North Carolina Estate Planning Blog : North Carolina Estate Planning Lawyer & Attorney : Trust Counsel, PA : Trust Administration : Serving Chapel Hill, Durham, Raleigh, Pittsboro, Orange County, Chatham County

Special Needs Trusts (SNTs), also sometimes referred to as Supplemental Needs Trusts, are used to provide supplemental benefits to disabled or elderly persons receiving governmental benefits (such as Medicaid and SSI) while not disqualifying them for the benefits. 

There is a distinction between "self-settled" or "first party" trusts, which are funded with the disabled persons own assets, and most often called special needs trusts, and "third party trusts", which are set up by another person and funded with that person's money.  The latter are often referred to as supplemental needs trusts.  The laws regarding SNTs are very complex, and such trusts should be drafted only by attorneys experienced in that area of the law.

The administration of SNTs is also complex.  Only certain types of expenditures are allowed.  The wrong type of payments from the trust can disqualify the beneficiary from receiving governmental benefits.  I currently serve as trustee for several SNTs - given the many needs of a disabled beneficiary, it can be a demanding job.

For examples of what expenditures from an SNT are allowable, and those that aren't, click "Continue Reading."

• Email This
• Print
• Comments
• Trackbacks

In a decision dated February 2, 2010, the North Carolina Court of Appeals upheld the Superior Court Judge's 2009 decision in Brown Brothers Harriman Trust v. Anne P. Benson, et al. Click here for my previous post about this case.

The Court of Appeals ruled that North Carolina's constitution does not require application of the common law rule against perpetuities' restriction of the remote vesting of future interests in property.  The court held that N.C.G.S. Section 41-23, which repealed the common law rule against perpetuities (in 2007), is a valid exercise of the General Assembly's authority.  Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al, No. COA09-474.

The effect of this ruling is that dynasty trusts are clearly a valid planning tool in North Carolina.  The only requirement is that the trustee be given the power to alienate (sell) the property in the trust.

• Email This
• Print
• Comments
• Trackbacks

Based on what appeared to be a giant "loophole" in the gift tax law applying to gifts made in 2010, taxpayers could arguably make gifts to a wholly-owned grantor trust free from gift tax.  Last week at the Heckerling Estate Planning Institute, commentators said this was too good to be true, and opined that the IRS would soon close the loophole.  No sooner said than done:

Yesterday the IRS published Notice 2010-19, which applies to taxpayers making gifts in trust during 2010.  Under section 2511(c), a transfer of property to a non-wholly-owned grantor trust is a transfer by gift of the entire interest in the property.  To determine whether a transfer to a wholly-owned grantor trust constitutes a gift, the gift tax provisions in effect prior to 2010 apply.

• Email This
• Print
• Comments
• Trackbacks

Effective October 1, 2009, Trustees of North Carolina trusts can, subject to certain requirements, appoint the trust property to another trust for the same beneficiary.  This "decanting" power can be useful in helping to protect trust funds.  The law applies to trusts created before and after the effective date.

NCGS Section 36C-8-816.1

• Email This
• Print
• Comments (2)
• Trackbacks

Click "Continue Reading" for a Comprehensive Living Trust Checklist to determine whether or not your trust needs to be upgraded.  Thanks to attorney Thomas J. Bouman for the checklist, which I have modified for North Carolina purposes.

• Email This
• Print
• Comments
• Trackbacks

• Email This
• Print
• Comments
• Trackbacks

Practically every day, I discuss with clients the pros and cons of revocable living trusts.  In my opinion, the positives generally far outweigh the negatives, but living trusts don't make sense for everyone.  There have been innumerable articles and blog postings about the advantages of using a living trust for estate planning, but I thought I'd approach the topic from a different angle - why might you not want to use a living trust:

1. You want the court to dictate how your estate is handled - all those rules have to be there for a good reason, right?
2. You favor supporting the government, so you like the idea of your estate paying thousands of dollars in court fees.
3. You believe everyone's testamentary dispositions and assets should be public record, including your own.
4. You want your executor to experience the joy to traveling to another state to handle probate in the location in which you own your timeshare, land, vacation place, etc.
5. You know your executor will enjoy filling out and signing lots of forms; after he or she has nothing better to do.
6. You know your family will not mind waiting for all the minute details of probate to be completed before the estate is closed and the assets distributed.
7. You are glad that the court clerks are kept busy, so a several month delay in approving a final account is no big deal.
8. An finally, you favor supporting lawyers, so you don't mind your estate paying thousands of dollars in attorneys fees for ensuring that the court requirements of probate are met.

If even one of these statements describes you, then maybe you aren't the right candidate for a living trust.  ;-)

• Email This
• Print
• Comments (3)
• Trackbacks

This article discusses when it might be appropriate to include your parents or grandparents in your will or living trust - generally when you are providing support for them.  In most cases, funds should be held in trust for the elder relatives, to protect the assets and preserve Medicaid eligibility.

Note: The article is written by a Canadian lawyer, so it contains a reference to Canadian governmental benefits.  Otherwise it is applicable to U.S. residents.

