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This case generally presents an excellent analysis by the Court of Appeals that somewhat helps to distinguish between validity of the title conveyed by an unrecorded deed as between the parties and the necessity of recordation to protect the grantee from third party claims. One significant conclusion of the Court and its statement of North Carolina doctrine should be considered carefully. The plaintiff, in her capacity as Executrix of the decedent's Estate and as beneficiary of his Revocable Trust, filed a complaint in 2012 against the defendants requesting declaratory judgment concerning whether a certain deed was valid. The plaintiff attached a copy of a trust agreement which provided that, upon the "incapacity or death" of the decedent settlor, "[his] friend, Jack K. Humphrey, Jr., shall serve as sole Trustee hereunder[.]" The trust agreement was concurrently funded with ten dollars as stated by the express terms of the trust agreement. It clearly stated that the purpose of the trust was to hold his "personal residence located at 225 Seacrest Drive, Wrightsville Beach, North Carolina" for appellant defendant's remaining lifetime should she survive him. "It is my intent and desire that [she] be provided with uninterrupted and exclusive use and enjoyment of the residence for as long as she shall live."
Plaintiff also attached a document titled "North Carolina General Warranty Deed" to her complaint ("the deed"). The deed, also dated 2 August 2011, identified the decedent as Grantor and purported to convey the subject real property to the decedent as trustee for the decedent's revocable trust. The trial court heard testimony from the decedent's attorney at decedent's request, had prepared the trust agreement, the deed and further that at the same time the decedent executed the trust agreement, he executed a deed conveying the real property to the trustee. He further testified that he had advised that "we were not done until we funded the trust and we had to do that with a bank account. We'll record a deed at the register of deed's office."
The trial court entered judgment finding as fact that at the time of the death of the decedent the revocable trust was funded with a bank account only. The trial court concluded that: "The deed from grantor David R. Robotham remained within the control of the grantor David R. Robotham until his death, was never delivered so was not a legally valid deed." (Emphasis added). The opinion first observes that "[t]he exchanges between the parties covering the subject in controversy are in writing, and manifest no ambiguity which would require resort to extrinsic evidence, or the consideration of disputed fact. Their construction is, therefore, for the [C]ourt." ... . It "'is a fundamental rule that, when interpreting ...trust instruments, courts must give effect to the intent of the ...settlor, so long as such intent does not conflict with the demands of law and public policy.'" (citations omitted)
The defendant beneficiary argued that the "present case 'does not fit the fact pattern' of previous cases regarding 'delivery of a deed from a grantor to a third—party grantee[.]' The rule that '"the creation of a trust must involve a conveyance of property,"' Bissette v. Harrod, N.C. App. , 738 S.E.2d 792, 799 (2013) (quoting In re Estate of Washburn, 158 N.C. App. 457, 461, 581 S.E.2d 148, 151 (2003)), does not contemplate the situation in the present case, in which the settlor and the trustee are the same individual. In Washburn, this Court has acknowledged that a conveyance is not required where settlor and trustee are the same individual. Id. ' "Aside from the situation in which a settlor of a trust declares himself or herself trustee, separation of the legal and equitable interests must come about through a transfer of the trust property to the trustee."' Id. (citation and footnotes omitted)
The analysis in the opinion is sufficiently succinct to quote in its entirety rather than risk clouding the doctrine by attempting to restate or paraphrase it:
It is well-established that, "[i]n creating an inter vivos trust, the creator [settlor] and the trustee may be one and the same person." Ridge v. Bright, 244 N.C. 345, 348, 93 S.E.2d 607, 610 (1956). Given that the settlor of a trust and the trustee are the same person in the present case, the trial court's reliance on delivery of the document labeled "North Carolina General Warranty Deed" is misplaced. There are multiple ways in which a valid trust may be created, for example:
(1) Transfer of property by a settlor to a person as trustee during the settlor's lifetime or by will or other disposition taking effect upon the settlor's death[; or]
(2) Declaration by the owner of property that the owner holds identifiable property as trustee unless the transfer of title of that property is otherwise required by law.
