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

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.

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Most folks know that cash accounts in banks are insured up to $100,000, per individual, per bank, by the Federal Deposit Insurance Corporation.  Trusts, of course, can own bank accounts, but often have multiple beneficiaries.  Recognizing this, the FDIC has issued guidelines so that one can calculate the amount of insurance coverage available for trust-owned accounts.

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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.

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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.

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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.

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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. 

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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):

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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.

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