Overview of Trusts in North Carolina

What is a Trust in North Carolina?

A trust is an instrument whereby one person, the settlor, transfers property to a second person, the trustee, who holds and manages the property for the benefit of one or more third parties, the beneficiaries.

Common Trust Terminology in North Carolina

In North Carolina, there is no denying that trusts are difficult to comprehend. Unlike a last will and testament, which has one main purpose, that being to dispose of the testator’s property upon his or her death, trusts have many different purposes depending on the settlor's intent. In fact, trusts may be created for any lawful purpose, such as asset protection, education, support, tax planning, or to contribute to a charity, to just mention a few. These varying purposes that trusts may serve is largely why they are so difficult for people to fully grasp.

On top of the multitude of reasons for creating trusts, the terminology used when referencing trusts further complicates understanding them. As may already be evident, to even begin to understand trusts in North Carolina, it is imperative to first know the meaning of certain terminology that is frequently used when discussing trusts. Some of the key terms are defined below.

Settlor: The person who creates the trust.

Trustee: The person who holds legal title to the trust property and manages the property for the duration of the trust.

Beneficiaries: The person(s) who hold equitable interest in the trust and to whom the trustee owes a fiduciary duty.

Res: The trust property.

Living (Inter Vivos) Trust: A trust that is created while the settlor is alive.

Testamentary Trust: A trust that is created when the settlor dies, typically in the settlor’s will or funded by the settlor’s will.

Revocable Trust: A trust that can be revoked, amended, or modified by the settlor.

Irrevocable Trust: A trust that permanently transfers property from a settlor to a trustee with no recourse for its recovery.

What Types of Trusts Exist North Carolina?

As mentioned at the beginning of this article, trusts are created for many different reasons. Some of the more common reasons that people may create a trust are to avoid probate, to provide for a minor, incompetent, or irresponsible beneficiary, to minimize taxes, and to protect assets. These varying reasons for creating trusts, among many others not listed here, has resulted in the creation of countless different types of trusts, including, but not limited to, the following:

  • Annual Exclusions Gift Trusts
  • Asset Protection Trusts, such as Domestic Asset Protection Trusts (DAPT)
  • Charitable Lead Trusts
  • Charitable Remainder Trusts, including Charitable Remainder Annuity Trusts (CRAT), Charitable Remainder Unitrusts (CRUT), and Testamentary Charitable Remainder Annuity Trusts (TCRAT)
  • Credit Shelter Trust
  • Grantor Trusts, such as a Grantor Retained Annuity Trust (GRAT), Grantor Retained Unitrust (GRUT), and Intentionally Defective Grantor Irrevocable Trust (IDGIT)
  • Gun/NFA Trusts
  • Education Trusts
  • Joint Exempt Step-Up Trusts (JESTs)
  • IRA Trusts
  • Irrevocable Life Insurance Trusts (ILIT)
  • Medicaid Planning Trusts, including Medicaid Asset Preservation Trusts and Medicaid Qualifying Trusts
  • Qualified Domestic Trusts (QDOT)
  • Qualified Terminal Interest Property Trust (QTIP)
  • Pet Trusts
  • Special Needs Trusts
  • Trusts for Children

While there are many different types of trusts, generally, each of those trusts listed above falls into two broader categories – (1) living trust or testamentary trust and (2) revocable trust or irrevocable trust.

Living Trusts vs. Testamentary Trusts

A trust is either a living trust or a testamentary trust. A living trust is a trust that is initially funded during the life time of the settlor. On the other hand, a testamentary trust is funded upon the death of the settlor, often within a last will and testament.

Revocable Trusts or Irrevocable Trusts

A trust is either revocable or irrevocable. With a revocable trust, the settlor retains ownership and control of the property in the trust and can change the terms, including the trustees and beneficiaries. However, with an irrevocable trust, the settlor gives ownership and control of the property in the trust to the trustee, and no longer owns or controls the property, thus making it so the settlor cannot enact changes.

What are the Requirements for Creating a Valid Trust in North Carolina?

In order to create a valid trust in North Carolina, the North Carolina Uniform Trust Code requires that certain elements are met. These include:

  • A settlor with capacity to convey;
  • A clear intention to create a trust;
  • A definite and ascertainable beneficiary, unless a charitable trust or a trust for animals;
  • A competent trustee with duties to perform; and
  • The same person is not the sole trustee and sole beneficiary.