There are many kinds of trusts that are used for many different purposes, including estate planning. Trusts governed by a contract called a “trust agreement,” under which the “Grantor” or “Trustor” (the person who creates the trust) transfers property from himself or herself personally, to himself or herself, as Trustee, to hold in trust, according to the terms of the trust agreement for the benefit of beneficiaries. The trust agreement appoints one or more trustees, names the beneficiaries of the trust and describes how the trust will operate during the Grantor’s lifetime and then upon the Grantor’s death.
Trusts can be revocable (meaning the Grantor can amend and revoke it at any time as long as the Grantor is competent) or irrevocable (meaning it cannot be revoked or amended, although the irrevocability of these trusts is not always absolute). A trust can be thought of as a separate entity from the Grantor and it is literally a separate tax entity if it is an irrevocable trust or in some circumstances when it is a revocable trust.
Trusts can be created either during the Grantor’s lifetime, in which case it is called a “living trust,” or it can be created by a person’s will at the time of that person’s death, in which case it is called a “testamentary trust.” A living trust is created when the Grantor signs the trust agreement and then also transfers property to the trust (called “funding” the trust) during his or her lifetime. Testamentary trusts are created when a person who has bequeathed property to the trust dies. The testamentary trust is created when the decedent’s property is transferred from his or her estate to the trust. The big distinction between the living trust and the testamentary trust is that the living trust avoids the probate process with respect to the property owned by the living trust, whereas the testamentary trust does not avoid probate because the decedent’s will has to be probated to fund the decedent’s property into the trust as provided in the decedent’s will.
The type of living trust used most commonly for estate planning purpose is the revocable living trust (“RLT”), which is formed when the Grantor both executes a trust agreement and transfers property to the trust during his or her life. The purposes of the RLT are to:
- Avoiding the cost and delays of the probate process. The filing fee payable to the Clerk of Court when an estate is filed is $.40 per $100 of property passing through probate, under NCGS 7A-28-307, and is capped at $6,000. In addition, there will be legal fees, the cost of publishing notice to creditors and other costs.
- Maintain privacy about the Grantor’s assets upon the grantor’s death and
- Sometimes for tax planning purposes
The Testamentary Trust is a trust that is either provided for in a person’s Will or as a free standing trust agreement but is not funded with property (or is funded with minimal property) until the Grantor dies, at which time the will “pours” property into the trust, which funds the trust.
The Living Trust is created during a person’s lifetime for the purpose of avoiding the probate process, which saves money, expedites distribution of the decedent’s property to his or her beneficiaries and maintains privacy about what assets the decedent had because there is no public filing of what those assets are. If you form a living trust, you must actually “fund” the trust by transferring your property into the trust so that the trust, rather than you personally, becomes the owner of the property transferred into it. Financial accounts are re-titled into the name of the trust and you real property is transferred by deed into the trust. A person with a Living Trust must still also have a Will because any property that is not transferred into the trust will still pass under the terms of your Will, unless that property passes in one of the ways described above in paragraph 1(B) [by right of survivorship or by beneficiary designation]. Probate is avoided entirely if all your assets are transferred into the trust and it is avoided partially if only a portion of your assets are transferred into the trust. Upon death, the trust owns the property transferred into it, rather than the Grantor owning it personally and thus no probate of the assets in your trust is required.
Tax Filings for a Revocable Living Trust. An RLT is ignored for tax purposes during the Grantor’s lifetime – so the Grantor’s tax filings are the same as if the trust did not exist and the Grantor has complete control over the trust property to use in nay manor he or she wishes in his or his or her role as trustee, as long as the Grantor is competent. The Grantor can also take property out of the trust and add property to the trust and can amend or revoke (terminate) the trust at any time while competent.