Consumers are often barraged by articles and advertising by vendors of living, revocable trusts. Much of the marketing of living, revocable trusts can be misleading. Living, revocable trusts have a place in estate planning but do not solve all problems. So, what is a living, revocable trust, and what can and can't it do for North Carolina residents?

What is a living Trust?

A trust is an arrangement to manage property.One person (the Grantor) transfers property to another person or organization (the Trustee) to manage assets for the benefit of a third person or group of people (the Beneficiaries). Traditionally, trusts are used to designate one person (the Trustee) to manage another's assets when that person (the Beneficiary) is incapable of managing his or her own assets. One example of this is a trust for a minor beneficiary. For tax planning purposes,trusts are often used to achieve certain tax advantages.

A living, revocable trust is a trust which you create during your lifetime that you can change from time to time or simply do away with. In a living trust you are typically the Grantor, the Trustee and the Beneficiary during your lifetime.

Creditor Protection

Does a living trust keep your creditors from getting to the assets in the trust? No.

Assets you own in a living trust are subject to your creditors just like any other asset that you own. Claims that a living, revocable trust can shelter your assets from your creditors are untrue.

Probate Avoidance

Does property held in a living, revocable trust avoid probate?Yes. One advantage of a living trust is the avoidance of probate. However, you need to determine whether probate avoidance is a major goal. Assets you transfer to a living trust during your lifetime do avoid probate at your death. However, the probate cost savings only applies to probate assets.Your Will controls who gets your probate assets.

Many assets you own may be nonprobate as-sets. Nonprobate assets are assets that pass to an-other at your death through a beneficiary desig­nation or by the way you have set up the owner-ship of the asset. For example, assets such as bank accounts and brokerage accounts are commonly held jointly with right of survivorship between a husband and wife.These assets pass automatically to the surviving owner. Assets that allow you to name a beneficiary, such as life insurance, annuities and retirement plans,are not subject to probate as long as you have named a beneficiary.

In North Carolina, real estate does not bear any probate costs even when the will is probated to record the proper owner of the property. (There will be a charge to probate the will). Even if property is subject to probate, the fees in North Carolina are only .4 percent (.004) times the fair market value of the property. For example,an estate with $100,000 in probate assets would pay a probate fee of $400. Probate fees can never exceed $3,000, regardless of the size of the estate. Many times the cost of setting up a revocable trust and titling assets in the trust is higher than the probate fees that would be saved.

Why might I want my estate to be probated?

If your Will directs who gets your assets, the clerk of court in the county of your resi­dence will monitor the administration of your probate estate and require proof of all expenses paid and funds distributed to your heirs.This is not done with assets in a living, revocable trust. A formal administration of an estate may be desirable to cut off claims of creditors. By publishing a Notice to Creditors in the newspaper, the time a creditor may make a claim against the estate is generally reduced to three months. This can be accomplished with a combination of a will and a living, revocable trust.

Will my heirs receive my assets more quickly?

Not necessarily. Probate does not necessarily delay distribution. Regardless of whether your estate is probated or not,your executor or administrator will still need to determine to whom you owe money and pay those creditors. Part of an estate administration involves determining if any income or estate taxes must be paid. Quite often distribution is delayed because your executor or administrator must find out what assets you own at your death and who you owe.The probate process itself does not cause these delays.

Income Tax and Estate Tax Savings

Does property held in a living, revocable trust avoid income tax and estate tax? No. For income tax purposes, a living revocable trust is ignored and any income on the assets is treated as owned by the person who created the trust. Any income earned on the investments in the living, revocable trust is taxed to the Grantor. A living, revocable trust by itself will not automatically save any estate taxes. Certain provisions must be included in the trust to save estate taxes.The estate tax planning provisions can be in a liv­ing, revocable trust document or in your Will.

Would I still need a will?

Yes. You still need to have a will in case there are probate assets that have not been transferred into your revocable, living trust. This will may or may not need to be probated,depending on your circumstances.

Privacy

Is my living, revocable trust recorded at the courthouse at my death as is a will? No. In North Carolina, a living trust is not recorded at the courthouse when you die.lf your goal is to keep the terms of your distribution to your family or the type and value of your assets private, the living, revocable trust will accomplish this purpose for the assets you transfer into the trust. However, your heirs will have the right to know the terms of your trust.Other nonprobate property, such as life insurance and retirement plan proceeds, is not a matter of public record whether or not you have a living, revocable trust as long as you have named a beneficiary.

Incapacity

Do I need to set up a living, revocable trust in case I cannot handle my financial affairs during my lifetime? No. Some people set up a living trust and transfer assets to it so that if they become incapacitated the successor trustee can handle the assets. The living trust will have a person (a successor trustee) already in place to manage your assets. However, a properly drafted power of attorney in which you name an agent to act for you can also do the same thing.

What about a Joint living, Revocable Trust?

A joint living, revocable trust is a single trust set up for a husband and wife. Both transfer substantially all their assets into this one trust. There is disagreement as to whether a joint living, revocable trust works at all for estate tax planning. A husband and wife could potentially lose any estate tax planning benefits available in a properly drafted will or living, revocable trust for each one. Couples who desire estate tax planning in their documents should be wary of joint revocable trusts since the tax treatment of these trusts is controversial,and they could miss certain tax planning opportunities.

Your situation may call for the use of a living, revocable trust. However, you and your attorney should discuss all planning options to determine which documents you should have.