Very often, “heirs” of land “inherit” their interest as beneficiaries of a trust. Depending on the goals of and family variables faced by the parent or other person who created the trust, beneficiaries might receive their land title outright following the death of the trust creator, or receipt of title to the land may be delayed and they receive a beneficial income interest from the land.
The essential nature of a trust is that of an arrangement whereby one legally holds title to property bound by an instrument to manage the property to the use and benefit of another. If a family has done some advanced estate planning, it is likely that property interests will be disposed through a trust.
Parties to the Trust: Grantor, Trustee and Beneficiary
The Settlor (a/k/a Grantor)
The essential nature of a trust is that of an instrument created to hold, manage, and ultimately distribute assets that separates the legal ownership of property from the enjoyment or benefit of property. The trust is a creation of a person who owns property, called a settlor or grantor. The Settlor as owner of property directs the terms of the trust instrument, including how property will be managed, who will receive its income, and who will receive title to it at a later time (if ever). The Settlor then places his or her property into the trust by appropriate conveyance (e.g. in the case of land, by deed executed with the trust as the grantee); this is called funding the trust. A trust can be funded by a settlor/grantor during the settlor’s life or at his or her death via a will.
The decisions that the settlor makes are many, and the purpose(s) for which he or she has settled a trust may vary. Of many decisions is whether, when and with what assets to fund the trust (such considerations are explored below). Many settlors fund a trust immediately after its formation, some fund assets over time as life variables change, some fund the trust at their death via a validly executed last will. After a funding decision (which will really be a series of funding decisions over time), the settlor is faced with two key decisions: 1) who will receive income generated by the assets held in the trust (and under what circumstances should they not receive income) and 2) who (and under circumstances) will eventually receive ownership of the assets free of the trust down the road.
The person charged with managing assets funded to the trust is called a trustee. It is to the trustee that the settlor conveys title. The trustee is considered the legal owner of the assets in the trust, and manages such assets with a fiduciary responsibility to do so in the best interests of the trust beneficiaries. Only the trustee can convey title to the property from the trust. The trustee may be a person or a non-human entity. Often, in the case of a revocable trust (sometimes called a “living trust”), the Settlor appoints themself the trustee in the trust instrument, and names a successor trust when the settlor as trustee no longer wishes to serve, is incapacitated, or dies.
The trustee is known as a fiduciary, meaning they are is bound to follow the directives of the trust, and otherwise manage trust assets in the best interest of the beneficiaries identified in the trust instrument or ascertainable by its language (ie. “my grandchildren”). The trustee’s fiduciary duty—an obligation of loyalty one owes another—has long been established by common law.1 North Carolina—by way of the North Carolina Uniform Fiduciaries Act2—has clarified the conduct of financial and property transactions with trustees, as well as the extent of powers available to a trustee when not otherwise limited by an agreement. The powers enumerated by the Fiduciaries Act are extensive, and confer power over property held in trust, its disposition and its protection.3 A will, trust or written instrument may simply refer to the statute to confer broad powers on a trustee,4 or may choose to limit those powers by language of limitation without reference to the statute.5
The Fiduciaries Act provides that a trustee—though generally prohibited from self-dealing—may receive compensation, the amount of which considered reasonable depending on a number of factors such as skill of management, time devoted to management, and amount and nature of property in the trust.6
The trustee—in his or her fiduciary capacity to act in the best interests of the beneficiaries of the trust—is generally bound by the “prudent investor rule.” The prudent investor rule is codified by both the Fiduciaries Act as a requirement that the trustee “observe the standard of judgment and care … which an ordinarily prudent person of discretion and intelligence, who is a fiduciary of the property of others, would observe as such fiduciary.” If the fiduciary has been hired based on a specific skill set, he or she is required to use those skills to manage the assets.7 Generally, the trustee must diversify the assets8—presumably to manage risk or increase return on the trust property. However, the prudent investor rule may be modified and restricted by the language of the trust,9 and indeed this is often done by trusts created to manage distribution of farm and forest land, to relieve the trustee of the obligation to liquidate property in the face of an attractive offer.
