Changing a Trust's Location (Situs)
Hi, thank you for tuning in to today's Emerald Gem, which stands for Get Educated in Minutes. I'm Jeff Wolken, National Director of Delaware Trust Planning for Wilmington Trust Emerald Family Office and Advisory and your host for today's podcast. In today's Gem, I'm going to answer the questions, why is the location of a trust or its situs important and how can I change my trust's situs to receive additional benefits?
I want to start by noting that many of the people I work with to review their trust related needs are surprised to find that their trusts are located in a specific state, which has an impact on how the trust is taxed and how the trust is enforced. Whether you are the person who created a trust, or you are a trust beneficiary, or both, your trust is generally located in one of the United States.
Moreover, you and your trust may be in different states. A New York resident, for example, may create a Delaware trust or move an existing trust situs to Delaware. Consequently, it may be important to review your trust's current situs and seek opportunities to improve your trust's performance through a change in situs.
A common test for determining a trust situs is locating the principal place of administration. Since a trustee is tasked with carrying out the administrative duties related to ongoing trust administration, the location of the trustee is a convenient proxy for the principal place of administration, and therefore, the trust situs.
Similar to how the laws in your home state provide you with personal protections and enforcement through local police and courts, a state's trust laws protect trust assets from beneficiaries and creditors, while sophisticated trustees and courts enforce those laws. Consequently, allowing your trust to live in a state with stronger asset protection laws helps protect trust assets.
Moreover, some states offer a so called domestic asset protection trust, where someone may protect assets they've contributed in trust for their own benefit. Finally, the states differ in the tools available to limit information passing to beneficiaries and the use of designated representatives to shield children and younger generations from the potential negative consequences of knowing significant trust assets are held for their benefit.
This level of privacy is not available in most states where a trust beneficiary typically must receive a copy of the trust agreement and regular account statements. Regardless of your personal home state of residence, you may create a trust outside your home state and most existing trusts may be moved into another state.
Consequently, there are a few straightforward steps you can follow to have your trust administered in a more favorable situs to mitigate your home state's taxation of trust income or to apply another state's favorable trust laws. Some of the common reasons people seek to change the trust status are to mitigate applicable income taxes, apply more flexible trust administrative laws, increase the asset protection afforded their trust, or for added privacy.
The opportunity to minimize or eliminate state income tax using a personal trust varies among the states. Each state has unique laws regarding how the state may tax a trust. For example, a New Jersey resident may be able to mitigate New Jersey tax if passive investment income is accumulated in a trust which has its situs in a state that does not tax this income, like Florida, which does not have a state income tax, or like Delaware, which provides a full exemption from tax under specific circumstances.
By properly structuring a trust to sever the connection back to your home state, neither Delaware nor your home state would tax the income accumulated in the trust. Another opportunity that comes with having your trust citus in a favorable state is the ability to divide up the role of the trustee and incorporate family advisors who may direct the trustee regarding trust investments, distributions, or other aspects of trust administration, a so called directed trust.
First, change your trustee to a trustee who is a resident of the favorable state. If you have already created a trust, or you are the beneficiary of a trust, it may be as simple as changing from a trustee located in your home state to one in another state. Because the situs of a trustee generally follows the location of the trustee, changing the location of the trustee to Delaware, for example, may eliminate or defer paying state income taxes.
A second step is appointing a successor trustee in a trust friendly state like Delaware. During your lifetime, some trusts are best administrated by you or other family members. These include irrevocable life insurance trusts, or ILITs, and revocable lifetime trusts, or REV trusts, used to avoid the probate process at death.
These trusts generally become their own taxpayer, or a non grantor trust, following the grantor's death. At this same time, the trust may receive significant value from the death benefit of a life insurance policy or significant assets following settlement of the estate which require professional management.
Appointing a successor corporate trustee in a tax friendly state like Delaware will offer professional management of these assets at the same time ongoing state taxes may be mitigated or deferred. Finally, a word of caution. For trusts with co trustees where advisors direct the trustee regarding how to carry out the administration of a trust, the location of these co fiduciaries may impact the situs of the trust for purposes of state income taxation and determining which state's law apply for purposes of asset protection.
Consequently, it is important to work with professional advisors familiar with these issues to ensure that you understand the situs of your trust and whether that location meets your needs. Thanks again for joining us today. Please contact your Wilmington Trust advisor if you have any questions about the location or situs of your personal trust.
And the options to change the site is to receive additional benefits. We are happy to help you. See you next time.
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