N.C. Gen. Stat. § 36C-4-401 (2013), see also Restatement (Second) of Trusts § 17 (1959), Restatement (Third) of Trusts § 10(c) (2003) (a trust may be created by "a declaration by an owner of property that he or she holds that property as trustee for one or more persons") . In order to create a valid trust by transfer, under section (1) above, title to the trust property has to be transferred by settlor to the designated trustee(s) to hold for the benefit of the intended beneficiary. Bland v. Branch Banking & Trust Co., 143 N.C. App. 282, 287, 547 S.E.2d 62, 66 (2001)
However, transfer of the trust property is not a requirement for creating a valid inter vivos trust by declaration -under section (2) above. Because the settlor of a trust and the trustee may be the same person, it follows that "where the settlor and the trustee are the same person, no transfer of legal title is required, since the trustee already holds legal title." 76 Am. Jur. 2d Trusts § 46. The Restatement Second provides illustrations of ways a valid inter vivos trust may be created by declaration:
a. Declaration of trust. If the owner of property declares himself trustee of the property, a trust may be created without a transfer of title to the property. Illustration:
1. A, the owner of a bond, declares himself trustee of the bond for designated beneficiaries. A is trustee of the bond for the beneficiaries.
So also, the owner of property can create a trust by executing an instrument conveying the property to himself as trustee. In such a case there is not in fact a transfer of legal title to the property, since he already has legal title to it, but the instrument is as effective as if he had simply declared himself trustee.
2. A, the owner of Blackacre, executes, acknowledges and records a deed conveying Blackacre to A as trustee for a designated beneficiary. A is trustee of Blackacre for the beneficiary.
Restatement (Second) of Trusts § 17, Comments (1959) . This method of creating a valid trust - declaration of trust - is recognized in Ridge, 244 N.C. at 349, 93 S.E.2d at 611 ("when the owner of personal property, in creating a trust therein, constitutes himself as trustee, it is not necessary as between himself and the beneficiary that he should part with the possession of the property"); see also N.C. Gen. Stat. § 36C-4- 401(2) (2013) (a trust may be created by "[d]eclaration by the owner of property that the owner holds identifiable property as trustee unless the transfer of title of that property is otherwise required by law"); Wiggins Wills & Administration of Estates in N.C. § 23:3 (4th ed.) ("Where the property owner declares himself trustee, delivery is not required.")
"The principle that a trust may be created by a declaration contained in a separate instrument, or in several instruments, other than the deed conveying the legal title, provided they have sufficient relation to each other and construed together evidence such trust, is generally recognized." Peele v. LeRoy, 222 N.C. 123, 125, 22 S.E.2d 244, 246 (1942) . "'Express' trusts are those trusts intentionally created by the direct and positive act of the settlor, by some writing, deed, or will, or an oral declaration[.]" Williams v. Mullen, 31 N.C. App. 41, 45, 228 S.E.2d 512, 514 (1976) (quoting 76 Am. Jur. 2d, Trusts § 15, p. 263)
The Court notes here that the record on appeal presents the trust agreement and the deed, duly executed in front of a notary and quotes: "Where there are two or more instruments relating to a trust, the instruments should be construed together to effectuate the settlor's intent." Davenport v. Central Carolina Bank & Tr. Co., 161 N.C. App. 666, 672, 589 S.E.2d 367, 370 (2003) (citations omitted); see also Smith v. Smith, 249 N.C. 669, 675, 107 S.E.2d 530, 534 (1959) ("All instruments executed at the same time and relating to the same subject may be construed together in order to effectuate the intention.")
The Court also quotes the express statement of intent that appears in the trust agreement"
I am creating and funding this trust in an effort to grant Sabrina Burnett exclusive use and enjoyment of my personal residence located at 225 Seacrest Drive, Wrightsville Beach, North Carolina for her remaining lifetime should she survive me. It is my intent and desire that Sabrina Burnett be provided with uninterrupted and exclusive use and enjoyment of the residence for as long as she shall live. Furthermore, it is my desire that the trust bear the costs associated with maintaining the home, including but not limited to, the costs associated with taxes, insurance, association fees (if any), pest control, assessments and necessary repairs. I have attempted to fund the trust with sufficient working capital to cover the expenses associated with the residence for a reasonable period of time. (Emphasis in original)
The deed contained the following declaration that the settlor held the real property as trustee:
WITNESSETH, that the Grantor, David R. Robotham, also known as David Ray Robotham (the "Settlor"), for a valuable consideration (non—taxable consideration) paid by the Grantee, the receipt of which is hereby acknowledged, has and by these presents does grant, bargain, sell and convey onto the Grantee [David R. Robotham, Trustee, David R. Robotham Revocable Trust] in fee simple, all that certain lot or parcel of land situated in the Town of Wrightsville Beach, County of New Hanover, State of North Carolina, and being more particularly described as follows:[.]