• Email This
• Print
• Comments
• Trackbacks

Governor Bev Perdue recently signed into law Session Law 2009-267, which:

• modifies North Carolina General Statutes Section 36C-2-203(a)(9) to state the proceedings may be brought before the Clerk of Superior Court to create a trust.
• Adds a provision to NCGS Section 36C-4-401 providing that a court may create a trust, including a trust pursuant to 42 USC Section 1396p(d)(4) [Special Needs Trust].
• Adds Section 36C-4-401.2, which provides that any interested party may petition the court to establish a trust pursuant to 42 USC Section 1396p(d)(4.

The changes are effective October 1, 2009.

The new laws will be extremely helpful, as Special Needs Trusts under 42 USC Section 1396p(d)(4) must be established by a parent, grandparent, legal guardian or court.  If there is no parent or grandparent is is willing and able, and no guardian, the only way to protect Medicaid and SSI benefits by using a Special Needs Trust is by having one created by the court.

• Email This
• Print
• Comments (1)
• Trackbacks

Offshore trusts continue to be an effective asset protection tool, including in bankruptcy, tax litigation, and divorce situations, even when the facts are not favorable to the trust grantor.  The catch, however, is that you might have to some time in jail for contempt of court before you and your money are reunited.

Here are three cases arising out of Florida:

In re Stephan Jay Lawrence, 238 B.R. 498 (Bankr. S.D. FL 1999).  Stephan Lawrence set up and funded an offshore asset protection trust just weeks after an arbitration award against him for over $20,000,000 due to a margin account deficit due to the 1987 stock market crash.  Lawrence then filed bankruptcy.  The court discredited Lawrence's testimony that he was no longer a beneficiary of the trust and found that he still had control over the trust, including the power to repatriate the trust assets.  Lawrence was held in contempt and jailed for not complying with the order to repatriate.

Lawrence remained in jail for about six years, after which time he was released by the court, based on a ruling that there was no realistic possibility that Lawrence would comply with the order for repatriation.

• Email This
• Print
• Comments (1)
• Trackbacks

A while back I blogged about the advisability of trustees of irrevocable life insurance trusts (ILITs) reviewing the policy owned by the trust to help ensure the policy is still a sound investment and won't lapse.  Here's an article from the Wall Street Journal website covering a related topic, Keep Tabs on Insurance that Covers Estate Taxes.  The article doesn't discuss the use of ILITs to avoid estate taxes on the life insurance proceeds and further protect the funds for the beneficiaries, but in my opinion an ILIT should always be used for life insurance in a taxable estate (over $3.5 million in 2009).  ILITs are the best (estate) tax shelters around!  Even for relatively "small" $1,000,000 policy, a $2,500 trust could easily save over $500,000 in estate taxes.

• Email This
• Print
• Comments
• Trackbacks

The recent Kiplinger.com article How to leave an IRA that's heir-tight contains lots of good information and advice about IRA distribution planning, but there's a glaring omission - no discussion of the use of trusts to protect IRAs for the benefit of one's heirs.

A stand alone IRA trust provides for maximum stretch out of the IRA payments will providing maximum flexibility and protection.  Anyone who has an IRA or other retirement plan over $200,000 (all accounts combined) or so who ultimately wants to leave it to children or grandchildren should seriously consider using an IRA Trust.

• Email This
• Print
• Comments
• Trackbacks

I previously blogged about NC's repeal of the Rule Against Perpetuities, which limited the amount of time a trust could stay in existence, and some questions that existed regarding the repeal's validity.

In February 2009, an order was entered by Judge Albert Diaz in the Mecklenburg County Superior Court found that:

1. Section 41-23 of the North Carolina General Statutes, denominated as Perpetuities and Suspension of Power of Alienation for Trusts (the "Act"), is a valid exercise of the General Assembly's legislative power to repeal both the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities, as they apply to trusts in North Carolina;
2. The prohibition against "perpetuities and monopolies" found at Article I, Section 34 of the North Carolina Constitution applies only to unreasonable restraints on the alienation of property and not to the vesting of remote interests.

The Court declared that the Act is constitutional and supersedes the common law Rule Against Perpetuities and the Uniform Statutory Rule Against Perpetuities.

Brown Brothers Harriman Trust Co., N.A., as Trustee of the Benson Trust v. Anne P. Benson, et al; Mecklenburg County File No. 08 CVS 13456

As a Superior Court ruling (rather than Court of Appeals or Supreme Court), this holding is not binding on other North Carolina Courts, but it does serve to help answer the questions posed in the my earlier post.  I would feel fairly comfortable preparing a North Carolina dynasty trust at this point.

• Email This
• Print
• Comments (1)
• Trackbacks

The use of Trust Protectors is becoming increasingly common, particularly in irrevocable trusts that may last for decades, if not generations.  A Trust Protector is generally an individual, often an attorney, cpa or family member, who is given certain powers over a trust by the trust grantor.  These powers can provide increased flexibility and protection for the benefit of the trust beneficiaries.

Here are the most common specific reasons to use a Trust Protector:

1. To allow a trust to be amended to take advantage of changes in the law.
2. To allow removal and appointment of a trustee.
3. To have an independent party to exercise distribution powers when the trustee is also a beneficiary.
4. To allow amendments to comply with tax law provisions to maintain or increase tax advantages to a trust.
5. To provide for management of special trust assets.
6. To provide for removal of trust assets from a creditor jurisdiction (in offshore or domestic asset protection trusts).
7. To allow change in the governing law or tax situs of the trust.
8. To allow addition of additional beneficiaries (such as new descendants).
9. To make certain tax elections.
10. To "watch over" the trustee.

