Background
In North Carolina, when a state resident passes away leaving behind assets, the estate administration process may begin.
A person interested in properly winding up the deceased resident’s estate may apply with the Clerk of Superior Court serving the deceased resident’s county of residence to become the estate’s personal representative. The personal representative may serve either for a county resident who died intestate (without a will), or for a county resident who died with a will (testate.) This begins the estate administration process (also called probate.) Where a North Carolina resident (the will testator or testatrix) dies with a will, that will normally names a person (or persons) executor, with the Clerk of Superior Court normally qualifying the will’s stated active executor as the deceased resident’s personal representative.
The deceased resident’s assets which legally must pass through the probate process are known as the resident’s probate estate. Where a deceased resident’s trust owns assets at the resident’s death, those trust assets form the deceased resident’s trust estate. Trust assets are managed by the active trustee stated in the trust document. Trust assets normally bypass the county probate process (although North Carolina law provides that revocable trust assets may be pulled back to pay valid creditor claims in probate, where there are not enough probate assets to pay valid estate debts left behind at the trust grantor’s death.) The process of managing the trust’s affairs following the trust grantor’s death is called trust administration.
A trust grantor (the person who sets up and funds a trust; that person may also be called the trust settlor or trustor) often creates a will too (this will may be called a pour-over will where it is paired with a revocable living trust document.) Such a pour-over will is designed to address any probate assets that were not placed into the trust prior to the trust grantor’s death. Where such probate assets exist following a trust grantor’s death, the will’s executor may have probate duties involved in closing the deceased trust grantor’s probate estate. The will executor and trust trustee may be one and the same person, as named in the deceased resident’s estate planning documents (the executor and trustee may also be different individuals.)
As the trust grantor moves assets out of the grantor’s probate estate and into the grantor’s trust during the grantor’s lifetime (a process called funding the trust), the grantor simplifies the probate process required after the grantor’s death. Carefully funding a trust leaves less work for the grantor’s will executor to do in probate. North Carolina law provides for a shortened summary administration of a person’s probate estate where a surviving spouse is the sole current heir of a deceased North Carolina resident’s estate, and a simplified procedure for small [probate] estates (less than $20,000 in personal property remains in the deceased person’s probate estate, or less than $30,000 if a surviving spouse is the sole current heir.) See the North Carolina Estate Procedures for Executors, Administrators, Collectors by Affidavit, and Summary Administration manual, pages 11-13.)
In addition to trust assets, certain other types of assets avoid probate in different ways. For example, life insurance may pass at the policy owner’s death directly to named policy beneficiaries. Qualified retirement account (such as IRA and 401K) assets transfer directly at the account holder’s death to beneficiaries or entities (such as trusts) named in the retirement account provider’s records. Regular (non-retirement account) bank, brokerage, or securities account assets may pass directly to beneficiaries named as payable on death (POD) or transfer on death (TOD) account beneficiaries. Bank or securities account assets owned jointly may be fully owned by the survivor at a joint owner’s death (note, however, that North Carolina probate law provides that creditors may call POD, TOD, or a decedent’s joint account assets back into probate to pay valid creditor claims, where there are not enough probate assets left in a deceased resident’s estate to pay valid estate debts.)
Real estate jointly owned by a married couple in a tenancy by the entirety, real estate owned by joint tenants with rights of survivorship, or vehicles specifically titled joint tenants with rights of survivorship (JTWROS or JROS) by the North Carolina Division of Motor Vehicles (or comparable out-of-state agency) may pass to surviving owners at an owner’s death by operation of law, outside of the probate process.
Preliminary advice
A trust trustee is a type of fiduciary (acts on behalf of another person, with a legal and ethical duty to put that person’s interests ahead of his or her own interests) named in the trust document to manage trust assets. The trustee’s duty to act in the best interests of the trust and trust beneficiaries is legally enforceable, with the trustee having the legal duty to follow the instructions provided in the trust documents. Although an unaffiliated trustee who manages assets properly is not personally liable for estate or trust debts, a trustee who violates his or her fiduciary duties may be held personally accountable.
