In my practice of law, one of the most frequently asked questions I receive is “what is the difference between a will and a trust?” This article will address the requirements to create both, a last will and testament and a trust, in North Carolina. Which one will best fit your needs and circumstances depends on your goals and concerns for estate planning.

WHAT IS A LAST WILL AND TESTAMENT?

In North Carolina, a will requires the testator (the person creating the will) to be at least 18 years of age, and be of sound mind. Unless contested, North Carolina law presumes that every individual has sufficient capacity to make a will. In a will, you do things like name beneficiaries to your personal property and real property, name a guardian for your minor children, disinherit someone, waive a bond requirement, and appoint a personal representative to your estate.

There are several types of wills recognized in North Carolina.

NUNCUPATIVE WILL: Also known as an oral will, is made by a person who is either terminally ill or in imminent peril of death and who does not survive such illness or imminent peril. A nuncupative will must be declared orally by a person before two competent witnesses who are simultaneously present, and specifically asked by the person to bear witness to their declaration. NCGS §31-3.5. Only personal property may be disposed of using this type of will. NCGS §31-3.2(b). A nuncupative will, must be probated within six months of the time it is made, unless it has been reduced to writing within ten days after it was made. NCGS §28A-2A-10.

HOLOGRAPHIC WILL: A holographic will is a will that is entirely handwritten by the testator. It is signed at the end of the document by the testator and it is found among the testator’s personal effects and belongings. It may also be found in the testator’s safe deposit box, or it is in the possession or custody of someone who has been directed by the testator to hold it for safekeeping. A holographic will does not need to be witnessed, although it is desirable that the holographic will be dated. NCGS §31-3.4(b). Probate of holographic wills, however, require three witnesses to the testator’s handwriting and at least one witness to the place it was found. NCGS § 31-18.2.

ATTESTED WRITTEN WILL: If you work with an attorney to draft your will, you will likely create an attested written will. This is a will that is signed by the testator and attested by two competent witnesses. NCGS §31-3.3. An attested written will is valid if the testator had the intent to sign the will (either themselves or at the direction of someone signing on behalf of the testator); the testator signifies to the attesting witnesses that the will is the testator’s will by either, signing in the presence of the witnesses or by acknowledging to them that the testator’s signature is previously affixed to the will; and the attesting witnesses have signed in the presence of the testator (they do not need to sign in the presence of each other. NCGS §31-3.3).

According to Caring.com’s 2021 survey, 70% of Americans do not have a will. One of the main reasons why people do not create wills is because they do not think they own any assets. However, if you’ve read our previous blog post regarding the reasons why a Last Will and Testament is important, then you know that there are many considerations why an individual should create a will.

Generally, a will takes less time than a trust to create and costs less money for an attorney to draft. It is important to note that a will does go through probate and is subject to public record. Whereas, a trust is private and not subject to probate.

WHAT IS A TRUST?

A trust is an instrument that creates a fiduciary relationship between a trustee (someone who holds property for the benefit of another) and its beneficiaries. It can be created for a variety of reasons, such as asset protection, medicaid planning, charitable purposes, etc.

The requirements to create a trust are stated in NCGS §36C-4-402(a) of the North Carolina Trust Code:

1. The Settlor must have capacity to create a trust (note that this differs from the “sound mind” requirement to create a will),
2. the Settlor must indicate the intention to create a trust,
3. the trust must have a definite beneficiary (unless it is for a charitable purpose, care for a pet, or a non-charitable purpose, as provided in NCGS §36C-4-409,
4. trust must have duties to perform, and
5. the same person is not the sole trustee and the sole beneficiary.

The person creating the trust is known as the “settlor” or the “grantor.” The trustee holds legal title to the property in the trust and manages the trust property for the benefit of beneficiaries. A beneficiary is one or more persons who have present or future interest in the trust property. The beneficiaries must be ascertainable either, now or in the future. The only exception is charitable trusts. Where there is benefit to the public-at-large, so there is no ascertainable beneficiary.

It is important to note that in North Carolina, a trust cannot be created with a sole trustee that is also the sole beneficiary. There must be a second trustee or another beneficiary named in the trust instrument.