Because the two contemporaneously executed documents relating to the trust were in evidence, were clear and consistent, the Court did not need to decide whether either document, standing alone, would have been sufficient to create a valid inter vivos trust by declaration.
It is here that the language of the opinion could have been clearer. The Court observes that the decedent made no promise to convey legal title directly to the defendant beneficiary. "Rather, the record plainly shows that [the decedent] retained legal title to the real property at issue. It is well-established that the trustee holds legal title to trust property. In re Estate of Pope, 192 N.C. App. 321, 335, 666 S.E.2d 140, 150 (2008) ("There is no dispute that legal title to the trust assets was lodged in the trustees."); see also Strong's N.C. Index 4th, Trusts and Trustees, § 236 (2008)." Fair enough if a bit confusing. Where the opinion drifts in to murky water is when the it states: "The documents at issue in the present case did not convey, as in transfer or deliver, legal title, because the [decedent] already held legal title to the real property. Legal title remained vested in the [decedent]."" This is clearly in error in that there was a valid conveyance of title to the trustee; "A deed, though not recorded, vests title from its delivery, as against the grantor and all but his creditors and purchasers from him for value." Warren v. Williford, 148 N.C. 474, 62 S.E. 697 (N.C., 1908).
When the court goes on to say: "We can locate no North Carolina law requiring the transfer of property when creating an inter vivos revocable trust by declaration. Other jurisdictions clearly do not require any transfer of title when creating a trust by declaration. See Taliaferro v. Taliaferro, 260 Kan. 573, 580, 921 P.2d 803, 809 (1996)" the cited language disposes of the issue as to whether there was delivery of the deed, which is in and of itself 'property', not in whom title resided.
When the court goes on: "('Where, as here, the settlor and the trustee are the same person, no transfer of legal title is required, since the trustee already holds legal title.'); Estate of Heggstad, 16 Cal. App. 4th 943, 950, 20 Cal. Rptr. 2d 433, 436 (1993) ('authorities provide abundant support for our conclusion that a written declaration of trust by the owner of real property, in which he names himself trustee, is sufficient to create a trust in that property, and that the law does not require a separate deed transferring the property to the trust') . Transfer is, of course, required when the settlor and trustee are not the same person. N.C.G.S. § 36C-4-401(1)." it seems top lose its focus, The Trustee as such is a different legal person than the settlor, though represented by the same individual. And as to a transfer of land in North Carolina, we still have to deal with the Statute of Frauds, N.C.G.S. Section 22-2 requiring it to be in writing.
The Court of Appeals arrived at the correct conclusion in holding that "the trial court erred in concluding: "The trust was never funded with the real property[.]" When considered together, the trust agreement and the deed created a valid trust by declaration, which included the real property." We also believe that they conveyed the land from the settlor to the trustee irrespective of recording as delivery was established by the cited doctrines. We are not clear that there "was not a requirement that Mr. Robotham execute a deed transferring title from himself to himself as trustee."
The Court effectually comes to this conclusion when the opinion states:
In addition, assuming arguendo transfer of the real property was required, that transfer would still have to have been from Mr. Robotham to Mr. Robotham, as trustee. The deed was executed by Mr. Robotham, as grantor, to himself, as "Trustee, David R. Robotham Revocable Trust." This deed was executed by Mr. Robotham simultaneously with the trust agreement. Once these documents were executed by Mr. Robotham, the David R. Robotham Revocable Trust was created, and the real property became part of the corpus of that trust. There is nothing in these two documents evincing any intent on the part of Mr. Robotham to prevent the trust from taking immediate effect, or prevent title to the real property from being immediately delivered to himself, as trustee. Mr. Robotham's intent is clear from the documents, and manifests "no ambiguity which would require resort to extrinsic evidence, or the consideration of disputed fact." Atkinson, 225 N.C. at 124-25, 33 S.E.2d at 670.
