A Primer on North Carolina Living Trusts

Most clients who seek me out for estate planning advice generally ask for help in drafting and executing a will for them. While a will is a necessary part of an estate plan, a trust can also be a very important part of that plan – and not just for the wealthy. The various benefits of trusts – discussed below – often provide valuable results for people of all income levels.

The most widely used type of trust is referred to as a living trust (also referred to as an “inter vivos” trust). A trust is a legal arrangement where a person called the “grantor” transfers property to be held by an individual called the “trustee” for the benefit of a third party, referred to as a “beneficiary.”  While many times the grantor, trustee and beneficiary are different people, that is not always be the case. Sometimes, the grantor, trustee and beneficiary can be the same person.

A living or inter vivos trust is one that is created during the lifetime of the grantor. In most cases, the grantor is both the trustee and the beneficiary during their lifetime. Usually, the grantor reserves the right to revoke the trust. After the death of the grantor, the terms of the trust control the disposition of the assets. In the usual case, the grantor’s spouse, if living, will receive the assets of the trust, either outright, or through distributions of the trust. If the spouse is not living, the grantor’s children or other chosen beneficiaries will receive distributions from the trust. These distributions can be made either by giving the property to the beneficiaries outright or by a successor trustee continuing to administer the trust until the time that the grantor specified that the beneficiaries are of a sufficient age to receive the remainder of their share.

The primary benefits of incorporating a living trust into your estate plan are avoiding the expense and hassle of probate in North Carolina, privacy, and avoiding ancillary probate in another state in which you own real property. When property passes via a will, a probate proceeding must be opened. The process can sometimes be time-consuming and expensive, and documents filed in a probate proceeding are public record which can be viewed by anyone, including a person intentionally disinherited under the terms of the will. Also, if you own property in another state, an ancillary probate proceeding must be opened in that state, which can be costly and burdensome to an executor. A trust avoids this problem because the trust, not you, owns the property, which passes pursuant to the terms of the trust. A revocable trust also provides a measure of planning should you become incapacitated. In that event, your successor trustee assumes responsibility for the administration of the trust and can manage the property held by it.

Evan Lohr is an estates attorney in Raleigh. He can be reached at evan@lohrnc.com or at (919) 348-9211.

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Trust Reformation in North Carolina

Reformation of a North Carolina Trust Pursuant to N.C.G.S. 36C-4-415

Suppose that Mr. Smith created a trust during his lifetime that he intended to benefit his two daughters and his nephew at his death. When drafting the trust, Mr. Smith’s lawyer mistakenly omitted language naming the nephew as a beneficiary of the trust. After Mr. Smith’s death, the trustee administers the trust according to the terms of the document. Does Mr. Smith’s nephew have any means of recourse?

Historically, the nephew would have been unlikely to succeed in an action to recover his interest under the trust. However, since the codification of the North Carolina Uniform Trust Code, Mr. Smith’s nephew may be able to reform the terms of the trust to include the provision naming him as a beneficiary. N.C.G.S. 36C-4-415 provides that:

”[t]he court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s intention if it is proved by clear and convincing evidence that both the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.”

The statute represents a substantial departure from the prior approach and provides aggrieved parties with a significant means of recourse: if the aggrieved party can prove by clear and convincing evidence that the person who created the trust intended to include a term but did not because of a mistake of fact or law, then a court may reform the terms of the trust to include that term. In the case of Mr. Smith’s nephew, he could petition the court to include him as a beneficiary of the trust in whatever amount the settlor intended.

As of this writing, no North Carolina appellate court has interpreted 36C-4-415, so it is unclear what its reach will ultimately be. It does, however, provide hope to intended beneficiaries mistakenly left out of trust documents.

Evan Lohr is an estates attorney with Lohr and Lohr PLLC in Raleigh. He can be reached at evan@lohrnc.com or at (919) 348-9211.