A lawsuit called a will or trust “contest” occurs where a disinherited heir tries to get assets which were not willed to him or her, or not distributed to him or her through a trust by the deceased asset owner. Frequently, the deceased person had a very good reason for not leaving assets to an heir who had not treated the deceased person well during life.
Because a will becomes a public document once its author passes away and probate begins, anyone can view the probate file and see what assets were left to whom. A disgruntled or disinherited will heir can use the long, open probate process to his or her advantage, using a court process to tie up estate assets so that probate cannot effectively proceed. Thus, the will challenger can potentially hold the executor and listed will beneficiaries “hostage” by blocking distribution of their inherited assets, which can give the challenger a lot of power to force a settlement with the will executor (and beneficiaries.)
Several features may make a trust harder to challenge in North Carolina. Assets held in valid trust do not go through the probate process. In addition, North Carolina law protects trust privacy. Only trustees or beneficiaries actually named in the trust are legally entitled to receive a copy of a trust, or an accounting from the trust, without a judge’s order. So, a challenger disinherited from the trust (and his attorney) may not be easily able to get a copy of the trust from the trustee–it may thus be much harder to challenge distribution of the assets with no road map to follow. And, unlike the probate of a will, the trustee is not legally required to give notice to all of the heirs of the deceased trust grantor.
A will challenger can challenge will beneficiaries more efficiently, as a group, by hijacking public probate proceedings. When challenging a trust, however, a challenger may be forced to file a lawsuit against each beneficiary individually, making the challenger’s job much more difficult, and increasing the challenger’s legal costs.
The following two methods are commonly used by attorneys to challenge wills:
capacity challenge–the challenger tries to prove that the testator (will author) was mentally incompetent when the testator signed the will, thus the testator did not know what he was doing when he left the challenger out, and the entire will is invalid. The challenger may try to prove that the testator did not intend to sign a will at all, and that some other heir made the will instead of the testator.
duress or undue influence challenge–the challenger attempts to prove that the testator was pressured by someone else (such as another heir) to leave the challenger out of the will.
Capacity, duress, or undue influence may also be argued in a revocable trust contest case, but these arguments can be harder to win. The following example demonstrates why.
EXAMPLE: When widowed Dad turns 70, he has a lawyer draft a revocable trust for him, where he leaves all of his assets at his death to Good Son, who has good manners, is always around, and always helps out. Dad disinherits Bad Son in that document, who joined a motorcycle gang 25 years before, rode out to Las Vegas, and never looked back.
The revocable trust that Dad signed at age 70 is a “living” trust, meaning that dad “funds” the trust with all of his assets right away, and in this case manages these assets himself as trustee of his own trust for 15 years, until Dad turns 85. A dementia diagnosis at age 85 causes Dad to resign as trustee, and turn over the management of his trust assets to his successor trustee Good Son.
When Bad Son learns in Las Vegas that Dad has passed away at age 87, Bad Son hops on his Harley, and rides back to North Carolina to find an attorney to help him get Dad’s assets (Bad Son assumes that Dad would not knowingly leave Bad Son any assets.) Good Son confirms (as trustee of Dad’s trust) that Dad did not leave Bad Son anything.
Bad Son finds a North Carolina lawyer to consult. The lawyer Bad Son visits has some bad news, and recommends against attempting a lawsuit. Because Dad set up the revocable living trust at age 70, and picked Good Son as the sole beneficiary at that time, Dad has a 15 year history of successfully managing Dad’s own assets after selecting Good Son as sole beneficiary. With Dad’s successful 15 year history of competently managing his own assets, it would be extremely hard to prove that Dad was not previously competent to set up the trust at age 70 (when he left Bad Son out.)
Plus, because Dad could have chosen to add Bad Son as a beneficiary during the 15 year period when Dad was managing his own trust assets, but continued to leave Bad Son out, it would be very hard to prove that Good Son continually unduly influenced Dad to leave Bad Son out during Dad’s entire 15 year period of successful trust management.
