Written by Jim Worthington on March 23, 2022

Many clients call and ask if they need a revocable or living trust instead of a will. A will takes effect only when you die and names a person or company as personal representative to pay your creditors and to distribute your property according to your wishes. A revocable trust is a document where you as the settlor name a trustee, usually yourself while alive, to oversee the terms of the trust both during your lifetime and after you pass. If you fund the trust by transferring assets to it during your lifetime (discussed more fully in the next article in this series), it can help your family take care of you and then can take care of your family after your lifetime while doing the following:

  • Avoiding probate,
  • Keeping family affairs private, and
  • Serving as the building block of many tax saving strategies.

When do you need to avoid probate?

First, what is probate? It’s the process that pays your creditors and distributes what’s left according to your will or the law of intestate succession if you don’t have a will. A previous article explained the intestate succession rules. The Clerk of Superior Court is the judge of probate in North Carolina. The personal representative is the person appointed by the court to carry out your will or those intestate succession rules. Having a will means you get to nominate the person to serve.

The Clerk’s office takes an active role in probate—whether it’s needed or not. For example, when the personal representative files the inventory of an estate, they must provide documents to support the values on the inventory. Other states, such as Kentucky where I also practice, take a more hands-off role. In those states, the court accepts the inventory without question and leaves it to the creditors and beneficiaries to raise questions. That process is much better for most estates where there is enough money to pay the bills and the family basically gets along.

You should also avoid probate if you own property in more than one state. That could require probate in both places. And even if the other state, where what we call the ancillary probate would take place, has easy probate procedures, it would be a hassle for your family to have to go through probate in two places.

When do you need extra privacy?

Avoiding probate is a good idea if you want privacy because probate involves making your will a public record. In addition, the paperwork to start North Carolina probate requires disclosing some details about what you owned at your death, including assets that aren’t even a part of probate. That information is also a public record. So, anyone who wants to look through the court file can read what your will says and find out what you owned. Let’s look at two common situations that call out for privacy.

One is when your dispositive provisions, i.e., the ones that say who gets your estate after you pass, are not equal and outright to your beneficiaries. You might be leaving less to one child, or you might have a special needs child who can’t receive an outright inheritance without losing government benefits. You don’t necessarily want to advertise these facts to everyone.

Another circumstance calling for privacy is when you don’t want to make the value of your estate a public record. The first part of this article mentioned that the personal representative must file an inventory of your assets. That inventory is part of the public court file. If you are the proverbial millionaire next door, you may not want people to know that you were quite successful and amassed a sizable estate. You may not want people to know how much your family is inheriting. Or you may be a small business owner and not want the value of that business to be in the public record. Competitors or potential purchasers might find that useful to the detriment of your family.

Will the trust save taxes?

The answer here is no. A revocable trust is not automatically a tax-saving device. Because you retain control over it during your lifetime and can make changes just like you could change a will, it is part of your estate for income and estate taxes. A revocable trust is an important part of any tax saving strategy, however.

The good news, though, is that the trust won’t increase your taxes. Moreover, if you’re the trustee of your own revocable trust during your lifetime, you will report its income using your social security number. There won’t be any extra tax returns until someone else becomes trustee or when the trust becomes irrevocable after your death. The revocable trust definitely wins out on the cost-benefit analysis.

Are you convinced that you need a trust? The next article in this series will explain more about how to make a trust and how to fund it to get the full advantage it offers.