Because there exists no ambiguity in the documents, it is irrelevant that Mr. Inlow informed Mr. Robotham after the fact that the transaction would not be "done" until the deed was recorded. At that point, the revocable trust had already been created, the real property was already part of the corpus, and Mr. Robotham was already trustee. Had Mr. Robotham wanted to revoke the trust, he could have done so, but any misunderstanding about the nature of the trust, its corpus, or Mr. Robotham's authority under the trust, could not alter the nature of the trust itself.
"A conveyance of land can only be by deed." New Home Bldg. Supply Co. v. Nations, 259 N.C. 681, 683, 131 S.E.2d 425, 427 (1969) (citation omitted) . "The word 'deed' ordinarily denotes an instrument in writing, signed, sealed, and delivered by the grantor, whereby an interest in realty is transferred from the grantor to the grantee." Gifford v. Linnell, 157 N.C. App. 530, 532, 579 S.E.2d 440, 442 (2008) (citation omitted) . Recordation of the deed was not required to effect transfer of title in this instance, even assuming transfer of title between Mr. Robotham and Mr. Robotham as trustee was required, or possible, in the creation of a trust by declaration. Washburn, 158 N.C. App. at 461, 581 S.E.2d at 151 ("'Aside from the situation in which a settlor of a trust declares himself or herself trustee, separation of the legal and equitable interests must come about through a transfer of the trust property to the trustee.'") (citation and footnotes omitted); see also Ridge, 244 N.C. at 349, 93 S.E.2d at 611 ("when the owner of personal property, in creating a trust therein, constitutes himself as trustee, it is not necessary as between himself and the beneficiary that he should part with the possession of the property")"
The last was correct with regard to parting with possession of the deed in order to effectuate delivery. As it was not necessary to the holding, this part of the opinion should be regarded as dubious with respect to the implicit exception to the Statue of frauds.Carmichael v. Lively, (13-1429) August 5, 2014
The renunciation at issue in this case was not registered in the office of the Register of Deeds until two years after its filing with the Clerk of Superior Court pursuant to N.C.G.S. Section 31B-2. A rescission of the renunciation and a deed of the subject property to the heir's spouse was filed and respectively recorded prior to registration of the renunciation with the Register of Deeds negating the intervening executor's deed. While the facts as reported might have supported undue influence and capacity issues, they were not raised at the summary judgment hearing and could not be considered on appeal. The trial court's summary judgment order finding the renunciation ineffective was affirmed by the Court of Appeals.
Fortner v. Hornbuckle, (13-1209) August 5, 2014
The opinion resolving this appeal analyzes at great length the clarity of the Jury instructions delivered by the trial court and finds them insufficiently clear. Of greater import to property professionals, is the impact of a retained interest on the status of a conveyance as a completed gift for gift tax purposes. The validity of the conveyances was not challenged, rather the personal representatives were seeking recovery of the proportional estate taxes incurred by reason of the gift not having been completed prior to death. The court found that the evidence suggesting that the donee would have returned the deeds if requested was sufficient to go to the jury on the question of the donor's intent to retain control. Citing Penninger v. Barrier, 29 N.C. App. 12, disc. review denied, 290 N.C. 552, (1976) for the doctrine that among other evidence, acquiescence by the grantees in such intention was evidentiary. It does not appear to trouble the court that this is a complete logical fallacy. The willingness of a donee to return a gift upon request is only an indication of the donee's generosity, affection or discretion and reflects nothing whatsoever upon the intent of the donor at the time the gift was made. It is interesting to observe that while our culture is replete with socially inappropriate terms of approbation for someone who asks for the return of a gift, we have no such term for the compliant donee, which suggests that such action is held in far higher regard than the former.
The opinion also addressed the adequacy of the jury instructions regarding funds held as a joint account with right of survivorship. The instruction needed to clearly state that the jury would have to first determine whether the remaining assets of the Estate were sufficient to satisfy all claims against the Estate as required by N.C.G.S. Section 28A-15-10 before deciding whether the plaintiffs were entitled to recover any or all of the funds contained in the joint checking account.
