What will happen to my assets after I'm gone?

If you are asking yourself this question, you may also be asking yourself: Should I create a Last Will and Testament (a “Will”) or a “Living Trust”? What is the difference? These are the two most common forms of estate plans and hopefully, this nutshell overview will help you answer these questions!

So, what is a Will? What is a Living Trust?

A “Will” and a “Living Trust” are both legal documents that determine how assets will be distributed to beneficiaries upon death; however, the terminology they use is a little bit different.

In a “Will”, the person who creates the document is known as the “Testator” and upon the Testator's death the Testator becomes the “Decedent”. In a “Will”, the Testator appoints an “Executor” to carry out the instructions set forth in the Will. It is then the Executor's job to file for probate in the North Carolina Superior Court. The Executor is subject to the supervision of the court during the probate process.

There are many different types of “Living Trusts”, but for this overview, we are just going to refer to them all in the general sense as a “Living Trust”. In a “Living Trust”, the person who created the trust is known as the “Settlor”. The Settlor then transfers assets to the trust and appoints himself or herself as the “Trustee”. This is known as “funding the trust”. Instead of an Executor, the Settlor appoints a “Successor Trustee”. The Settlor can appoint as many Successor Trustees as he or she feels is necessary to manage the trust long after death.

Ok, so legal jargon aside, what are the benefits of each?

The benefits of each can be measured in terms of cost and control!

Cost: A “Living Trust” is a more complex legal document than a “Will”, so a “Living Trust” will typically cost more to draft. Exactly how much it will cost will depend on the complexity of the “Living Trust”, and this is determined as part of the drafting process with the attorney.  It is also important to consider that to effectively form a “Living Trust”, assets such as bank accounts and other financial assets must be transferred to the Living Trust to fund it; simply drafting the Living Trust will not effectively transfer assets to beneficiaries without the Living Trust first being funded. So while that transfer of assets itself is not a cost of creating the trust it is important to remember that a transfer of assets that must take place to effectively form the trust.

This is different from the Last Will, where the drafting of the document alone is enough to execute a proper estate plan.

However, in spite of initially costing more, a Living Trust may save money in the long run! One of the most important features of a Living Trust is that it avoids the probate process, which means there is no court involvement with the Living Trust. That's right, no court involvement, and no attorney needed to distribute the assets!

Consider this: In North Carolina, probate fees are .40¢ per every $100.00 of property subject to probate, with a maximum amount of probate fees set by statute at $6,000.00. In addition to these probate fees, there may be other fees such as executor fees, attorney fees, and the fees of other professionals involved with the administration of the estate. It is important to know that unlike the probate fees which have a statutory maximum, there is no statutory maximum for fees that may be charged by professionals involved in the administration of the estate! All of these fees associated with the probate of a “Will” are then paid for out of the estate.

The effect that a “Living Trust” and a “Will” has on creditors also must be considered when evaluating the cost of both. It is important to know that in a “Living Trust”, a creditor has no time limit by which claims may be made against the estate. However, in North Carolina, a creditor has three months from the date a will is probated to make a claim against the estate.

In conclusion, while a “Living Trust” may initially cost more to set up, the savings, in the long run, may very well be worth it depending on an individual's particular situation. This is one of the main reasons that more and more people are choosing a “Living Trust” to distribute their assets upon death instead of a “Will”.

Control: A key aspect to consider when choosing between these two types of estate plans is the extent to which the distribution of assets is controlled by the Executor of a “Will” vs. the Successor Trustee of a “Living Trust”. When a “Will” is submitted for probate, the entire process can take months or even years before the assets of the estate are distributed. With the Living Trust, the asset distribution can take place in a matter of weeks because there is no court involvement and the Successor Trustee is in control of distribution.

Another consideration when choosing between the two estate plans is the privacy issue. In North Carolina, when a “Will” enters probate it becomes a public record. That means that anyone can stop by the courthouse and read it! They will then know what you owned and who you distributed it to, as well as any other private content contained in your “Will”.

Last but not least, a great feature of the Living Trust is controlling how the assets in the trust are to be managed when the Trustee becomes either physically or mentally incapacitated. The Living Trust will set forth guidelines, created by the Settlor, to determine how and when the Trustee is to be deemed incapacitated and how the Living Trust will be managed thereafter.

So let's look at a mini-review of the pros and cons of both estate plans…

Living Trust

Pros

• May save a significant amount of money in the long run.
• Successor Trustee can distribute assets much faster than through the probate process.
• Protects your privacy in the distribution of your assets.
• Provides a management contingency plan in the event of incapacity.

Cons

• Costs more at the outset.
• Creditors are not limited by a time frame for bringing claims against the estate.
• To be effective it must be funded by trust assets.

Last Will and Testament

Pros

• Least expensive option from the outset to distribute assets upon death.
• Creditors face a cut-off date for bringing claims against the estate.
• No need to transfer any property to a trust to make it valid.

Cons

• May cost significantly more in the end through probate fees, attorney fees, and other professionals' fees.
• There is no contingency plan if the Testator becomes incapacitated.
• The probate process can be incredibly slow in distributing assets.
• There is no privacy because the document becomes public record when admitted to probate.

Ok! I understand the basics, where do I go from here?

This nutshell estate planning guide is intended to be just that! It does not cover any of the details or nuances that would be covered in a one on one consultation with an attorney. There is no one right way to set up your estate plan, but there are wrong ways! There are several different types of “Living Trusts” with different options for organization and implementation and only by meeting with an attorney can you really flesh out exactly what is right for you.