basis step-up at the first death (only the decedent’s share, not the whole of a jointly held asset as in community property states) and how the estate is divided. Titling and beneficiary designations do real work in a Colorado plan for that reason.
How is a Colorado trust taxed?
A trust files federal Form 1041 and Colorado’s DR 0105, paying tax on income it retains and passing income it distributes to the beneficiaries through the distribution deduction. Colorado taxes a resident trust on all its income and a nonresident trust on Colorado-source income; the residency rules turn on the trust’s administration and fiduciaries, and they are a planning lever for trusts with out-of-state connections.
Can you administer the trust after death?
We handle the tax side of trust and estate administration: the final Form 1040, the fiduciary returns, the basis and valuation work, and the elections that reduce the combined tax. The co-author of Trusted, the firm’s trustee guide, does this work daily. State-law probate filings are coordinated with Colorado-licensed counsel where required.
Plan the tax before the transaction, not after.
A free consultation with an attorney-CPA who can draft the structure and run the numbers in the same meeting.