I generally do not recommend choosing a family member as a Trust Protector, because, depending on how close the kinship is, a family member serving in that role could create income and estate tax problems due to attribution rules.  Also, family members rarely have the expertise needed to make and carry out the necessary decisions.

Attorneys and CPAs may be wary of serving due to concerns about liability.  Corporate fiduciaries may have the same concern, and are not set up to serve in that capacity.  One alternative is to use a specialty Trust Protector firm such as TrustProtector, LLC.

• Email This
• Print
• Comments (1)
• Trackbacks

Here's a great article from Santa Barbara attorney Mark Cornwall - Beware the Pros at Cons.  Occasionally clients ask me about such arrangements, and, of course, and I inform them that's it's a bunch of baloney.   Remember - if it sounds to good to be true, it most likely is!

• Email This
• Print
• Comments
• Trackbacks

I recently blogged about my disagreement with the North Carolina State Employees Credit Union's policy on mortgages when the property was previously held in the owner's living trust.  Somehow SECU became aware of my post, sent me a letter by email objecting to my statements, which, in the interest of fairness, I thought I should share.  Click "Continue Reading" for the text of the letter.

By the way, I still find SECU's policy to be unfair to those members who have living trusts, but, of course, that's only my opinion.

• Email This
• Print
• Comments
• Trackbacks

My standard advice for clients who are transferring real property to their revocable living trusts is to check with their title insurance company to make sure they will still be covered.  For those insured by Chapel Hill's own Investors Title Insurance Company, all that is required is to notify Investors, who will then issue a simple amendment, at no charge, to show the trust as the insured.  Hopefully other insurers will do the same.

Also, don't forget to check with your homeowners insurance policy to ensure continued coverage.

• Email This
• Print
• Comments
• Trackbacks (1)

I have long known that the North Carolina State Employees Credit Union (SECU) refuses to refinance any residence owned by a revocable  living trust.  Their explanation is that they do not have the legal expertise to determine whether the trust affects the borrower's legal title and powers to the property.  Other lenders solve this by having an attorney (usually the one who drafted the trust) certify that the trust will not adversely affect the loan transaction.

For my clients that chose to work with SECU,  we would simply deed the house out of the trust to the client, and then after the closing, deed it back to the trust.  Some trouble and expense, but nothing major.

Last week, a client of mine had been told by SECU that she could refinance without using an attorney or updating her title insurance.  However, when they found that the home had been transferred in and out of the trust, they required that she use an attorney for the closing and obtain updated title insurance.  This will end up costing her another $800 or so. 

I spoke to Hill Scott, with SECU in Raleigh, on behalf of my client, but my pleas fell on deaf ears. I asked to speak to an attorney with SECU (someone who can understand what a revocable living trust is), but was told by Mr. Scott that SECU has no attorneys on staff!

Bottom line - If you have titled your home in your living trust, and insist on working with SECU when refinancing your mortgage, be aware that the costs of the transaction may increase significantly due to SECU's inane policies.

• Email This
• Print
• Comments (1)
• Trackbacks

A colleague of mine, Dennis Toman of Greensboro, contacted the North Carolina Deparment of Insurance about the issue of insuring homes owned by living trusts.  Bernard Cox, assistant to the Deputy Commissioner, stated that:

We tend to agree with your insurance company that the manual eligibility rule for HO policies would allow this arrangement [keeping the homeowners policy in the name of the individual owner and naming the trust as an addtional insured]. The individual maintains an insurable interest as long as he/she remains primary resident and has life time rights. I am stating the rule would allow it but individual companies do have different underwriting requirements, please understand.
 

This is good news, but those who own real estate in their living trusts should always check with their insurer.  I am informed that GEICO will allow the above-referenced method.

• Email This
• Print
• Comments
• Trackbacks

Revocable living trusts are a common estate planning tool for avoiding probate.  It is not uncommon for a home to be transferred to the trust for that purpose, as well as occasionally motor vehicles. I normally advise my clients to check with their insurance company to make sure their coverage will not be affected.

However, yesterday I had a conversation with a local independent insurance agent, who said that most of the insurance companies he works with will not insure homes and cars owned by revocable living trusts under standard personal policies.  Instead, business policies must be used, which can be more expensive.

For homes owned by living trusts, the insurance companies require a business fire policy, and then for complete coverage a renter's policy must be obtained.

If this causes the insurance costs to increase significantly, it may outweigh any benefit of avoiding probate.

Bottom line - check with your insurance agent or company before transferring a home or a car to your trust.  If the new ownership will up your insurance costs, discuss the matter with your attorney to make sure the transfers are still worthwhile from a financial standpoint.  For real estate, you should also check with your title insurance company.  Finally, make sure your umbrella liability insurance covers your trust assets also.

