When you’re preparing for the future, you may be considering a revocable trust as part of your estate planning. It’s a great way to manage your assets and make sure they go to the right people later on. The big question many people have is, who actually owns the property once it’s in the trust?
The short answer is that technically, the trust itself holds the property. However, the legal details in North Carolina show a split between two kinds of ownership: legal title and equitable interest.
Legal Title vs. Equitable Interest
In North Carolina, a revocable trust is a legal tool for holding and managing assets like bank accounts, real estate deeds, and investment accounts.
Under N.C. Gen. Stat. § 36C-3-301, the trustee holds the legal title to every asset put into the trust. This means the trustee’s name appears on the deed or account registration.
At the same time, the person who created the trust, called the settlor or grantor, keeps the equitable interest. This is the beneficial ownership. The settlor gets to:
- Use all the trust assets for their own benefit.
- Change the beneficiaries.
- Completely amend or revoke the trust, as allowed by N.C. Gen. Stat. § 36C-2-601.
In most cases, the grantor names themselves as the trustee while they are alive. They have full control and management over the property, even though they hold legal title on behalf of the trust. If the grantor revokes the trust, the property’s title simply comes back to them directly.
After the Settlor’s Death
A revocable trust offers flexibility until a major life change. When the grantor passes away, the trust immediately becomes irrevocable.
The person you named as the successor trustee then takes over. They hold the legal title and are responsible for managing and distributing the assets to the beneficiaries according to the trust’s instructions. The beneficiaries gain the equitable interests in the property once it is distributed.
Who Pays Taxes on Revocable Trust Income?
During the grantor’s lifetime, the trust is not a separate entity for taxes. The grantor retains ownership for tax purposes, so all income the trust assets generate—like interest, dividends, or rent—is taxed to the grantor individually. It must appear on their personal tax return.
A significant benefit involves Capital Gains Considerations. When the grantor dies, property held in the trust receives a “step-up in cost basis.” This step-up matches the property’s fair market value on the date of death, which can mean substantial savings on capital gains taxes for the beneficiaries if they later sell the property.
Benefits of Transferring Property to a Trust
Transferring your property into a revocable living trust is a valuable estate planning option for several reasons:
- Avoiding Probate: Assets in the trust bypass the public and costly process of probate court, allowing for a faster distribution to your beneficiaries.
- Privacy: Unlike probate, trusts are not subject to public records, keeping your asset distribution confidential.
- Incapacity Planning: If the grantor becomes incapacitated, the successor trustee can seamlessly take over property management without needing court intervention.
- Continuity: The trust provides a smooth transfer of assets, helping maintain family wealth.
Get Personalized Guidance
Understanding the roles of the trustee, settlor, and successor trustee can be confusing. To make sure your property is managed, protected, and transferred exactly as you wish, it is wise to consult a legal professional.
Our estate planning lawyers can guide you through setting up a revocable trust and securing your financial legacy. Contact Salines-Mondello today at (910) 777-5734 for a consultation.