The extra difficulty in challenging Dad’s revocable living trust could cause Bad Son to ride back to Vegas, and look for some other trouble to get into.
In the Jan 24, 2019 article “Scamming Grandma: Financial Abuse of Seniors Hits Record,” the Wall Street Journal states that U.S. banks reported a record 24,454 suspected cases of elder financial abuse to the Treasury Department last year, more than double the amount five years earlier. Although it is hard to obtain an exact figure because so much elder financial abuse goes unreported, the AARP frames elder financial abuse as a $40 billion to $50 billion problem within the U.S. Trusts can help.
The United States reports higher rates of elder financial abuse than other industrialized nations. In Europe, seniors’ retirement funds are mostly doled out to them gradually, in monthly payments from government or other pension funds, where they are used to pay monthly expenses. In the United States, because of insufficient monthly Social Security and pension payments, workers are encouraged to save a great deal of their retirement funds themselves, held in potentially large IRAs or other accounts which they control. In fact, according to the Wall Street Journal article and the American Bankers Association, people over 50 represent only one third of the population, but account for 61% of bank accounts, and 70% of bank deposits.
In the U.S., these large pots of money in the hands of seniors (who also exhibit higher rates of illness and cognitive decline) are irresistible to thieves–who can be local door to door scammers, local or long distance romance scam artists, household workers or care providers, nefarious family members, or international financial scam and con artists who reach seniors through telephones, computers, and cell phones. Recent scientific studies reported by the National Institutes of Health tell us that as brains age, they undergo physiological changes that diminish older people’s ability to identify threats and assess the trustworthiness of potential predators. Thieves, of course, discovered these weaknesses long ago.
An elder law or estate planning attorney can create a trust for a senior who is still competent, which figuratively creates a “vault” holding the seniors’ assets, and gives the vault key to a responsible family member or institution. Only this “trustee” can make financial transactions on the senior’s behalf. When predators, such as telephone scam artists, figure out that the senior does not have the key to the vault holding his or her assets, they often quickly lose interest in continuing the scam.
Trusts may also be set up much earlier in life, so that as long as the owner of the assets is mentally competent and not susceptible to predators, the asset owner can act as his or her own trustee and account manager. As the asset owner ages, a co-trustee may be added to help watch the accounts and help the account owner when needed. If the asset owner later becomes susceptible to financial abusers or is no longer mentally competent to manage assets, another responsible family member or an institutional corporate trustee may become sole trustee and manager of the senior’s accounts.
Because trusts may contain detailed, legally enforceable instructions for how a senior’s money is to be used, but financial or durable power of attorney documents typically do not, a trust may be a safer vehicle for managing a senior’s money than a power of attorney. In addition, trusts are more complex, and frequently put together in a lawyer’s office where the trustee can potentially be screened by the drafting attorney. A power of attorney document is often easily downloaded from the Internet, and used by a thief or dishonest family member very quickly, without an attorney’s involvement, to scam a senior.
As banks and financial institutions see higher rates of fraud with powers of attorney, and because trusts are often associated with more affluent clientele, a trustee managing a senior’s assets may be treated with more deference by financial institutions, and experience fewer hassles, than an agent on a power of attorney document.
An elder law or estate planning attorney can help a family determine if a trust is right for their needs.
You love your pet as a member of your family, but what might happen to your dog or cat if you couldn’t be there for him or her? Unfortunately, many pets from senior owners end up at North Carolina animal shelters, after their owners either become ill or pass away.
Many of these pets tend to be older than average, so animal shelters have a hard time finding another loving home for them. Potential adoptive parents frequently don’t pick them because they are afraid that these pets will pass away too soon, or that the older pets’ vet bills will be too high. Thus many seniors’ pets must be euthanized, which is the last thing their loving senior parents would have wanted.