• Email This
• Print
• Comments (1)
• Trackbacks

Life insurance trusts (ILITs) are a popular estate planning technique used to shelter life insurance proceeds from estate taxes, creditors and mismanagement by beneficiaries. While the insured is alive, generally the only asset of an ILIT is the life insurance policy.  However, ILIT trustees have a duty to make sure that the policy is a sound investment, and may be liable to the beneficiaries if it is not.

So, for ILITs that have owned the same policy for several years, the trustee should ask the following questions:

• Is the policy performing as illustrated?  If the policy was obtained when interest rates were high, the initial illustration probably assumed a relatively high interest rate for the life of the policy.  However, in the last several years, interest crediting rates for universal life and participating life dividends have been lower.  Market downturns have also adversely affected the performance of variable products.  Failure to address this issues could cause polices to lapse.
• Is the policy sufficient for current needs? Changes in the insured lfe and beneficiaries lives, along with changes in estate tax and other laws, may make adjusting the death benefit advisable.
• Is there a more competitive policy available? Life insurance rates on similar policies tend to drop over time.  Longer life expectancies, lower mortality costs, and improvements in underwriting all contribute to lower current costs.
• Do newer policies offer better features? Limited guaranteed policies are now available, along with riders for return of premium, accelerated death benefits,  and long term care benefits.
• Is the insurance company financially strong?  Life insurance companies are rated for financial strength and stability by ratings services such as Moody's A.M. Best , and Standard and Poors.  Is your carrier's ratings decline significantly, consider switching to a stronger company.

Have an insurance professional conduct a few on the policy every few years to make sure that you are fulfilling your fiduciary duty and reducing the risk of future legal action by beneficiaries.

• Email This
• Print
• Comments (2)
• Trackbacks

I recently posted a link to an article on Special Needs Trusts - here's another one from the Wall Street Journal, which quotes several well known lawyers, including Barry Nelson in Miami, who has a special needs child himself.

• Email This
• Print
• Comments
• Trackbacks

This is the Press Release issued by the FDIC (emphasis added):

The FDIC's Board of Directors today adopted changes to simplify the rules for determining the coverage available on revocable trust accounts – commonly called payable-on-death accounts or living trust accounts. The interim rules, which are effective immediately, eliminate the concept of qualifying beneficiaries, so that coverage is based on the naming of virtually any beneficiary.

Under the revised rules, coverage for the vast majority of account owners generally is based on the number of beneficiaries named in a depositor's revocable trust account(s). The insurance limit will still be based on $100,000 per named beneficiary. For revocable trust account owners with more than $500,000 in such accounts naming more than five beneficiaries, the coverage is the greater of either $500,000 or the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary.

"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair. "We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records."

The new rules are effective as of today and apply to all existing and future revocable trust accounts at FDIC-insured institutions.

Comments on the interim rule are due no later than 60 days after the interim rule is published in the Federal Register. Publication is expected to occur within a week.

• Email This
• Print
• Comments
• Trackbacks

A recent article in the Baltimore Sun discusses the special planning that should be done by parents of children with disabilities.  I think the article is good, although it it states that one should contact a lawyer OR financial planner who is an expert in the area.  While enlisting the advice of a knowledgeable financial planner might not be a bad idea, it is an absolute must to have an expert attorney involved as well.  Financial planners cannot prepare wills or trust documents.

North Carolina also has at least one non-profit organization that offers "pooled" trusts - Life Plan Trust.

• Email This
• Print
• Comments
• Trackbacks

I generally recommend that persons with IRA or qualified plan assets of at least $200,000 should consider a Standalone IRA/Retirement Plan Trust. 

There are many reasons that justify creation of a separate trust just to receive retirement plan assets. Though most attorneys think it can be done with only one master trust, there are various drafting problems and post-mortem administrative problems that are lessened by using a separate trust for retirement benefits alone. Many of the benefits of a separate trust(s) established to solely hold retirement plan or IRA assets after death are included below.

• Email This
• Print
• Comments
• Trackbacks (1)

When doing estate planning, one needs to consider to whom to leave one's property, which is usually not much of a problem.  Next, one must decide who will be in charge of the administration the Will - the executor .  This choice is sometimes more difficult, but even without suitable family or friends, a professional or corporate fiduciary can be named.  Once these decisions are made, the very simplest of wills can be created.

However, a simple will does not address three very important estate planning considerations dealing with protecting assets and family members:

1. Estate Taxes - currently estate taxes are an issue for estates over $2 million.  What many people don't realize is that virtually everything they own is taxable.  The most common misconception is that life insurance is tax free.  This is generally true for income tax purposes, but not for estate tax purposes.  The combination of life insurance face value, retirement plans and equity in real estate put many couples over the exemption amount.  Without proper planning property roughly 50% of the property over $2 million will go to the government (45% federal tax plus NC estate tax).   Also, in 2011 the estate tax exemption will be reduced to $1 million.
2. Probate Avoidance - Even the most sophisticated Will does not avoid probate for property passing under the terms of the Will.  The probate process, governing by the court, can be lengthy and expensive.  Living Trusts can keep matters out of the court and save time, money and hassle.   As a rule of thumb, I recommend Living Trusts for those who have probate assets of $200,000 or more.  An example of a probate asset would be a brokerage account in one's sole name.
3. Asset Protection - Leaving an inheritance to someone outright makes things simple, but once that person receives the assets, there is no protection for the inheritance.  The assets could be lost to bad judgment, creditors, or divorcing spouses.  I urge my clients to consider leaving assets in trust, even to their spouses.  The protection offered can be invaluable in case the unexpected happens.  The trusts can be designed to be very flexible, and the beneficiary can even be a trustee.

