By: Randall A. Denha, J.D., LL.M.
Transferring assets to a trust to reduce tax liability and achieve other goals is a common and straightforward estate planning strategy. Where a trust is set up, however, can impact its effectiveness. Because states have varying trust laws, some jurisdictions may be more favorable for a trust’s situs (or location) than others. You may have the option of moving your trust to a more favorable jurisdiction, but doing so isn’t as straightforward. In fact, without help from your estate planning advisor, taking this action can be risky. Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for revocable trusts. In fact, it’s possible to change situs for a revocable trust by simply modifying it. If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved.
Situs is the place you choose as your trust’s “home” or its state of “incorporation.” The question of trust situs is much like the choice a professional athlete or retiree faces when deciding where to make her new home, or where a business owner decides to incorporate. The athlete or retiree may choose Florida in lieu of California or New York, because Florida does not have a state income tax. A business owner may choose to incorporate in Nevada or Delaware versus a state with less favorable business or tax laws.
Sometimes a change in Trust situs is warranted. There are several reasons to change the situs of the trust: state taxation, location of the assets, location of the Trustee(s) and location of the beneficiaries.
Trusts can play a significant role in family wealth management. When establishing a trust, or when considering moving a trust, there are important considerations about which state jurisdiction may be the most favorable to the family’s long-term mission and vision for their wealth. For example, you may be able to avoid or reduce state income taxes on the trust’s income and capital gains, take advantage of trust laws that allow the trustee to potentially improve investment performance, extend the trust’s duration or increase the creditor protection for beneficiaries. Since different states offer different opportunities, one should carefully assess these differences before selecting a “situs” for a trust. Sometimes straying from home may be the best choice for realizing the mission and vision you have for your wealth due to each state’s unique set of laws.
The most common reason to move a Trust is taxes. Of course the “tax tail doesn’t always wag the dog,” so there could be many other reasons to move a Trust. The ability to delay, defer and possibly avoid state income taxes and/or transfer taxes provides additional opportunity for tremendous growth of the assets of a trust. As stated, there are other important state law considerations when selecting a situs, including creditor protection, the ability to create a self-settled (or asset protection) trust, and privacy. While many states have created a trust environment that is favorable to long-term planning, taking all of the factors listed above into account (taxes and other state law considerations), four states frequently are named as the top preferred domestic trust jurisdictions: Nevada, Alaska and Delaware and South Dakota.
Recently, after a client of mine passed away having a trust drafted under Michigan law, his sole beneficiary and trustee (a Florida resident) asked if the trust could be moved to Florida to save Michigan state income taxes and to ease in the administration of the Trust itself. The answer was yes. This change was warranted by the trust documents and a welcome change for the beneficiary who seldom travels to Michigan.
THIS ARTICLE MAY NOT BE USED FOR PENALTY PROTECTION. THE MATERIAL IS BASED UPON GENERAL TAX RULES AND FOR INFORMATION PURPOSES ONLY. IT IS NOT INTENDED AS LEGAL OR TAX ADVICE AND TAXPAYERS SHOULD CONSULT THEIR OWN LEGAL AND TAX ADVISORS AS TO THEIR SPECIFIC SITUATION.