A beneficiary is a person designated by the settlor/grantor in the trust instrument to receive income from the assets in the trust, or at a certain time and perhaps conditions or contingencies, ownership of the assets themselves. The beneficiary can be the Settlor, or any person(s) or entity(ies) the Settlor designates as beneficiary. The beneficiary is not an heir (or legatee), and does not receive income or assets as an inheritance. At death, the Settlor’s last will and testament often devises or bequeaths his or her property to the trust for management and distribution by the trustee under the terms of the trust.
The trust instrument is the written document creating and detailing the terms of the trust, how property therein is to be managed, how its income is distributed, and the directions and conditions for distribution of assets. The instrument names the trustee to manage the trust property, and then a successor trustee should the first trustee die or resign as trustee. In a revocable trust (described below) the settlor often serves as the trustee. To fund a Trust, the grantor transfers the title of his or her assets into the name of the trust, which are then legally owned by the trustee who is bound by the terms of the instrument the grantor created. The trust instrument grants the trustee the power and authority to follow the terms of the trust in management, income and asset distribution.
Revocable and Irrevocable Trusts
Reasons for establishing trusts include: avoiding or minimizing probate costs, guard against will contests, protect privacy in property transfers, protecting assets from risks associated with beneficiaries, allow for someone else to manage property when its owner no longer wishes to or is no longer able to, allow someone else to manage property for minors, and in some cases to minimize estate tax. Trust options today are only limited by the creativity of the settlors and may serve very different purposes depending on the terms. Outlined below are several of the more common types of trusts.
While there are numerous types and uses of trusts, those discussed below are most closely associated with farm and forestland succession planning and practice.
Revocable (a/k/a Living) Trusts
A revocable living trust is created by the settlor during their lifetime and the settlor retains the power to destroy (revoke) the trust at any time during their life. The settlor as trustee retains control of the corpus, so he or she can add or remove property at will. Only at the death of the settlor does the trust become permanent (irrevocable).
A revocable trust is sometimes referred to as a “will-substitute” when its end purpose will be the distribution of assets in the trust to named beneficiaries (similar to the heirs of a will). Probate is avoided because the assets are no longer property of the deceased, but are owned by the trust – even though the deceased may have been both the trustee and the beneficiary. These trusts are particularly useful when property is held in several states and therefore would have to be probated in each respective state. Although probate costs are avoided, trusts cost more to create than a will because they usually involve more structural detail and disposition contingencies, and fees may be associated with changing the title of assets.
Because the settlor retains control of the assets during life (settlor retains the power to revoke the trust and have the property returned), the property remains part of the decedent’s federal taxable estate.10
Revocable living trusts should be used in conjunction with a “pour over will”. Since a will directs the court how to dispose of your assets at death, this provision will act as a catch-all and direct property still titled under your name to “pour” into the trust, normally to take advantage of an estate tax exemption of the first spouse to die.
An irrevocable intervivos trust is created during grantor’s life and cannot be terminated solely by the grantor once created. If created and managed correctly, these trusts can reduce the value of property otherwise subject to federal estate tax and remove protected property that might be exposed to creditors—often medical—of the grantor. The property will not be included in the value of the settlor’s taxable estate only if the settlor has permanently forfeited the property. Therefore, the settlor must not retain any guaranteed right in the income or corpus of the trust, but must relinquish such decisions to the trustee. Additionally, the settlor does retain the power to transfer the property once inside the trust without the act of the trustee. These trusts are often used to own life insurance policies, as insurance proceeds are normally part of one’s federal taxable estate when owned outright.11
With an irrevocable trust, the grantor does not serve as Trustee, and instead appoints another trusted person to serve as Trustee. The grantor normally names a trustee line of succession in the event a trustee cannot or will not serve. Historically with an irrevocable trust, assets funded to the trust cannot be removed by the Grantor, nor may the Grantor make modifications to the trust without petition to the appropriate court (which nonetheless must apply legal principles that avoid frustrating the purpose of the trust or its beneficiaries). Modern updates to trust law—found in the Uniform Trust Code (UTC)12 adopted by most states—provide a mechanism by agreement between Grantor and all beneficiaries of the trust agree to modify the trust without court proceedings, even if such modification frustrates the original purpose of the trust.
