By Cowles Liipfert & Don Wells

Many individuals prefer to avoid a full court administration at death (called “probate” of the estate).  This article will address probate procedures in North Carolina, but probate procedures can vary from state to state.

There are several reasons why one might want to avoid probate:

(1) Simplicity – Probate requires for a Personal Representative (e.g. – an executor or administrator) to file applications, inventories and accountings with the Clerk of Superior Court’s office in North Carolina, as well as to publish a creditors’ notice in a newspaper and to file fiduciary income tax returns for the estate, as follows: 

(a) If there is a Will, the Will must be “certified by the Clerk of Court (also called “probate”) to be the valid will of the decedent;

(b) A Personal Representative must be appointed for the estate;

(c) In North Carolina, the Personal Representative must file an application and a preliminary Inventory with the Court at the time of qualification, followed by a more complete inventory three months after qualification.  Annual accountings to the Court are required thereafter until the estate is closed, reporting the receipt, disbursement and distribution of every penny.  The final accounting covers the period, either after the inventory (if no annual accounting has been filed), or after the prior annual accounting (if any annual accounting has been previously filed).    

(d) A creditors’ notice must be published for four weeks in a newspaper of general circulation in the county of probate.

(e) The estate must file a fiduciary income tax return or returns for any income received after the date of death until the estate is formally closed, which may be filed either on a fiscal year basis or a calendar year basis.

If court probate of the estate can be avoided, several of these requirements would be eliminated.

(2) Privacy – With court probate, all the estate proceedings are matters of public record, i.e., anyone can look at the estate file at the courthouse and see to whom each asset is left and, if any gifts are not outright, the terms and conditions upon which they are left are set forth – which a family may prefer to be kept private.  For example, a family member’s share may be left “in trust” because he or she is unable to manage his or her finances for various reasons, which the family may prefer not to be disclosed as a matter of public record – such as substance abuse, a shaky marriage, etc.  Also, an unscrupulous person may search the public records and “target” a beneficiary for a scam.

(3) Minimizing expenses – There are certain costs related to probate which may be saved if court administration is avoided, such as fees to the Clerk (4/10ths of 1% for assets which go through administration, up to a maximum fee of $6,000), the cost of publication of a creditors’ notice in a newspaper, and attorney fees (generally higher when there is  administration of the estate than when there is no court administration), etc.

To avoid probate after death, you may use a combination of techniques:

Techniques to Avoid Probate

Probate may be avoided on an asset-by-asset basis for assets (a) owned by a married couple as tenants by the entirety, (b) assets owned by more than one person as joint tenants or tenants in common, with right of survivorship, (c) assets in accounts which are “payable on death” or “transfer on death” to a named individual or individuals, or (d) retirement accounts or annuities payable to named beneficiaries at death.  Life insurance policies payable to named beneficiaries are paid directly to those beneficiaries and do not go through probate, but if a beneficiary predeceases the insured and no successor beneficiary has been named, a policy will likely be payable to the insured’s probate estate.  

A drawback of many of these techniques would be that, if a beneficiary, co-owner, etc. predeceases the owner, the asset may revert to the owner’s estate or may inadvertently go to someone who is not the desired beneficiary.  Also, an asset may pass outright to a successor whose gift should be managed by someone else.  Examples of such beneficiaries would be a minor or incapacitated person.

Unpaid Creditors

If there were unpaid creditors at death and probate assets were not sufficient to pay all the decedent’s debts, some non-probate assets could be pulled into the probate estate by one or more of the creditors and used to satisfy creditors’ claims.  In that case, a family member could serve as the personal representative.  If no family members are willing to go through probate, a creditor could apply to be appointed as personal representative and, in that capacity, could pull those assets into the court-administered estate, to provide money for debt payment.

Revocable Living Trust

One popular way to avoid court probate is through the use of a revocable living trust, created and funded during the lifetime of the trust’s Grantor.  There would be some extra up-front legal expense and activity required in creating and funding the revocable trust, but savings could occur at death. 

Funding of Revocable Trust

A revocable trust should be funded by re-titling assets into the name of the trust during the Grantor’s lifetime.  With certain assets which cannot be transferred during the Grantor’s lifetime, such as retirement accounts, the Grantor may, during his or her lifetime, name the trust as beneficiary upon death, and those assets would not go through probate, but would be directly payable to the trust.  Naming trusts as beneficiaries could create tax consequences, so this alternative should be considered only after thoughtful review.

A major benefit of using a revocable trust to avoid probate would be the Grantor’s ability to make provision for alternative disposition of assets if a beneficiary predeceased the Grantor, in which case secondary beneficiaries could be named, either outright or in further trust, etc.

At the death of the trust’s Grantor, assets titled in the name of the trust technically belong to the trust and not to the Grantor, so it would not be necessary for those assets to go through court probate.  Probate is essentially the process for collecting a decedent’s assets and using them to pay creditors, funeral and burial expenses, taxes, the cost of administration, and court costs, and distributing the remaining assets to the proper persons.  The same things can be accomplished without court involvement, by a well-drafted trust agreement.

In order to get the full benefit of using a trust to avoid court administration at the owner’s death, assets must be titled in the name of the trust before the Grantor’s death, so it is important to transfer those assets to the trust while the Grantor is living.

Failure to Fund Revocable Trust

Some people assume that it is enough to sign a trust agreement, and they do not follow up with the transfer of assets (i.e. – re-titling the assets into the name of the trust), in which case those assets would pass as part of the court probate of the trust’s Grantor, rather than already being trust assets prior to death. 

Warning: If the trust’s Grantor does not transfer assets to the trust during the Grantor’s lifetime, and if the Grantor does not have a will, the probate estate of a North Carolina decedent would not pass to the Grantor’s revocable trust but would instead pass to heirs under the North Carolina Intestate Succession Act, who are determined strictly by family relationship.   In that case, the provisions of the trust agreement would not be followed at all for those assets.

Pour-over Will

Assets which pass under a will must go through probate, even if the will leaves those assets to a trust.  The Grantor of the trust should endeavor to transfer all of his or her assets to the trust during the Grantor’s lifetime, but if anything “slips through the cracks,” it is a good practice for the trust’s Grantor to have a companion will for “overlooked” assets and for other assets to be received after death.  Such a will is often called a “pour-over” will.  The pour-over will may leave to the trust any assets which have not been titled in the name of the revocable trust prior to the Grantor’s death.  Even a diligent Grantor may have assets such as tax refund checks, medical refund checks, etc., which are payable to the Grantor personally or to the Grantor’s estate, and which would not be titled in the name of the trust.   Assets of limited value may be transferred to a revocable trust via an “Affidavit of Collection” without having to go through a full estate administration.

Conclusion

A Revocable Trust Agreement should be carefully drafted, and it should make some provision for successors to any primary beneficiaries who do not survive the Grantor, even if it is unlikely that those beneficiaries will predecease the Grantor.  Revocable trust agreements should also provide for management of assets on behalf of possible minor beneficiaries, such as by leaving their assets to a Custodian under the Uniform Transfers to Minors Act, or, if necessary, by a trustee, in further trust after the Grantor’s death.

Revocable trusts can be useful tools in an estate plan, but they must be very carefully drafted with professional assistance, and they require a follow-up in re-titling assets into the name of the trust, in order to obtain the full benefits of a revocable trust.

We do not recommend using an online program to draft your own revocable trust agreement because it is too easy to make mistakes, in form or substance, or to create unintended consequences by using such programs.

To discuss this subject with a member of our law firm, call 336-725-2900.