As you can see, it pays to look beyond the basics when developing an estate plan.

• Email This
• Print
• Comments
• Trackbacks

They other day a client came in and said that he had heard that probate in North Carolina was a "breeze."  Wrong!  While probate here is less expensive than in some states, I still counsel my clients to avoid it in most cases.  Here are 10 Reasons to Avoid Probate in North Carolina:

1. Court fees can exceed $6,000.
2. Accountings must be filed reporting every penny coming into and going out of the estate.
3. Documentation of bank accounts and expenditures is required.
4. A formal inventory of assets is required.
5. Attorneys fees generally far exceed fees in similar non-probate estates.
6. All filings are in the public record.
7. Notices to creditors must be published in the local newspaper.
8. Delay due to court rules and busy Clerks' offices.
9. Bond may be required if not waived in the Will.
10. Stress induced by court deadlines and requirements.

My office handles dozens of probate matters every year, so we have first hand experience with all types of estates.  I recommend avoiding probate to save time, money and aggravation.  Generally, a Living Trust is the best way to avoid probate, but there are other methods as well.  An experienced estate planning attorney to help you make the right decision about handling you estate.

• Email This
• Print
• Comments (11)
• Trackbacks

• Email This
• Print
• Comments (1)
• Trackbacks

The U.S. Supreme Court,  in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), ruled that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2% floor for miscellaneous itemized deductions under Internal Revenue Code Section 67(a).

Later this year, the Treasury Department will issue final regulations under Reg. 1.67-4 in keeping with the Supreme Court's decision in Knight. The final regulations on bundled fees that include a portion for investment management will most likely include safe harbors or methods to calculate the portion fully deductible.

Since the final regulations will not be published prior to due dates for the 2007 returns, bundled trustee and executor's fees will be fully deductible for 2007 and prior years (tax years beginning before January 1, 2008)  IRS Notice 2008-32; 2008-11 IRB 1.
 
Notice 2008-32 does, for 2007 and prior year returns, require allocation of "readily identifiable" expenses that are subject to the 2% floor of Sec. 67.

This works to the disadvantage of trusts in which a "custodial' or "administrative" trustee is used, with relatively low trustee fees, with separate (and generally higher) fees paid to the investment advisor, who handles the investment management.  But, beginning this year, the playing field has been leveled to some degree.

Click "Continue Reading" the text of Notice 2008-32.

• Email This
• Print
• Comments
• Trackbacks

Many parents are deeply concerned about the escalating costs of college and post-graduate education for their children, and how these costs may impact their overall financial and estate planning objectives. If you have college-bound younger family members, you should be aware of an important new technique that can pay for educational expenses, solve income tax issues, and provide an important piece of your estate plan.

You have probably read about 529 College Savings plans (named after the Code section that creates these state-sponsored savings plans). In fact, nearly everyone interested in saving for education has probably investigated the pros and cons of these plans. They are immensely attractive because they are estate tax free, income tax free, and in some states protected from creditors.  North Carolina has a good plan, but does not provide much creditor protection.

Whether you are a parent with future educational obligations for your young ones, or perhaps a loving aunt, uncle, grandparent, or stepparent, state education savings plans provide at least part of the answer. And the other part is this: With a carefully-crafted Educational Trust, you can now control that 529 Plan as an asset of this specially designed planning instrument.

A 529 Plan combined with an Educational Trust provides more flexibility to move assets between siblings (the one in medical school will need more money), and just as importantly, provides a smooth transition should you become incapacitated or die. Further, should you experience a financial emergency, the funds can be returned to you.  It can also provide increased creditor protection.

• Email This
• Print
• Comments
• Trackbacks

If you’re like many folks, you may be deeply concerned about how litigious our society has become and fear that your assets may one day be taken by creditors. If you share these concerns, I want you to be aware of an important new technique that can asset protect any inheritance you may receive and provide an important piece of your estate plan.

The traditional estate planning process has focused exclusively on passing assets downstream to beneficiaries (i.e., to children and grandchildren), often ignoring a potential inheritance from parents or other family members. However, Americans are living longer and longer and, as you may know, up to $41 trillion is scheduled to change hands in the coming decades. Most of these assets will be transferred in a manner that it is not protected from the claims of creditors or former spouses.

The laws of almost every state, including ours, prohibit so-called “self-settled trusts” – an irrevocable trust you establish yourself for your benefit, yet which purports to protect the trust assets from creditors. Therefore, once you receive an inheritance in the typical manner it is too late; you cannot protect these assets yourself. You can, however, protect the inheritance by creating an Inheritor’s Trust that will be the recipient of the inherited assets. An Inheritor’s Trust legally protects these assets, yet allows you to access them as necessary. It also removes these assets and their growth from your estate so that they will not be subject to estate tax upon your death.