In order for property to qualify for a Like-Kind Exchange, both the relinquished property sold and the replacement property acquired must meet certain requirements. One fundamental requirement is that both properties must be held for use in a trade or business or for investment. Property used primarily for personal use, like a primary residence or a second home or vacation home, or property that is held for sale in a business does not qualify for like-kind exchange treatment. At times, a taxpayer may wish to convert business property to personal use or may have an opportunity to sell the property soon after its acquisition as either relinquished or replacement property. We are often asked what the IRS considers an adequate "holding" period in such instances. An initial response would be that the IRS only sets out two explicit holding periods.
Under § 1031(f)(1), the non-recognition provisions of § 1031(a) do not apply to an exchange between related parties if either of the parties sells the exchanged property within 2 years of the exchange. In October 2004, Congress passed the American Jobs Creation Act, of which Section 840 effectively closed a loophole that previously allowed taxpayers to take advantage of the absence of guidelines. The Act amended Section 121(d) (relating to special rules for exclusion of gain from sale of principal residence) by adding at the end the following new paragraph:
(10) Property Acquired in Like-Kind Exchange – If a taxpayer acquired property in an exchange to which section 1031 applied, subsection (a) shall not apply to the sale or exchange of such property if it occurs during the 5-year period beginning with the date of the acquisition of such property.
It is to be expected that when the question arises, taxpayers desire a decisive answer and advisors often seize upon the 2-year period specified for related parties to satisfy that desire. In such cases one would suppose that a 12-year holding period would certainly be considered long enough for property to be considered to be "held for investment." However, as shown in Allen v. U.S. 113 aff'd2. d 2014-2262 (2014), the intent of the taxpayer controls the characterization rather than the length of the holding period. In Allen, the taxpayer admitted that he originally acquired the property to develop it and resell it. However, when the IRS denied Capital Gains treatment, he argued that he changed his mind and decided not to develop the property and subsequently continued to hold it "for investment" until he could sell it.
This case illustrates that the intent of a taxpayer of whether to hold property for resale or to hold for investment, is a critical issue as to its characterization when capital gains treatment or a qualified like kind exchange tax deferral is challenged by the IRS. As taxpayers typically do not document their thinking, proving a question or fact such as the taxpayer's intent may prove difficult. Courts take into account a number of factors to determine if property was held for sale or for investment. The Tax court here, citing Pool v. Commissioner, 251 F.2d 233, 236 [1 AFTR 2d 428] (9th Cir. 1957) (quoting Rollingwood Corp. v. Commissioner, 190 F.2d 263, 266 [40 AFTR 1006] (9th Cir. 1951)) lists several factors that a court should consider in determining whether property was held by a taxpayer primarily for investment or for sale to customers in the ordinary course of the taxpayer's trade or business, including:
(1) the nature of the acquisition of the property;
(2) the frequency and continuity of sales over an extended period;
(3) the nature and the extent of the taxpayer's business;
(4) the activity of the seller with respect to the property; and
(5) the extent and substantiality of the transactions.
The opinion citing appropriate authority notes that each case is decided upon its particular facts, that the presence of any one or more of these factors can determine the outcome of a particular case and that the taxpayer bears the burden of proving that the IRS's determination is wrong. Importantly, in considering the first of the listed factors, the tax court quoting Pool observes: ""[w]hile the purpose for which the property was acquired is of some weight the ultimate question is the purpose for which the property is held."" In Allen, the court found that the taxpayer failed to adequately prove that he changed his intent to "holding the property for investment." In deciding the case in favor of the IRS, the Tax Court found the following evidence persuasive:
The Court citing Tibbals v. United States, 362 F.2d 266, 273 (1966), acknowledged that the taxpayer's intent with respect to a property can change over time and that the intent during the period prior to the sale is the critical. It determined that the taxpayer failed to furnish any evidence that adequately demonstrated when, how, or why his intent changed.
The Allen case demonstrates the need to preserve solid evidence that documents and clearly establishes proof of a taxpayer's assertions that their intent with regard to an exchange property changed from an intent to sell property to an intent to hold for investment. While a short holding period might cause an adverse characterization by the IRS with regard to the taxpayer's intent, this case clearly demonstrates that the opposite is not implied by a lengthy holding period.