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Using a Testamentary Trust to Simplify Probate

A strategy for the client without a revocable trust.

I recently helped an executor administer an estate that poured over to an unfunded revocable trust. Although the decedent failed to use the trust to avoid probate, the trust made probate easy. The executor immediately transferred all the probate assets to herself as trustee and conducted the administration privately inside the trust.

After filing the inventory, her accounting to the probate court was brief. She reported one receipt (a refund collected after the inventory was filed) and no disbursements because the trustee, not the executor, paid the estate liabilities. She reported distribution of all assets to herself as trustee, the sole beneficiary under the will.

She still had to administer the trust. She paid the liabilities of the estate and trust, accounted privately to the true beneficiaries and distributed the net assets to them. Because of the abbreviated probate, though, she and I didn’t work as hard as we would have without the trust.

How It Works

This easy probate is also available to folks who don’t need or want a revocable trust or can’t afford one. A standalone will can leave everything to a testamentary trust, appoint the same person as executor and trustee plus require the trustee to pay all estate liabilities. On the testator’s death, the executor can immediately distribute everything to himself as trustee and administer the estate inside the trust. The true beneficiaries are named in the testamentary trust. The trust terminates after all estate and trust liabilities are satisfied. In North Carolina where I practice, the administration of this trust is private unless the will requires the trustee to file court accountings. Unless there’s a caveat or other litigation involving the estate, probate should be easy no matter how difficult the trust administration is. 

Accounting Easy To Prove to Court

A brief accounting is not the only advantage; the accounting is easy to prove to the court. The executor makes no disbursements and so is relieved of delivering the stack of canceled checks and bank statements that supports a conventional probate accounting. The executor doesn’t have to prove post-death income because the assets were distributed to the trust before they could produce income. The trustee’s signed receipt proves distribution of the entire estate to the trust, even when countless true beneficiaries receive a share from the trustee. If the trustee fails to get a receipt from the beneficiary of the photographs or if an unhappy child refuses to acknowledge receipt of tangible personal property, the court’s review of the accounting is unaffected.

If the fiduciary’s lawyer is paid from trust assets, the executor is relieved from the requirement in North Carolina of petitioning for approval of attorney fees.

Publicly Traded Investments

If there are publicly traded investments in the probate estate, the executor can avoid the headache of investment accounting to the court. The probate accounting doesn’t report dividends and interest produced after distribution of the investments to the trust. It doesn’t report reinvestments and other purchases inside the trust with the necessary adjustment to the number of units and carrying value; nor sales inside the trust with the gain or loss and necessary adjustment to units and value; nor distributions of units to the true beneficiaries at adjusted value. 

Trust as Beneficiary

The client can designate the trust as beneficiary of a life insurance policy or transfer-on-death account if a direct designation of true beneficiaries is too complicated for the financial institution to accept. The designation will avoid probate.

No Standing to Intervene

An unreasonable true beneficiary has no standing to intervene in the North Carolina estate proceeding and must initiate a separate proceeding against the trustee to pursue a claim. (Although, this coin has another side where the beneficiary is reasonable or the fiduciary breaches a duty.)

Accounting to True Beneficiaries

This approach doesn’t relieve the trustee from delivering a complete accounting to the true beneficiaries. In North Carolina, however, the beneficiaries may waive trust accountings. If the preparation of a formal accounting will be expensive, a beneficiary might waive the accounting if the trustee provides sufficient documentation (for example, bank and brokerage account statements, canceled checks, copies of deposits) or otherwise satisfies the beneficiary that no breach of fiduciary duty has occurred.

Single Beneficiary

A client who wishes to leave the entire estate to a single true beneficiary shouldn’t use this approach, if the beneficiary will be the executor. Such an executor can distribute the entire estate to himself soon after the decedent’s death, assume the liabilities of the estate and achieve the same results described above.

Disadvantages

The pour-over-to-a-testamentary-trust will has disadvantages. It appears more complicated than necessary, inserting a middle man between the executor and the true beneficiaries. Clients may not like the apparent complexity.

The executor-trustee can’t elect to treat the estate and trust as the same taxpayer. She may have to file an income tax return for the estate in addition to returns for the trust. The trust is stuck with calendar year reporting and consequences that fiscal year reporting might have avoided or mitigated.

The fiduciary may be tempted to claim double compensation, seeking maximum executor’s commission and trustee compensation. A testator can prevent this by limiting or prohibiting executor compensation. In North Carolina, such a limitation shouldn’t be a deal-breaker because reasonable compensation is still available under the trustee compensation statutes.

In North Carolina, title to real property passes under the will directly to the beneficiaries, just as if the decedent had deeded the property to the beneficiaries on his deathbed (subject to the executor’s power to divest the beneficiaries and sell the property to pay estate liabilities). This efficient transfer of title to the true beneficiaries is lost if the will leaves everything to a trust. The testator can, however, specifically devise the real property to the true beneficiaries in the will and leave the residue to the trust. If the North Carolina testator wants the fiduciary to sell (or consider selling) real property, a pour-over-to-a-testamentary-trust will is preferable. By giving the real property to the trustee, the will eliminates the need for the legal work otherwise necessary to divest the true beneficiaries of title to the real property.

The pour-over-to-a-testamentary-trust strategy deprives the executor and beneficiaries of the protections of probate court supervision. But the protections aren’t free. The expense explains, in part, the prevalence of revocable trusts.

I find that clients who see how the testamentary trust can reduce estate administration expenses tend to like it, despite the disadvantages. So I propose the plan to clients in situations in which the client doesn’t need or declines a revocable trust. 

Walton Davis is a sole practitioner in Black Mountain, N.C.

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