Additionally, for a trust to become valid, it must be funded with “trust property.” Funding a trust requires legal transfer of title of the property from the “settlor” to the “trustee.” This means that the settlor must have present ownership interest in the property to be transferred to the trust.

When a trust is created, legal title to the trust property is vested in the trustee, while equitable title vests in the beneficiaries. See Fisher v. Fisher, 218 N.C. 42, 9 S.E.2d 493 (1940).

A trust may be “revocable” or “irrevocable” depending on the type of trust. A revocable trust is an inter vivos trust (created during the settlor’s lifetime), in which the settlor retains the right to revoke or amend the trust without the consent of the trustee or a person holding an adverse interest. NCGS §36C-1-103(16).

It is important to note that in North Carolina, unless stated otherwise, all trusts are presumed to be revocable.

An irrevocable trust is an inter vivos or testamentary trust (trust created by the testator’s will), in which the settlor or testator does not retain the right to revoke or amend the trust.

Depending on your purpose for the trust, such as tax planning or medicaid planning purposes, a revocable or irrevocable trust may be created.

Under North Carolina Law, NCGS § 36C-4-401, there are four methods to creating a trust:

1. Transfer of property by a settlor to a person as trustee during the settlor’s lifetime or by will or other disposition taking effect upon the settlor’s death.
2. Declaration by the owner of property that the owner holds identifiable property as trustee unless the transfer of title of that property is otherwise required by law.
3. Exercise of a power of appointment in favor of a trustee.
4. A court judgment, order or decree, including the establishment of a trust pursuant to section 1396p(d)(4) of Title 42 of the United States Code.

A few examples of the different types of trusts include:

• An asset protection trust – generally, this type of trust protects assets from exposure to future lawsuits, malpractice claims, bankruptcy claims, creditors’ claims, divorce or remarriage, nursing home expenses, etc.
• A charitable trust – as mentioned above, this type of trust is generally for charitable purposes, while allowing the settlor to take advantage of charitable tax deductions associated with gifts being made.
• An education trust – generally, this type of trust is created by parents and grandparents for the benefit of their children to fund college education while receiving estate tax benefits.
• A Grantor retained annuity trust (GRAT)/Grantor retained Unitrust (GRUT) – typically, this type of trust is used to remove the full value of the asset and its future appreciation from the Settlor’s taxable estate taxes upon death.
• An Individual Retirement Account (IRA) trust – these trusts are created to protect retirement plan assets from lawsuits, creditors, or divorce. They are generally designated for retirement plans, such as, 401Ks, 403(b)s, and the like.
• A pet trusts – these types of trusts are created so that there is specific, detailed instruction on how to provide for a pet, and to ensure sufficient funds are available to care for the pet without overburdening the future caretaker.
• A lifetime qualified terminable interest property trust (QTIP) – this type of trust is typically used for lifetime asset protection or tax planning purposes.
• An irrevocable life insurance trust (ILIT) – generally, this type of trust is created to protect one’s life insurance proceeds from future lawsuits or creditors.

There are many other types of trusts that are not mentioned in this article, but our point in mentioning these few types of trusts is that depending on the reason why you want to create a trust may determine the type of trust you create.

So, the million dollar question is “ do I need a will or a trust,?” and my answer is that everyone over the age of 18 years old should have a will, regardless of whether you have created a trust. Reason being is that it is likely that you will own assets at your date-of-death, such as personal items, clothing, vehicles, bank accounts, and other items. These items have to go somewhere when you die, so to avoid conflict and confusion, make it clear how you intend for your assets to be distributed upon your death in your Last Will and Testament.

Even if you do have a trust, there may be some assets you own at your death that are not trust property. Therefore, you should have a will as a catch-all to determine what happens to those particular assets at your death. Whether you need a trust depends on your specific circumstances and the purpose for creating that trust, such as asset protection, providing for your child’s education, or a pet, and the other purposes described above.

Speak with an attorney about your particular situation and determine whether a trust instrument is right for you.

Consult The Law Office of Crystal M. Richardson PLLC today to talk more about your needs – 336-805-6200.