Under North Carolina law, you can’t just gift your pet money, or simply leave money for your pet in your will, like you can do for a human loved one. That’s because our legal system treats a pet as a person’s personal property, not as an individual with legal rights. Fortunately, North Carolina law does provide you with a valuable alternative: the pet trust.
Animal care trusts (pet trusts) have their own separate section in the North Carolina Trust Code (the statutes which describe how trusts must be formed and administered in North Carolina.) The North Carolina pet trust is a legally enforceable document which allows any person to leave money or other assets for one or more named pets that are alive at the time the trust was created. Trusts or wills containing testamentary pet trust language may later be amended if needed (with a trust amendment or codicil), to account for pets that have left or have been added to the owner’s household.
Under the pet trust statute, the grantor (the person who sets up the trust) chooses a trusted caretaker for the pet (trustee). The trustee uses the funds the grantor left for the pet to take care of the pet, and to pay such expenses as food and housing costs, and vet bills. The instructions for the pet’s care that the grantor writes into the trust are legally enforceable, and it is illegal for the trustee or anyone else to use any of the money left for the pet for anything other than the pet’s care.
The North Carolina pet trust may be set up affordably, and may be added to a will, added to an existing trust (such as a revocable trust), or set up as a freestanding document. Because a will document is normally only used after a person passes away, it may be better to set up a pet trust within a living revocable trust, or as a freestanding trust. This is the best way to make sure that your pet will be provided for if you become ill and can no longer take care of your pet, or after you pass away.
N.C. Gen. Stat. § 36C-4-408
CATEGORIES: Elder Law, Medicaid Planning, Estate Planning, Creditor Protection, Asset Protection Trust, Irrevocable Trust, Trusts, Advance Planning, Winston Salem, North Carolina, NC.
An irrevocable Asset Protection Trust (APT) may be used as part of an advance asset protection planning strategy, to help a client create a “nest egg” of assets to be passed to his loved ones free from the claims of unforeseen future creditors. Such trusts can help protect estates against large future medical care bills, such as bills from Medicaid Estate Recovery, hospital, or nursing home bills, or other unforeseen future liabilities such as legal liabilities, auto accidents, financial liabilities, bankruptcy, or can provide financial protection from nefarious family members.
In order to create an APT free from unknown future creditors in North Carolina, the trust must be designed so that the trust grantor, who sets up the trust, does not benefit directly from the trust assets. The trust beneficiaries, however, may benefit from APT assets during the grantor’s lifetime—in fact the APT may be set up to start benefitting a spouse (see item 4 below), children, or other beneficiaries immediately.
When the client’s estate is large enough to make a gifting strategy useful, it may make more sense to set up an APT instead. The StepAPT™ asset protection trust is designed to protect close family members, and provides these benefits:
- The StepAPT™ Can Provide Creditor Protection to The Grantor. Making a proper transfer into the StepAPT™ is legally very similar to making a gift to a family member. Once the grantor properly transfers assets into the StepAPT™, North Carolina and federal law considers this a transfer out of the grantor’s estate for creditor purposes, and future creditors such as Medicaid or hospitals cannot legally reach the assets in the APT.
- The StepAPT™ Can Provide Creditor Protection to Trust Beneficiaries. The StepAPT™ may be set up to provide creditor protection to trust beneficiaries both during the grantor’s life, and after the grantor’s death.
- A Beneficiary May Serve as His or Her Own Trustee. If appropriate, a non-grantor beneficiary can be set up as Trustee, so that he or can distribute assets to himself or herself according to the terms of the trust, while still retaining valuable creditor protection.
- The StepAPT™ May Be Set Up to Protect Spouses. If the Grantor has enough assets so that the need to use Medicaid to pay for long term care is not likely, the StepAPT™ may be set up to benefit and protect a grantor’s spouse. Spouses can decide to set up asset protection trusts for each other.
