‘Do I need a trust?’ is one of the most frequently asked questions by people preparing an estate plan. While many people believe trusts are only for the wealthy, a revocable trust is a powerful estate planning tool that can save you money, keep your information private, and make things easier on your family.
A revocable trust, also called a living trust, is a legal document that authorizes a trustee to hold title to and manage assets. While you are alive and have capacity, you can be the trustee of your trust, which means you retain full control over anything in the trust. You can put things in, take things out, and change the trust terms at any time. You can even name a spouse or other individual as a co-trustee so he or she also has access to assets in the trust, much like a joint account. While you are alive, all income from the assets in your trust is reported on your individual income tax return. So practically, not much changes for you. However, in the event of your incapacity and at your death, a trust can make a huge difference for you and your loved ones.
Here are the top four reasons why you should consider a revocable trust:
1. Privacy. When you pass away in North Carolina, any assets in your individual name that do not have named beneficiaries will be subject to the court probate process. That means that those assets will be listed on court accountings, which are public records. If you have assets passing though probate, then even right of survivorship accounts and accounts with payable on death or transfer on death beneficiaries, must be listed on these public court forms. Your will is also a public record at death. So any third party has the ability to see what you have at death and who will be inheriting it. Third parties can then use this information to take advantage of your loved ones. It may be family members or friends convincing them to invest in speculative businesses or loan them funds, or sometimes even new friendships or relationships where financial gain is the motive. If you don't want the intimate details of your financial life and last wishes to be made public, a trust can protect your privacy.
2. Minimize work and save time. While the purpose behind probate is good (ensuring that your debts are paid and your remaining assets are distributed per the terms of your will), the process itself is time-consuming. In North Carolina, the executor named in your will must first file an application with the court to probate the will and qualify as executor. Three months after the executor is qualified by the court, he must file an inventory of your estate assets and their values at death, with backup documentation. Your executor must also file one or more accountings showing all funds that come in and go out of your estate during the administration period. The more transactions that occur, for example, sales of stock in investment accounts, dividends received or bills paid, the more work this is for the executor. If you own real estate in another state, this may mean multiple probate processes in each state where you hold property. With a trust, you can avoid having to file these court accountings, making the administration process much easier and quicker for your executor. As a result, your beneficiaries can often receive their inheritance sooner.
3. Save money. The court probate process can be expensive. In North Carolina, in addition to the court filing fees, the court charges a probate fee of 0.4% of all probate assets, up to a $6,000 maximum probate fee. Often Executors need help filing court accountings and getting advice throughout the probate process, so there is also the cost of hiring those professionals. This includes attorneys and accountants, and may include appraisers if you have business interests or valuable personal property. You can eliminate most of these expenses with a Trust.
4. Ease of management during incapacity. If you are incapacitated, someone needs to be able to pay your bills, deal with your property and otherwise take care of your finances. A power of attorney is a wonderful tool to allow another individual to manage your affairs if you are unable to do so. However, because our laws place a burden on third parties to determine whether your agent under your power of attorney has the authority to do something, such agent can often run into delays and roadblocks when trying to transact business. Often an agent is faced with transaction delays, having to execute certifications of his or her authority, and sometimes even needing to get attorneys involved. With a revocable trust, the law does not require third parties to verify that a trustee has certain powers – they are entitled to rely on the trustee. This makes it easier for a trustee to take care of your affairs during incapacity.
Of course, there is no one-size-fits-all when it comes to estate planning. If your probate assets are minimal and your estate plan is relatively simple, a revocable trust may not be necessary. An experienced estate planning attorney can help determine whether a revocable trust is right for you.
*Disclaimer: The foregoing article discusses the probate process and revocable trusts in North Carolina. The rules in other states may be different. If you live in another state, consult with an attorney in your state.