Transferring property into an irrevocable trust is essentially a gift to the beneficiaries and transfers may be subject to gift tax.13 Annual amounts over the current annual gift exemption transferred into the trust will be subject to gift tax (though the lifetime exemption applies). However, the transfer will reduce the unified credit and increase the amount of your estate that will be subject to estate tax. For very large estates, it may be valuable to make the election so that property appreciates in the trust instead of in the estate. Since the property must be forfeited by the settlor, the beneficiaries must have a present interest in the trust property. Because transfers to an irrevocable trust are considered gifts, carry-over basis rules apply and the property does not get a step-up in basis at the settlor’s death (see Gifting Real and Personal Property).
Other types of trusts include testamentary trusts which are established by will. Because testamentary trusts only come into being at the death of the testator, they are of no use during the property-owner’s lifetime. Spendthrift trusts protect assets which may be recklessly spent by beneficiaries, by limiting the rights of the beneficiary to sell or spend the trust corpus or principal. A Qualified Terminable Interest Trust (QTIP) provides a surviving spouse income during his or her lifetime. Charitable remainder trusts allow the settlor to contribute their property to charity and receive the income from the property over their lifetime. Special Needs Trusts can protect a disabled or elderly individual’s qualification for supplemental security income or medicaid.
Funding the Trust
The purpose of a trust is to provide sound management of assets in favor of selected beneficiaries. Of course, to achieve this purpose, assets must be affirmatively placed in the trust. This is called “funding” the trust, and how such is done depends on the nature of the property, as well as the trust.
As noted above the steps taken to fund a trust depend on the type of property. The UTC defines property as “[a]nything that may be the subject of ownership, whether real or personal, legal or equitable, or any interest therein.” Often, a trust is funded when the trust instrument is executed by the grantor by taping a $1 bill to an appendix of the trust (in modern law, this is now more tradition based on an ancient common law requirement that the trust must be funded upon creation; such requirement does not appear in the UTC). Obviously, more assets must be placed in trust to achieve the benefits of the trust regarding property.
Funding the trust with fungible property (cash) is accomplished by opening a bank account in the name of the trust and funding that account. A grantor/trustee may use Grantor’s social security number in setting up the bank account on a revocable trust. For an irrevocable trust, the trustee must secure an Employment Identification Number (EIN) from irs.org. This number—the equivalent of a social security number for entities—is presented to the bank for set up of a new account, in the name of the trust and trustee, with trustee as signatory on the account.
For other personal property—such as investment accounts, stocks, etc.—such property is ‘retitled’ to reflect the trust (revocable or irrevocable) as the new owner. For any item of personal property that is registered, e.g., a vehicle, such registration must be changed to reflect title in the trust.
As for unregistered personal property, such assets are funded to the trust as an internal matter, with a document listing such items and attached as appendix to the trust. (As a matter of convenience, an appendix to the trust titled with instructions on titling is helpful, as is a list of unregistered items with which Grantor wishes to fund the trust.) Otherwise, any transfer of personal property to a trust should be accompanied by a document expressing unambiguous intent to do so. For example:
Yuri Zvgo owns a famous painting by the Russian artist Ivan Shishkin (1832-1898). He directs his lawyer Komarovski to draw up a bill of sale or other writing, noting the transfer of the painting—considered personal property—to the trust with the language “I, Yuri Zvgo, convey my painting “Among the Flat Valley” by Ivan Shishkin to Yuri Zvgo, Trustee of the Yuri Zvgo Revocable Trust, attaching such writing to the trust instrument.
For real property, funding is accomplished by deed, for which a quit claim deed will suffice. A quitclaim deed (often mistakenly referred as a “quickclaim” deed) is simply a transfer of all interest a title holder has in the real property, without any warranty to defend the title to the property in event another person claiming title comes forward. The operative transfer of the deed—for an unmarried property owner—should read as follows:
THIS DEED, made this 21st day of May, 2021 , by and between Robert Andrew Branan (hereinafter “Grantor”), and Robert Andrew Branan, as Trustee of the Robert Andrew Branan Revocable Trust, a revocable trust agreement executed in North Carolina with an address of address of Trustee (hereinafter “Grantee”). Said Trust is evidenced by a Certificate of Trust recorded at Book 123 Page 456 of the Orange County Registry, North Carolina.