- The StepAPT™ Provides a Step Up in Tax Basis Which Can Greatly Reduce Taxes on Appreciated Assets. Transferring appreciated assets by gift, like a house, family farm, or stocks that have appreciated, can cause the gift recipient to pay capital gains taxes on all of the increase in value during the giver’s lifetime, which can total thousands of dollars, or more. Putting assets in a StepAPT™ asset protection trust, however, provides a step up in basis to the beneficiary, so that all of the capital gains accumulated during the grantor’s lifetime are erased. The beneficiary then only owes capital gains taxes for asset appreciation between the time that the grantor dies, and the time that the beneficiary sells the asset.Here is an example of how important getting a step up in basis can be: Suppose Dad bought a family farm in 1945 for $50,000. That farm then increases in value so that it is worth $500,000 in 2017. Then Dad gifts the farm away to son Bob in 2017, and Dad dies on January 1, 2018. If son Bob then sells the farm, at a 15% federal capital gains tax rate Bob would have to pay the IRS $67,500 in capital gains taxes for the farm’s appreciation during Dad’s life.If Dad would have benefitted Bob by placing the family farm in the StepAPT™ instead of making the gift to Bob, Bob would have received the step up in basis, the $67,500 would be erased, and the family would have saved $67,500 in income taxes.
- Not a Medicaid Asset. Any assets placed into the StepAPT™ are not countable as Medicaid assets, thus are protected from Medicaid. But because the StepAPT™ is an advance planning tool, and Medicaid considers transfers into an irrevocable trust as gift transfers, assets must be transferred into the StepAPT™ more than 5 years before the grantor uses Medicaid, to avoid penalties. The StepAPT™ should not be set up to benefit spouses when Medicaid may later be needed.
- The StepAPT™ Avoids Probate. Assets placed in the StepAPT™ do not pass through probate following the grantor’s death, making the surviving family’s job easier.
- The StepAPT™ May Reduce Income Taxes. The StepAPT™ is designed as a grantor trust, which means that income taxes paid by the trust are taxed at the grantor’s individual tax rate during the grantor’s lifetime, which is normally lower than a trust tax rate.
When using an APT, such as the StepAPT,™ it is important to plan early. An APT will not protect against any already known creditor, so trust assets cannot be moved into the trust to escape that creditor. Planning early helps assure that assets placed in an APT will be protected against any unknown future creditors, both under North Carolina and federal law.
USING A StepAPT™ WITH A REVOCABLE TRUST
The different, popular Revocable Living Trust (RLT) does not protect trust assets from the grantor’s creditors during the grantors life, or from estate creditors immediately following his death. But a revocable trust does allow the grantor to easily pull assets out of the trust at any time to benefit him during his life. An irrevocable StepAPT,™ cannot benefit the grantor during life, but it can protect against creditors both during life and following death.
A flexible estate planning strategy may include forming both a revocable living trust and a StepAPT™ for the client, allowing the client to utilize the best features of each type of trust. If a client has a downturn in health, or for any other reason, the revocable trust trustee may flexibly protect any amount of assets at any time by moving them from the revocable trust to the StepAPT™.
Categories: Estate planning, elder law, asset protection, creditor protection, business formation, trust, trusts, probate.
The LLC has become one of the most popular legal structures for shielding an owner’s personal assets from business liability risks. An LLC owned by a single person, or “member”, is considered a desirable “disregarded entity” by the IRS, which allows the LLC owner to skip filing a partnership return and instead report his LLC income directly on his personal income tax return.
In North Carolina, the personal ownership interest in an LLC, or membership, is classified as an item of personal property. Unfortunately, that classification leads to this not-commonly-known fact: when the individual owner of a single-member LLC dies, the LLC’s necessary ownership transfer to the decedent’s heirs must pass through probate.
