Living
Trusts versus Wills: What
are they and which one for
me?
A Will is a document signed
by a testator that meets the
other formalities specified
by North Carolina Law needed
to pass probate property in
the manner specified in the
Will. The process of
submitting a Will to the
clerk of the superior court
and proving to the clerk
that the Will is valid and
should be given effect is
called “probate”. In fact
the word “probate” comes
from the Latin verb “probare”,
which means “to prove”.
The clerk of the superior
court, unless serious
disputes arise that are
taken up to a superior
court, supervises the
process of administering an
estate by requiring the
personal representative
(either an executor or an
administrator) to provide a
performance and surety bond
to the clerk (unless
waived), to give notices to
creditors, and to furnish
the clerk periodic
inventories and accountings
of the estate. The clerk’s
basic function is to insure
that the personal
representative satisfies
creditors of the deceased
and distributes the estate
to beneficiaries as required
by the terms of the will or
by law. The clerk’s
jurisdiction generally
extends, with some
exceptions, to “probate
property” – which is
property of the deceased
that is available to claims
of creditors, as opposed to
property that passes
“outside” the estate as
nonprobate property.
Often it is easier to think
of what nonprobate property
is when attempting to define
probate property. Common
forms of nonprobate property
are: retirement plan
benefits (they pass
according to the beneficiary
designation form), insurance
proceeds (again, they pass
according to the beneficiary
designation form), life
estates (sometimes called
“lifetime rights”), joint
tenancy with rights of
survivorship property (which
will pass automatically to
the other joint tenant), and
annuities (beneficiary
designation). Keep in mind,
however, that nonprobate
property can become probate
property if the property
passes to the personal
representative (for example,
an insurance policy may name
as a beneficiary “my estate”
and the insurance company
will pay the proceeds to the
personal representative).
As will be explained below,
compared to many other
states North Carolina has a
relatively “friendly” and
inexpensive probate system.
One other important type of
nonprobate property are
assets that are held by a
trust with beneficiaries
other than the estate at the
time of the grantor’s
death. These are often
called “living trusts” and
are the sorts of instruments
that are often advertised as
a way to avoid probate.
They avoid probate because
they are nonprobate property
as described above. Trusts
enable the grantor to
determine who receives the
money, when they receive it,
and what conditions must be
met. While a living trust
is set up during the
grantor's life, a
testamentary trust takes
effect upon the grantor's
death and is often contained
within the terms of the
Will.
Living, or inter vivos
(more Latin meaning “between
the living”), trusts come in
two basic categories:
Revocable and irrevocable.
Revocable “living trusts”
are perhaps the more common
because the grantor can
revoke it or amend it at
anytime before his death and
the proceeds remain
nonprobate property. A
living trust has no estate
tax advantage at all over
assets passed by will. The
property in a revocable
living trust generally will
be included in the grantor’s
estate. To avoid estate
taxation of trust property,
the trust must be irrevocable
and meet a host of other
technical requirements. We
constantly work with these
requirements in planning for
our clients.
The most-touted advantage of
a irrevocable living
trust are substantial
estate tax (and occasionally
income tax) benefits to the
grantor. Depending on trust
design, assets placed in an
irrevocable living trust are
not attributable to the
grantor, although the trust
itself may be taxed. Estate
taxes also may be avoided.
Other advantages cover both
revocable and irrevocable
living trusts. If a living
trust covers all of the
grantor's assets, then he or
she may not even need a
will. Many people wish to
spare their relatives from
going through probate, and,
as explained above, living
trust assets are not subject
to probate. Because there is
no probate, survivors do not
have to reveal the extent of
the living trust's assets
through a public filing as
happens with probate. If the
grantor holds real estate in
more than one state, a
living trust covering that
property may allow survivors
to avoid probate in those
states.
Aside from the advantages
for the survivors, a living
trust can help a grantor
manage his or her financial
affairs because a trustee
takes over the
administration of the
trust's assets if the
grantor becomes
incapacitated. Some people
are particularly concerned
about how their finances
will be managed if they
should fall ill. A living
trust may provide peace of
mind because a trustee can
continue to manage the
trust's funds in the event
the grantor becomes mentally
or physically
incapacitated. On the other
hand, a property drafted
power of attorney can
usually address these
concerns.
The main disadvantage of a
living trust is that the
grantor loses some
flexibility and control over
his or her property and
funds. Because a living
trust becomes effective upon
creation instead of at the
grantor's death, the assets
covered by the trust start
to be administered by the
trustee at that time. If
the trust is a revocable
trust, usually the grantor
can elect to serve as long
as he is able and control is
not much of an issue (other
than, perhaps, a slight
accounting headache). If
the trust is irrevocable,
the grantor loses much
control that he or she might
otherwise have had. If an
individual prefers to have
unrestricted control over
his or her assets, or feels
that he or she may want to
modify an estate plan, a
testamentary trust or will
provides the flexibility to
change terms for as long as
the grantor is able.
A living trust often costs
more to establish than a
will. In many states the
costs of probate may be so
high that the extra cost
involved in establishing a
living trust may be
justified. In North
Carolina, however, probate
is generally a simpler
process and often the costs
of establishing a living
trust are not justifiable
solely to avoid probate.
The question of whether to
use a revocable living trust
in lieu of a will must
always be answered on a
case-by-case basis.
A “one size fits all”
approach is not wise.
Unfortunately, there are
many “trust mills” that
advertise the “wonderful
advantages” of living
trusts, hold seminars to
tout those advantages (often
with a free lunch!) and
often “cold call”
prospective clients at
home. Unfortunately, this
approach often furnishes the
client a mass-produced (and
very expensive) document
that does little to address
a client’s real needs. For
more on this marketing
topic, read Bob’s article
The $99 Legal Special!
Nevertheless, we often
design and use irrevocable
living trusts to achieve
certain gift and estate tax
advantages and accomplish
other important family
goals. Life insurance
trusts and qualified
personal residence trusts
are very common examples of
these sorts of trusts.
Unlike revocable trusts,
these trusts are seldom, if
ever, designed to hold all
of the grantor’s assets.
The major advantage of a
Will and a testamentary
trust contained in the
Will is that the grantor
retains absolute control
over his or her assets.
Because a testamentary trust
becomes effective only upon
the grantor's death, the
grantor may make changes to
its terms any time before
death. For many people,
retaining control of their
property is an important
goal that testamentary
trusts help them achieve.
Retaining control can have
its disadvantages, though.
If the grantor becomes
incapacitated prior to
death, the trustee cannot
take charge of the trust
assets in order to manage
the grantor's finances
during that time. A
guardianship may be required
for such incapacitated
grantors if adequate
provision has not been made
through powers of attorney.
Guardianship issues,
however, are easily
avoidable through proper
planning, usually
through the use of a
property drafted power of
attorney.