• Email This
• Print
• Comments
• Trackbacks

In addition to the repeal of the rule against perpetuities, which is effective January 1, 2008 (perpetual trusts will be allowed in North Carolina provided certain requirements are met), there are a few other changes to North Carolina trust law, which were effective October 1, 2007:

• Section 39-6.7 - Construction of Conveyances to or by Trusts.  This section creates a rule of construction that eliminates the problem that arises when property is conveyed to or from a trust rather than the trustee of the trust.
• Section 36C-11-1104 - Trustee Signatures.  This provision was amended to provide that "...The signature of a trustee of a trust who signs a document for or on behalf of the trust shall be deemed to be the signature of the trustee of such.  A document which identifies a trust shall be deemed to include the trustee or the trustees as such."
• Section 36C-6-602.1 - Deals with modification of revocable trusts by guardian or agent.  A general guardian or guardian of the estate may exercised the power of a settlor of a revocable trust as provided in G.S. 35A-1251(24).  Also provides that an agent under a power of attorney may exercise the following powers of a settlor to the extent expressly authorized by the terms of the trust or power of attorney as long as the act does not alter the designation of beneficiaries to receive property on the settlor's death under that settlor's existing estate plan: (1) Revocation of the trust; (2) Amendment of the trust; (3) Additions to the trust; (4) Direction to dispose of property of the trust; and (5) The creation of the trust, notwithstanding G.S. 36C04-402(a)(1) and (2).
• Section 36C-6-605 - creates anti-lapse provisions for revocable trusts in the event of failure of beneficiaries.
• Section 36C-6-606 - provides revocation of provisions in a revocable trust in favor of former spouse upon divorce or annulment.
• New provisions have also been added regarding the class of beneficiaries who must consent to the modification or termination of trust.  The presumption of fertility is now rebuttable, so the court may limit the class to those who are reasonably likely to take. 

• Email This
• Print
• Comments
• Trackbacks

The Problem: Continuing care retirement communities have been growing in popularity with seniors for years.  Such communities usually require a "buy-in" upon admittance and many provide for a refund of a portion of the fee upon death.  The contracts (often called Residence and Care Agreements or the like) generally provide that the refund will be paid to the estate of the resident.  The trouble with this is that the refund triggers probate even if there are no other probate assets.  Since the refunds are often hundreds of thousands of dollars, unnecessary probate fees of $1,000 or more often result.

The Solution:  For those residents with living trusts, this can be avoided by a simple amendment to the Residence and Care Agreement that provides that the refund will be paid to the resident's living trust rather than his or her estate.  The amendment (or addendum, as some facilities call it) must be signed by the resident and the management of the facility.

For those residents without living trusts, the cost of having a trust prepared will generally be at least equaled by the probate cost savings alone, not to mention time and trouble avoided by escaping probate.

• Email This
• Print
• Comments
• Trackbacks

Effective August 19, 2007, North Carolina repealed the Rule Against Perpetuities, which means that multi-generation dynasty trusts can be created in North Carolina.  Previously trusts could not last longer than 90 years or a life in being plus 21 years. 

However, some questions have arisen about possible conflicts with other North Carolina laws, which has led to caution on the part of attorneys in recommending dynasty trusts until the questions are addressed.  Click "Continue Reading" to view a memo by attorney Liz Arias, Co-Chair of Legislative Committee for the Estate Planning and Fiduciary Law Section of the North Carolina Bar Association.

• Email This
• Print
• Comments
• Trackbacks

Estate planners love acronyms, and one of the most common when referring to a particular type of trust is QTIP, which stands for Qualified Terminable Interest Property.  A QTIP trust provides a way for someone to leave property in a trust for a spouse free of tax by way of the unlimited marital deduction, but yet control where the assets go at the death of the spouse.  The QTIP assets are included in the estate of the surviving spouse for estate tax purposes even though he or she has little or no control over them.

As you can imagine, QTIP Trusts are especially favored in second marriages where there are children from the first marriage.  This article on bankrate.com discusses estate planning in second marriages, including QTIP Trusts.  However, the article fails to mention the use of Credit-Shelter (or Bypass) Trusts, which can also provide support for the surviving spouse but are used in larger estates because the assets are sheltered from estate taxes at the death of the second spouse to die.  Also, the article seems to say that the estate tax exemption is $1 million, which is erroneous.  The federal lifetime gift tax exemption is $1 million, but the estate tax exemption is $2 million.

• Email This
• Print
• Comments
• Trackbacks

While this posting doesn't exactly relate to North Carolina law, one of NC's neighboring states, Tennessee, has adopted legislation to allow Domestic Asset Protection Trusts (DAPTs).  Being licensed in TN as well as NC, this is of interest to me, and it may be of interest to NC residents who want to establish a DAPT, but would prefer to "stay close to home."

With the addition of TN, 10 states now allow DAPTs, but TN is the only one in the Southeast.  The TN law refers to their version of the DAPT as the "Tennessee Investment Services Trust" (TIST), hoping to avoid the negative connotation the term "Asset Protection Trust" has for some.

DAPTs, including TN's TIST, allow a grantor to contribute assets to a trust in which the grantor is also a beneficiary, while keeping those assets protected from creditors.  There are certain exceptions, of course, and all of the statutory requirements must be met for the protection to  be effective.