The above caption depends on how property is titled. If the property is owned by one of a married couple (i.e. the property was inherited by one of the spouses), the other spouse must join to ensure the trust is granted full rights in the property free of any spousal rights under state law. If the property was purchased by a married couple and is considered joint property (at least in common law states), and the trust is not a joint trust, the spouse is signing and relinquishing their rights in the property to the trust (the relinquishing spouse—as a survivor—may of course be made the income beneficiary of the trust. Often, spouses choose to use a joint trust, with both serving as Trustee and the survivor serving as Trustee until death or resignation.
In order to transact business where the land is concerned, vendors such as banks and timber companies will likely require evidence of the trust (which is a private document) recorded in the chain of title. This document is known as a Certificate of Trust. In North Carolina such a document may be requested in a form that is recordable in the chain of title.
Because land owned outright by a decedent—though not a probate asset—is nonetheless listed in probate as a possible asset to satisfy creditors if the probate estate has insufficient assets. Deeding the land to a trust prior to death removes the land as a recoverable asset. Often, the attorney will draw up a deed of Grantor’s land to the trust, and execute and record it (at the client’s direction) along with a certificate of trust immediately following Grantor’s execution of the trust. This has the benefit of getting it over with, and not simply neglecting the act until such time as the benefits of using the trust are reduced. For example, with an irrevocable trust—as noted above—a key motivation for using such a trust may include creditor protection, exclusion from federal taxable estate. Under federal tax law ( A delay in recording (funding) increases the risk that such benefits of the trust will not be realized.
In modern estate planning practices, many firms subscribe to a service that keeps up to date on changes to state law regarding trusts (e.g. relevant changes to UTA and UFA) and provides the forms for modification based on client preference. Such services offer all documents associated with the trust suite, including pour-over will, trust instrument, certificate of trust, deeds to trust, powers of attorney, etc. Some lawyers have drawn up their own preferred documents and adapted them to the client’s needs.
Property Tax Considerations
When funding a trust with real property, it is important to know the impact of the transfer on differential property tax qualification. Many states have property tax schemes preferential to agricultural and timber production. For example, some state laws allow (or require) tax assessors to place a lower appraised value on certain properties in order to reduce the property tax paid on the property. Such laws have strict requirements for enrollment of real property, which can include ownership limits, type of use, minimum income generated by the real property, etc. Failure to maintain requirements causes removal from the program, and most such programs require some repayment of the avoided or deferred tax that would otherwise have been due.
Regarding ownership, strict attention should be paid to any requirements for continuing enrollment of real property in such a program upon transfer of that property to a trust (revocable or irrevocable). First, the landowner must make sure that a trust qualifies as an owner for purposes of enrollment. Second, state programs may require steps to continue a real property tract’s enrollment after the property is transferred to the trust (revocable or irrevocable). For example, in North Carolina, a trust may qualify as an owner—under the state definition of “individual owner,” so long as the trust a) has a purpose of forest management (among other things) and b) all beneficiaries of the trust are individuals.
1 As the famous American jurist New York Chief Judge Benjamin Cardozo observed, “As to this there has developed a tradition that is unbending and inveterate.” See Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y.1928).
2 N.C.G.S. §32-1 et seq.
3 See N.C.G.S. §32-27
4 N.C.G.S. §32-26(c)
5 N.C.G.S. §32-72
6 See N.C.G.S. §32-54
7 N.C.G.S. §32-71
8 N.C.G.S. §36C-9-903
9 N.C.G.S. §36C-9-901
10 26 U.S.C. §645(a)
11 26 U.S.C. §2042
12 N.C.G.S. §36C-1-101 et seq.
13 See 26 CFR §25.2511-1
Publication date: March 30, 2022
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