During trust administration, and at all times while administering the trust, the trustee must be careful to follow trust instructions and the law, act in good faith, keep good and transparent financial records, and act in the interest of all beneficiaries. A trustee who is also a trust beneficiary must remain neutral in all trust transactions, and cannot distribute assets to himself or herself in a way that jeopardizes distributions to other trust beneficiaries (as provided by the instructions written into the trust document.) Likewise, North Carolina law provides that all current trust beneficiaries have a right to receive a copy of the trust document, and a right to financial accountings and trust management records at “reasonable intervals.” It is a good idea for a trustee to be proactive, and responsive, in providing these items to current trust beneficiaries.
A trustee may keep trust accounting records on a computer program (such as Quickbooks or Quicken), with more specialized trust accounting software available for professionals. Particularly where a trustee manages funds that benefit others (or are otherwise subject to inspection or audit), a trustee should consider consulting a Certified Public Accountant (CPA), law practice that provides trust administration services, or other highly qualified accounting professional to help set up, oversee, or provide trust accounting and trust administration assistance.
A trustee who is a close family member of a deceased grantor, or a beneficiary of the trust, frequently chooses to provide trustee services without charge. But, a trustee may choose to pay himself or herself a management fee according to the language of the trust document (which often states that a trustee may receive “reasonable” compensation from trust assets.) Where the language of the trust does not provide for trustee compensation, North Carolina law provides that a trustee is entitled to compensation that is “reasonable under the circumstances,” a term that is further defined in a list of 11 different considerations.
A trustee may also reimburse himself or herself for trust administration expenses (either according to the language of the trust document, or as permitted by North Carolina law) that are “properly incurred in the administration of the trust,” “without prior approval of the Clerk of Superior Court.”
The trustee should be upfront with beneficiaries early on in the trust administration process about an intent to compensate himself or herself from trust assets, and be conservative and reasonable when disbursing such payments to himself or herself. Such fees and expenses should be clearly stated and communicated within the periodic accounting statements provided to trust beneficiaries.
NORTH CAROLINA TRUST ADMINISTRATION CHECKLIST
- Attend to the needs of any minor child, disabled, ill, or in-facility adult, pets, or livestock left unattended by the trust grantor’s death.
- Secure any home, other structures, vehicles, or personal property left unattended following the trust grantor’s death. Do not let surviving or current beneficiaries or others take personal property prior to the executor’s or trustee’s formal distribution of that property. Store vehicles in a closed garage if possible. Consider changing or re-keying locks. Take photos of jewelry or other small valuables; consider storing such valuables in a safe deposit box or safe, at least temporarily. Notify the insurance carrier if a home or other important structure is now vacant. If not properly notified, an insurance carrier may not cover thefts, damages, or other losses.
- Ensure that the funeral director has submitted a notification of death to the proper local registrar in the county where the death occurred. Obtain at least 12 copies of the death certificate (normally provided by the funeral director.)
- Locate original estate planning documents. Will and trust documents are very important. Power of attorney documents become invalid at the principal’s (or document signer’s) death. Do not ask the financial or general durable power of attorney agent to make financial transactions, or sign legal documents, via a power of attorney document following the principal’s death.
- Notify the Social Security Administration about the death at the SSA’s customer service number 1-800-772-1213. Claim the deceased resident’s death benefit ($255 in 2021), and claim any applicable benefits for a surviving spouse or dependent children. Warren Coble & Associates, Inc. may be consulted in Asheboro, North Carolina to help determine survivors’ Social Security benefits.
- If the deceased resident was a military veteran, contact the Department of Military and Veterans Affairs (Veteran’s Administration or VA) to determine if the deceased resident is eligible for funeral or burial costs, or to see if a surviving spouse or dependent children are eligible for continuing benefits. Consider contacting the deceased person’s county Veterans Service Center for their help in determining potential benefits. This link provides more information on VA memorial benefits.
- Review will and trust documents. Seek legal assistance when needed to understand specialized terms and provisions (for example, what is per stirpes or per capita distribution?)
- Obtain a new Certification of Trust document (summarizes the long trust document and communicates its validity to 3rd parties) from a trust attorney if needed. Have the active trustee sign and properly execute the new Certification of Trust document.
- Open (if needed) and/or maintain the primary trust checking account, or checking accounts for any discrete subtrusts which become active.
