On August 11th, Governor McCrory signed North Carolina Senate Bill 336, Act to Amend the Law Governing Estate Planning and Fiduciaries (the “Act”). Notably, the Act adopts a procedure for living probate in North Carolina and modifies several key provisions in the North Carolina Uniform Trust Code (the “UTC”) regarding the use of directed trustees and decanting.
The Act also addresses several other areas applicable to fiduciary law, including expanding the statutory provisions on guardianships to specifically include incompetent adults (previously the statute, Chapter 35A of the North Carolina General Statutes, referred only to minors), adopting the Uniform General Powers of Appointment Act (enacted as Chapter 31D of the North Carolina General Statutes), and amending the statute on the conveyance of tenancy by the entirety property to a trust (Chapter 39 of the North Carolina General Statutes).
Living Probate
Living probate allows a petitioner, typically the testator of a Will, to file an action to have the Will declared valid. This process can be used to prevent a contest of the validity of a Will after the testator’s death. Accordingly, the Act enacts Article 2B of Chapter 28A of the North Carolina General Statutes (the “Statute on Living Probate”) setting forth a procedure by which a petition can be filed to obtain an order that a Will is valid prior to the death of the testator.
While the provisions of the Statute on Living Probate may seem advantageous, in reality they may have very limited applicability. First, to be effective, the petition would have to provide notice to all interested persons, which (though not defined in the Statute) would have to include all persons who may claim an interest in the estate to preclude a later challenge by a disinherited beneficiary. Next, full disclosure of the terms of the Will is to be provided to all persons receiving notice. Thus, by using this procedure, a testator would be providing notice to all heirs and potential beneficiaries of his or her estate of the contents of the Will, the dispositive plan, the identity of the executor, and other relevant information. For example, an individual who has chosen to treat an heir (such as a child) disproportionately, or even disinherit that heir entirely, likely would not want that heir to be made aware of that decision during his or her lifetime.
Further, if an interested party contests the validity of the Will, the matter is referred to the Superior Court and proceeds as if it were a caveat proceeding. In such a case, the petitioner would produce evidence that the Will was executed in accordance with applicable law, and that the testator had testamentary capacity and was under no undue influence when the Will was executed, and the contesting party (or parties) would submit evidence to the contrary. Legal fees in these matters can quickly accumulate, making the contested matter expensive for the petitioner.
Only four other jurisdictions (Alaska, Arkansas, North Dakota and Ohio) have enacted similar statutes, the first being North Dakota in 1977. While the Statute gives the testator the opportunity to testify to intent, competency, and undue influence (key issues in most Will contests), the use of the procedure to admit this evidence must be weighed against the risks, costs, and potential family fallout if such a procedure is filed.
Directed Trustees
Article 8A of the Uniform Trust Code was enacted effective January 1, 2013, to permit the appointment of a power holder to direct a trustee to take certain actions in the administration of a trust (the “Directed Trustee Statute”). Pursuant to the Directed Trustee Statute, a power holder is a fiduciary and a trustee is relieved of liability for following the direction of a power holder, unless following such direction would constitute intentional misconduct on the part of the trustee. See N.C.G.S. Section 36C-8A-4. The Act clarifies several provisions in the UTC to conform to the designation of a power holder as a fiduciary by extending to the power holder the provisions applicable to trustees regarding the standard of fiduciary duty. Specifically, the Act modifies sections of the UTC to provide that a trust instrument cannot relieve a power holder of the obligation to act in good faith and in the best interests of the beneficiaries and cannot provide exculpation for a power holder for acts committed in bad faith or with reckless indifference.
In addition, the Act clarifies the provision of the UTC as to co-trustees and the liability of a trustee for actions of a co-trustee where power is delegated. The enactment of this amendment to N.C.G.S. Section 36C-7-703 is consistent with the standard of liability and protections for a trustee acting under the direction of a power holder as set forth in the Directed Trustee Statute. While it may appear that the roles of a power holder and a co-trustee are virtually identical, a trustee has general duties, obligations, and responsibilities in the administration of a trust, whereas a power holder’s responsibilities are limited. Therefore, where a grantor desires to appoint a fiduciary with limited or narrow authority, the Directed Trustee Statute can be very helpful to permit the appointment of a power holder who does not have general trust administration duties.
Decanting
North Carolina enacted a statute allowing decanting (the process by which a trustee appoints trust property to a new trust for the benefit of the same trust beneficiaries) effective October 2010. The applicable statute is found at N.C.G.S. Section 36C-8-816.1 (the “Decanting Statute”). Trustees and attorneys have taken advantage of the Decanting Statute to modify irrevocable trusts in response to a variety of circumstances and situations, many of which were unforeseen at the time of the creation of the trust. However, the ability to use the Decanting Statute is subject to certain requirements and qualifications. The Act expands the ability to use the Decanting Statute in certain situations, including permitting the appointment to a trust that is a qualified special or supplemental needs trust where the beneficiary is disabled. This provision can be particularly advantageous where a beneficiary unexpectedly becomes disabled and the trust agreement does not otherwise contemplate distributions in accordance with a standard that would exclude the trust property from being considered in the beneficiary’s qualification for governmental benefits. In addition, the Act allows the trustee to appoint to a trust that has a tax status different from the original trust, allowing greater flexibility in tax and estate planning.
Effective Dates
The sections of the Act affecting amendments to the UTC, including the provisions on the Directed Trustee Statute and Decanting Statute, become effective on October 1, 2015. The remaining sections of the Act became effective when signed into law on August 11th.
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