While the LLC is passing through probate, its revenue stream flows to the decedent’s estate, not to the heirs. The LLC membership may thus be tied up in probate for months, or even a year or more. This can interrupt a family’s finances. For example, if a retired husband and wife were living on the monthly income from 10 rental properties held in the husband’s single-member LLC, the wife’s access to cash flow from the LLC may be disrupted if the husband dies and his LLC membership passes into probate.
In North Carolina, the best way to keep a single-member LLC’s ownership interest out of probate is to employ a trust. The popular revocable living trust keeps assets held by the trust out of probate because the trust is a separate entity which transcends the trust grantor’s death.
When a grantor’s revocable trust becomes owner of the grantor’s single-member LLC, the LLC Articles of Organization and Operating Agreement are set up so that the trust owns the single membership in the LLC. Because the IRS considers a revocable trust a grantor trust, income from the single-member LLC owned by a grantor’s revocable trust is still reported on the grantor’s individual tax return, maintaining desirable pass-through taxation.
Distribution terms added to the grantor’s revocable trust direct how ownership of the LLC will be transferred to the grantor’s beneficiaries following the grantor’s death. Because trust distribution following the grantor’s death takes place privately outside of probate, the ownership transfer from the grantor’s trust to the beneficiary(ies) can take place almost immediately, keeping the LLC’s cash flow intact and uninterrupted to a needy beneficiary(ies).
Categories: Estate planning, revocable trust, trusts, marital trust, elder law, Winston Salem, North Carolina, NC.
Married couples in North Carolina contemplating adding a living trust to their estate plan may have a choice: one joint trust or two separate trusts? In most cases, I recommend a separate trust for each spouse, for the following 6 reasons:
- NORTH CAROLINA IS A COMMON LAW PROPERTY STATE. North Carolina is a “common law, ” or “separate property” state. In general, separate trusts are preferred by planners and attorneys in common law property states like North Carolina, and joint trusts are used more frequently in community property states like California.
- SEPARATE PROPERTY STAYS SEPARATE. Many married clients enter into the estate planning process owning a significant amount of separate property. They may own assets that they acquired before the marriage, they may have inherited family farmland, and they may expect to inherit assets or receive gifts from their parents or grandparents in the future. Using a separate trust for each spouse more cleanly keeps their separate assets separate, so that they will be more easily characterized as separate at death or in case of divorce.
- JOINT TRUSTS MAY COMMINGLE SEPARATE PROPERTY. Where separate property (which has not been properly identified and tracked as separate property) is combined by both spouses in a joint trust, it may become “commingled.” Where such property has been commingled, or has become jointly titled in a joint trust, it may be considered by our court system as having been converted from the contributing spouse’s “separate property” to “marital property.” The spouse who contributed the separate property to the joint trust may lose the ability to control it as separate property in case of divorce, or the spouse’s fiduciaries or beneficiaries may lose access to that property following the spouse’s death.
- SEPARATE TRUSTS WORK BEST WITH BLENDED FAMILIES OR WHERE SPOUSES HAVE DIFFERENT TRUST BENEFICIARIES. It is common for spouses to have separate sets of children from prior marriages. Separate trusts allow couples with blended families to each select different primary or secondary trust beneficiaries.
- CONSUMER DEBT PROTECTION. With a joint trust, all of the assets of both spouses may be endangered by the debts of just one spouse. But if separate trusts are used, the separate assets of the uninvolved spouse may be protected from the creditors of the indebted spouse. This protection may be limited in certain cases however– if the debt involves certain “necessities” such as food or medical care, the North Carolina “necessities doctrine” provides that both spouses may be responsible for the debt.
- LIABILITY PROTECTION. Where separate trusts are used, if one member of a couple is involved in a car wreck which creates liability, the uninvolved separate assets of the other spouse within the other spouse’s separate trust may be protected against that liability.
Joint trusts may still be appropriate for married couples in some cases, but for the above 6 reasons, separate trusts are the most flexible choice for married couples in North Carolina, and allow each spouse to have better control over their separate assets.