- Evaluate and attend to the ongoing operations of any business entity held by the trust, where the trust grantor’s or beneficiary’s death left a vacancy. Obtain professional assistance if needed.
- Identify current trust beneficiaries. Notify current trust beneficiaries of their beneficiary status, and provide them with a copy of the trust and will documents.
- If the grantor’s death initiated a conversion of the grantor’s revocable trust to an irrevocable trust, or created a new irrevocable or separately taxable trust(s), obtain a new federal taxpayer identification number (Employer Identification Number, or EIN) from the IRS for the irrevocable trust(s). A new EIN may be obtained quickly online at the IRS’s Online EIN webpage.
- Find and organize the deceased trust grantor or beneficiary’s important financial documents.
- If the grantor’s death leaves a home vacant, cancel non-critical utilities such as cable television and internet service, telephone service, and magazines, newspapers, or other subscriptions. Keep electricity connected, and any HVAC system running, to guard against accumulating mold and mildew in the warmer months, or freezing pipes in cool months.
- Inventory trust assets, and get trust assets appraised where needed.
- Inventory probate estate assets, and get probate estate assets appraised where needed.
- Review trust investments; take over management of trust assets and probate estate assets, and connect with or involve professionals (such as a financial advisor) when needed.
- Where appropriate, seek, update, and/or maintain insurance on assets that will remain in trust.
- Make claims on any bank or brokerage accounts, individual stocks or securities, life insurance policies, annuities, retirement accounts, or any other assets where the trust is named as the beneficiary.
- If named as the Executor in the deceased trust grantor’s will document, make an appointment, then apply as the Personal Representative of the probate estate with the Clerk of Superior Court, in the deceased grantor’s / will testator’s (or testatrix’s) county of residence. Bring the original will document to the appointment, along with a copy of the the deceased individual’s death certificate, an initial inventory of the will testator’s or testatrix’s probate assets, and any other documentation requested by the county Clerk’s estates representative. Begin any required small estates, summary administration, or other probate process with respect to the deceased testator’s or testatrix’s probate estate assets. Involve an estate administration or probate attorney, if needed. Complete any required probate estate tasks, following the legal and accounting requirements. If another person or entity is serving as the will executor, coordinate with that executor to make sure that any needed probate tasks are completed.
- Create or take over the record keeping system / accounting system for trust assets. Consider using accounting software to organize and track assets, and to create initial and periodic accounting reports. Involve a CPA or other appropriate professional when needed.
- Monitor the deceased resident’s incoming mail, and pay valid probate estate debts and trust estate debts as they come up. Pay any other known, valid debts.
- Collect any funds owed to the probate estate, or owed to the trust(s).
- Prepare and provide an initial accounting of trust assets to current trust beneficiaries.
- Return the entire Social Security payment made to the deceased person for their month of death, no matter what day of that month the death occurred (this is required.) Note that a Social Security’s monthly payment for a given month is normally made in the first week of the next month. If Social Security payments were deposited directly into the deceased grantor’s bank account, keep that account open, as it can take several months for Social Security to recall payments made after death.
- File a final federal Form 1040 and an associated North Carolina state tax return for the final year of the deceased grantor’s life. File a federal Form 1041 for the trust if trust taxable income, after subtracting its withholding and credits, is more than $600 (tax year 2020 requirement.) Issue a federal Schedule K-1 (Form 1041) to each beneficiary receiving trust distributions.
- Provide periodic accountings and statements to trust beneficiaries.
- Sell trust assets, where such assets will not be distributed directly “in kind” to beneficiaries, instead of remaining in trust.
- Obtain, from an attorney, real estate deeds and other documents required to distribute real estate to beneficiaries (as provided by the distribution language written into the trust), and properly execute and file these documents.
- Prepare proper documentation to retitle motor vehicles, where they will be distributed directly “in kind” to beneficiaries, according to the language of the trust.
- Distribute personal property, trust income, and principal to trust beneficiaries, according to the terms of the trust.
- Document any final trust distributions to beneficiaries in a formal letter, accompanied by a final distribution statement.
- Continue to manage assets to be held in ongoing trust(s) for beneficiaries.