Tennessee has also extended their rule against perpetuities to 360 years, allowing the TIST (and other TN trusts) to last for many generations.  North Carolina's rule against perpetuities has also been repealed this year - are NC DAPTs next on the horizon?  It certainly would be a way to keep trust dollars in the state and perhaps attract investment funds from other states.

• Email This
• Print
• Comments
• Trackbacks

Living Trusts are a common estate planning technique for avoiding probate and facilitating management of assets in the event of incapacity.  If someone has a living trust, it usually makes sense to transfer transfer his or her real property to the trust as part of the trust funding process.  This is particularly important for out-of-state real estate, so that no probate will be required in that jurisdiction.

The transfer is done by way of a new deed, which will need to be prepared by an attorney licensed in the state in which the property is located.  The cost is usually about $200 per deed.

However, here are some things to be aware of when transferring your real estate to your living trust:

1)     Mortgage - Virtually every mortgage has a due-on-sale clause, which means the mortgage company can call the loan due if you transfer your property.  However,  the federal Garn-St. German Act (Title 12 of the US Code 1701-j-3; aka the Federal Depository Regulations Institutions Act of 1982), provides that there is no due-on-sale violation when a property is placed into a legitimate inter-vivos trust by a borrower who is a natural person, so long as the borrower is, and remains, a beneficiary of the trust; and the trust is revocable and does not confer occupancy rights to another.   This covers most living trusts.  Of course, you are still liable for the mortgage after the property is transferred to the trust.

2)     Title Insurance - When you buy real estate, you generally obtain title insurance to cover you should there later be a question about your legal ownership of the property.  As part of the process of transferring your real estate to your trust, you should contact the title insurance company to ensure that your coverage will continue under the trust.  Make sure you have it in writing.

3)     Homeowner/Hazard Insurance - Likewise, contact your  insurance company or agent to make sure your property will still be insured.  Again, if it the wording is not in the policy itself, get it in writing.

4)     Rental Property - If you have rental property, you should not put it directly in the trust.  I always recommend owning rental real estate in a Limited Liability Company to protect your other assets should your tenant sue you.  Your living trust can then own the LLC.

5)     Married Couples - When married couples own property together in NC, it is generally Tenancy by the Entirety, which means no interest in the property can be sold without both spouses agreeing, the property is protected from creditors of either spouse.  This is an important benefit, which is lost if the property is placed in trust.  An estate planning attorney can counsel you as the best way to handle it based on your particular set of circumstances.

6)     Time-Shares - Time-Shares are generally considered real property and thus will trigger probate in the jurisdiction in which they are located.  Thus, it's a good idea to put them in a living trust also.

7)     Foreign Property - Countries with legal systems based on English law, such as Canada, Australia, New Zealand, Bahamas, Bermuda,, British Virgin Islands, Cayman Islands, South Africa, etc., generally recognize trusts, so you may be able to change ownership to either your U.S. trust or a trust prepared pursuant to local law.  Civil law countries (most other countries in the world) may not recognize trusts.

• Email This
• Print
• Comments
• Trackbacks

On June 25 the U.S. Supreme Court agreed to hear a case on whether the investment expenses of trusts are fully deductible or subject to a 2% floor. The Circuit Courts are in disagreement on this issue. The case is Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trust v. Comm'r of Internal Revenue.

North Carolina is in the Fourth Circuit, which has held that the fees are subject to the 2% floor.  If the Supreme Court rules the other way, it will be a big benefit for beneficiaries of North Carolina trusts.

• Email This
• Print
• Comments
• Trackbacks

Today I came across a question and answer column on the Raleigh News and Observer website called "Ask Holly."  The answers are written by a Holly Nicholson, a Raleigh Certified Financial Planner who also has a law degree.  The person posing the question about avoiding probate and finding a good lawyer erroneously referred to revocable trusts as "reversible" trusts.  Ms. Nicholson counseled her to begin the attorney selection process by asking the lawyer about reversible trusts, and then consider using any lawyer who nicely explains that the term is actually "revocable" trusts.

I must respectfully disagree with Ms. Nicholson's recommendation.  I believe that it is best to educate oneself about estate planning terms and techniques before attempting to choose a qualifed lawyer.  Purposely acting ignorant serves no useful purpose, is deceptive, and is not a good way to start off what should be a relationship of mutual trust.  Any attorney worth hiring will be polite and patient regardless of how much or how little a prospective client knows about estate planning.

• Email This
• Print
• Comments (1)
• Trackbacks

North Carolina is not known for its attractive estate planning and asset protection laws, but NC residents can avail themselves of certain out-of-state planning strategies that can provide significant estate tax savings and creditor protection.  One state that has some of the most favorable laws is Nevada.

As a write this, I'm sitting in a hotel room in Las Vegas, having just finished up a meeting with nationally known estate planning and asset protection attorney Steve Oshins, whose office is located here.  Mr. Oshins, who is published frequently in Trust & Estates magazine and Estate Planning magazine, has developed several innovative trusts and trust-related strategies, such as the Megatrust, the Inheritors Trust and the Opportunity Shifting Trust. 

I have joined Mr. Oshins' Advanced Planning Legal Network to be able to bring these same types of techniques to my clients.

