What is trust “situs” and why does it matter?
The residence of a trust is called the trust “situs” and it may be determined by a combination of factors, including the terms of the trust, the location of the trust settlor, the location of the trustee(s), and the location of beneficiaries. Situs matters because different states have different rules applicable to trusts – and some rules are more favorable than others, depending on your specific circumstances and estate planning goals.
Can I choose my trust’s situs, or am I forced to use my state of residency?
There is a common misconception that one must situs their trust(s) in the jurisdiction of their residency. To the contrary, one can “cherry pick” the best jurisdiction for them given their goals and circumstances, and frequently that is not their residency jurisdiction. As long as the trust is established correctly and has sufficient connections to the chosen situs (e.g., a trustee in that jurisdiction), it can be governed by laws of your choice. By analogy, for decades anyone who created a U.S. corporation did so in Delaware, not because the incorporator resided in Delaware but because Delaware had the best laws for corporations. Similarly, trust setlors can select the best jurisdiction for them given their circumstances.
What are some important considerations that may vary by jurisdiction?
Different states, or jurisdictions, apply different rules to trusts. Choosing the appropriate situs will depend on your personal circumstances and goals. Some of the most common factors weighed in choosing trust situs include:
- Taxation. Some states subject undistributed trust income to state level estate taxation; some states do NOT. Whether your trust income will be subjected to such taxation depends on the situs, which, in turn, depends on a combination of factors. Choosing the appropriate situs could result in substantial tax savings.
- Applicable Perpetuity Period. The “perpetuity period” refers to the length of time a trust can continue – at the end of the perpetuity period the trust must distribute its assets outright to the then beneficiaries. Thus, if your intention is to benefit subsequent generations, this is an especially important consideration; the longer the applicable perpetuity period, the longer the trust can serve beneficiaries – and the greater the benefit conferred. Funds held in trust can provide creditor protection and insulation from transfer taxation, such as estate and gift taxes. Some states have unlimited, or extremely long, perpetuities periods; other states subject trusts to much shorter perpetuity periods. Choosing the appropriate situs could result in a longer lasting trust, with greater financial and protective benefit for generations yet to come.
- Asset and Creditor Protection. One advantage of trust-based planning is that, when done properly, it can offer high levels of asset protection from various forms of financial liability, such as creditor protection, protection from divorce, and protection from civil judgments, both for the trust settlor beneficiaries. Case law and statutory regulation differs state to state regarding the type and degree of asset and creditor protection afforded by various types of trust-based planning; some states provide substantially more protection against the ability of creditors to pierce through to trust assets or offer shorter “lookback” windows for transfers to trusts. Choosing the appropriate situs could result in greater levels of asset and creditor protection, again both for the trust settlor(s) and beneficiaries.
- “Decanting” refers to the ability to pour assets out of an irrevocable trust and into a new trust, with terms or situs that better suit the current circumstances and better serve the beneficiaries. “Directed Trust” rules refer to the ability to give someone other than the trustee (generally called a “trust protector”, “trust advisor”, or “trust director”) power over some (or all) aspects of trust administration. Decanting, and using Directed Trusts generally increases the flexibility of a trust to adapt to changes in circumstances and can prove very useful in protecting settlor’s intent and the best interests of the beneficiaries. Different states have different rules and regulations regarding decanting and directed trusts; with some states offering more favorable options. Choosing the appropriate situs could result in substantially more flexibility.
What jurisdictions might serve me best?
Choosing the best situs for your trust-based planning needs depends on a number of factors and requires careful attention to, and familiarity with, the rules of various jurisdictions. Alaska, Delaware, Nevada, South Dakota (in alphabetical order) have long been considered favorable jurisdictions, but other states, including New Hampshire, Ohio, Tennessee, and Wyoming (in alphabetical order) also have a lot to offer. We have the knowledge and experience necessary to help you determine the appropriate situs, after careful consideration of your unique needs.
If you would like to discuss whether a certain jurisdiction will help you accomplish your family’s legacy planning goals, we would be honored to speak with you.