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Wills, Trusts, and Estate Planning

Many people avoid thinking about estate planning because it is uncomfortable to consider their own death or the death of their loved ones.  Others may think estate planning is only for the wealthy--people named Rockefeller and Vanderbilt.  The reality is that we all come with expiration dates and most of us have assets that will have to be transferred to other people when we die.  And most of us want to make sure that our assets go to the people, churches, or charities we love.  That means we need an estate plan.  To understand why, it is helpful to start with a basic discussion of "estate planning" and what happens to property when a person dies without a will.

What is Estate Planning?

Estate planning is the process of arranging how and to whom your assets--i.e., all your "stuff"--will be transferred during your life or upon your death.  There are many ways of arranging and controlling this inevitable transfer.  The most common way is a will, but it is increasingly common for people to include trusts in their estate plan.  

Why does someone need an estate plan?  

The purpose of estate planning is to ensure that assets go to the people you want to benefit and in the manner you want, while minimizing taxes, legal fees, and other costs.  Whether you want your assets to go to your spouse, your children, your unmarried partner, your church, or your favorite nephew, a properly executed estate plan permits you to control who gets your assets.  If you do not make your own estate plan through a will or trust, you will be stuck with the estate plan drawn up for you by the General Assembly in Raleigh (or the legislature in whatever state you reside). Most people would not be happy with that outcome.  

For example, if a resident of North Carolina is married without children and dies without a will, the surviving spouse takes one-half of the decedent's real property, the first $50,000 in personal property, and one-half of the remaining personal property.  The balance would pass to the deceased person's parents (or other relatives).  (See N.C.G.S. § 29-1 et seq.) It's important to bear in mind that "personal property" includes things like bank accounts, stocks, cars, jewelry and furniture.  How many people would execute a will that left one-half of their real estate and personal property to their parents?  Not many.  

Another example:  if a resident of North Carolina is married with two or more children and dies without at will, the surviving spouse takes one-third of the decedent's real property, the first $30,000 in personal property, and one-third of the remaining personal property.  The balance would pass to the deceased person's children, whether or not they are minors.  Here it's important to know that minor children cannot manage their own property, so their share of the deceased person's estate would be held by a court-appointed guardian (which may or may not be the surviving spouse).  That guardian would be required to file annual accounts with the probate court (a potentially time consuming and costly process) and generally would not be able to disburse the principal for the minor children's support unless the surviving spouse could show that he or she lacked the resources to provide for the child.  Very few people would execute a will that imposed those kinds of hassles and restraints on their spouse.

What can a will do for me? 

A properly executed will gives you control over what happens to your property after you die.  Perhaps most significantly, executing a will lets you, rather than the General Assembly, determine who gets your assets.  You can chose to leave your assets to your spouse, your partner, your children, your church or synagogue, a charity, or anyone else you want. 

If you have minor children, your will is an appropriate place to nominate a guardian for them.  You can also include provisions in your will to create a trust for your minor children, so that their guardian can more easily manage their assets, access the assets to pay for the children’s support and education, and avoid the costs associated with filing annual accounts with the courts.

If you have a pet, you can include provisions in your will naming a caretaker for your pet and setting aside assets to pay for the care of your pet after your death.  Any money left over when your pet joins you on the other side will go to the person or persons you designate.

Your will can include a provision that permits your executor to pay more than the statutory maximum for your gravestone and cemetery lot without the approval of the Clerk of Court.  The current statutory maximum is relatively low, $1,500 for the gravestone and $250 for a perpetual care cemetery lot.

Your will can also include provisions to allow your executor to sell real property to pay your debts without obtaining a court order.  Ordinarily real property vests in your heirs or devisees immediately upon your death.  If your debts exceed the value of the other available assets (e.g., bank accounts, stock, and cars), your executor (or if you die without a will, your administrator) must initiate a special proceeding before the clerk of court to get approval to bring real property back into the estate so that it can be sold to pay your debts.  That adds time, expense, and complexity to the process of closing out your estate.  Having a will that gives the executor the power to sell real property without a special proceeding can reduce expense to the estate, which means there will be more money to distribute to the beneficiaries under your will.

What can a trust do for me?

Whether you have a will or not, probate is a slow, public process.  An estate file will be opened in the clerk’s office, which will contain your will (if any) and schedules of all your assets and debts.  This file is a public record and can be examined by anyone.  The assets in probate can remain unavailable to your heirs or beneficiaries for months or years.  Using an inter vivos or “living” trust can remove your assets from the probate process, keeping your assets private and available to your family or other beneficiaries after your death.

Although there are many kinds of trusts, a common and relatively straight forward trust is a revocable trust in which you execute a trust document naming yourself as both trustee and primary beneficiary and then transfer assets to the trust.  In this situation, you retain compete control of the assets and can use them just like you did before.  You can often even keep the same bank accounts, while adding “trustee” after your name.  The trust document states who shall become trustee upon your incapacity or death (the “successor trustee”) and who will be the beneficiaries upon your death.  When you die, all the assets held by the trust continue to be controlled by the trust document and avoid probate.  Often, the transition is as simple as the successor trustee going to the bank with the death certificate and the trust document to have his or her name substituted as the trustee.  The successor trustee then continues managing and dispersing assets as governed by the trust document (e.g., paying the mortgage, tuition, or credit card bills of the beneficiary) without the need for court involvement or approval. 

Trusts can also be used to protect assets from a beneficiary’s creditors.  Many trusts include a “spendthrift” provision that prevents the creditors of a beneficiary (like a credit card company) from being able to reach the assets in the trust to pay the beneficiary’s debt.  Although North Carolina does not currently permit a person to create their own spendthrift trust, one person can create a spendthrift trust for the benefit of another person.  In other words, parents can create spendthrift trusts for the benefit of their children and one spouse can create spendthrift trust for the benefit of the other.  This is a very valuable feature of trusts, especially when the beneficiary is not financially responsible, has significant debt, or has substance abuse problems.

If you have a disabled child or relative who is eligible for Medicaid or other forms of public assistance, there are special trusts designed to benefit the disabled person without disqualifying them for the public assistance they receive.  These trusts are often called “special needs trusts” or “supplemental needs trusts.”  These trusts are a valuable tool for improving the disabled person’s quality of life.

What about estate or death taxes?

Fortunately, most individuals and families do not have to worry about estate taxes in their estate planning.  Congress has recently increased the size of estates exempt from the federal estate tax to $5.25 million.  North Carolina’s estate tax exemption mirrors the federal exemption—though several bills are making their way through the General Assembly to repeal North Carolina’s estate tax.  As a result, individuals and families in North Carolina with less than $5.25 million in assets generally will not owe any estate taxes as a result of a death in 2013.  Nevertheless, it is necessary to revisit this issue periodically, as Congress or the General Assembly may increase or decrease the estate tax exemption amount at any point in the future.

For high net worth individuals and families, proper estate planning can minimize or eliminate estate taxes.  It is important for these individuals and families to consult a qualified attorney to discuss the options and strategies available.