Click  "Continue Reading" for a brief description of the advantages of using Nevada laws for estate planning.

• Email This
• Print
• Comments
• Trackbacks

This article on the website of the National Consumer Law Center provides a glossary of living trust related terms, description of common scams, educational resources, and more.

Living trusts can be great estate planning tools for some, but only if they are sophisticated, personalized documents prepared by a qualified estate planning attorney.  I use them often in my practice, but it's not uncommon for me to recommend against them for certain clients for whom living trusts are not a good fit.

• Email This
• Print
• Comments
• Trackbacks

Capital Trust Company of Delaware's website is full of articles and other information on trusts and estate planning  One short piece that I found worth sharing is the Beneficiary Bill of Rights.

When preparing trusts, estate planning attorneys should not simply draft to reflect the wishes of the grantor, but should also incorporate provisions providing protection for the beneficiaries.  An example would be the power to remove the trustee without cause and name a replacement trustee.  Such a provision can be invaluable in avoiding conflict and even litigation with an uncooperative trustee, but certain limitations may be necessary to reign in greedy or overly aggressive beneficiaries.

• Email This
• Print
• Comments
• Trackbacks

The February 9, 2007 issue of USA Today contained an article on Living Trusts.  I found the article to provide a good overview of living trusts and their advantages and disadvantages.  However, a few things deserve comment:

• The article contains a statement from Mary Randolph, author of The Executor's Guide, that a lawyer will need about 10 hours to draft a living trust, so that at $150 an hour, the cost will be $1,500 for the trust and accompanying will. 

 Many estate planning attorneys charge a flat fee for preparing an estate plan, and the author neglected to mention the other documents that should be included in a complete estate plan - Durble General Power of Attorney, Health Care Power of Attorney, Living Will, and HIPAA Authorization.  In addition, most qualified estate planning attorneys probably charge significantly more than $150 an hour.  While all of my estate plans are done on a flat fee basis, my own hourly rate is $295.

•  The article quotes North Carolina's attorney general, Roy Cooper - "We've received numerous complaints about the pushy sales tactics of scam artists selling living trusts.  They offer a free seminar or a free lunch, and then scare them about high probate costs and the frustration of settling an estate."

What the article fails to say is that very rarely are these "scam artists" attorneys.  Usually they are fly-by-night companies that sell generic fill-in-the blank forms, or annuity salespeople.  See my post Living Trust Scammers Booted out of NC.

•  While the author does encourage people who think they need a living trust to go see a trustworthy lawyer, he also says that those who have modest estates and think probate costs will not be onerous probably don't need a living trust.  He then goes on to advise people to consider "transfer on death" (TOD) accounts. 

My view is that no one should decide for themselves whether a will or living trust is most appropriate, and should not use TOD accounts without being fully informed about their advantages and disadvantages.  A qualified estate planning attorney should be consulted in both cases.

• Email This
• Print
• Comments
• Trackbacks

The use of  a "Trust Protector" in trusts for maximum flexibility and protection is becoming increasingly common.  For a good explanation of what trust protectors do, when they are often used, and what to risks to be aware when using a trust protector, take a look at this article from Capital Trust of Delaware's website (click Continue reading):

• Email This
• Print
• Comments
• Trackbacks

• Email This
• Print
• Comments
• Trackbacks

Good news in this recent article in the News and Observer:

Andrea Weigl, Staff Writer :
A Wake Superior Court judge has ordered two California companies to stop selling estate planning products to North Carolina consumers while a lawsuit that accuses the companies of bilking seniors out of hundreds of thousands of dollars proceeds.
Earlier this month, Judge Michael R. Morgan ordered American Family Prepaid Legal Corp. and Heritage Marketing and Insurance Services to stop selling or offering their products in North Carolina. In May, North Carolina Attorney General Roy Cooper sued the two companies, alleging that they worked together to defraud elderly consumers.

American Family Prepaid Legal would solicit customers to buy legal services plans to create living trusts to avoid paying probate costs, the lawsuit says. The company billed its living trust, which cost $1,995, as a bargain when compared with probate costs, the lawsuit says. But for someone to pay almost $2,000 in probate costs, his estate would have to be worth more than $500,000, the lawsuit says. Once the consumer signed up for the living trust, a Heritage sales agent visited the home, ostensibly to have the consumer sign paperwork but really to try to sell deferred annuities.

"These companies targeted seniors, using tricky sales practices to pressure them into spending their savings on living trusts and annuities they may not need," Cooper said Wednesday in a statement.

Consumers who think they or their loved ones have been involved in this or a similar scheme are encouraged to call the N.C. Attorney General's Consumer Protection Division at (877) 566-7226.

Some North Carolina attorneys are also guilty of overstating the value of living trusts, implying that probate is much more costly than it actually is, and that estate taxes savings can be achieved only by the use of living trusts (as opposed to wills).  Of course, some attorneys go to the other extreme and don't believe it using living trusts in any  situation. 

I view myself as "neutral," only recommending living trusts when I think there will truly be a cost savings or other benefit.  I have had many new clients come into the office requesting living trusts based on advice of friends or articles they had read, when a will is a simpler, cheaper method of transferring their property.

• Email This
• Print
• Comments
• Trackbacks (1)