Answer: It Depends
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.
Probate Property Defined
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.
Revocable vs. Irrevocable Trusts
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.
Living Trust Advantages
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.
Living Trust Disadvantages
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.
So . . .
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.