By: Eve Zurakowski
Trust creation is an important part of wealth transfer planning. Trusts can reduce the size of your taxable estate while your family members still benefit from assets held in the trusts you create. However, setting up a trust that serves your goals can be difficult. You need to choose the right trust format and be selective about the location in which you establish the trust. In this post, we will discuss several factors impacted by the “situs,” or location, of the trust.
What kind of assets will be held in your trust, who is the trustee, who is the beneficiary, how should the income or principal be distributed, and in what state the trust will be formed are all questions to consider and discuss with your tax advisor and estate attorney. However, the location in which the trust is formed is a key consideration. Trust “situs” refers to the state where the trust is established, and whose laws will govern the trust. The ideal situs will minimize tax liabilities and offer maximum asset protection and administrative flexibility.
When we look at different state laws, we need to consider these factors:
State Trust Income Tax Rates - Investigate how each state taxes trusts. A few states do not have income taxes on non-grantor trusts – AK, FL, NV, SD, TX, WA, and WY. Other states might tax trusts differently depending on their income sources, on the residence of the beneficiary, on the residence of the trustee, or on the residence of the trust.
Asset Protection – State laws vary in the ability to protect the assets in a trust from creditors or others (such as former spouses or non-beneficiary family members). Some states allow adding a “Spendthrift Clause” to limit or prevent access to trust assets. Parents without confidence in their children’s fiscal management skills may want to add such a clause to any trusts they create.
Trustee Selection – The trustee plays a major role in the trust; he or she manages the trust investment and distribution. Therefore, it is important to choose the right person as trustee of the trust. Sometimes, you might want to have more than one trustee for different tasks in trust management. This is called a direct trust; some states allow this, but not all.
Ability to Move or Modify Trust (Decanting) – Sometimes a trust needs to be moved to another state or have the trust agreement changed. Some states allow “decanting” to change the trust agreement. It provides flexibility for the trust if changes occurs.
Trust Privacy – One may not want to disclose a trust agreement to minors. Some states allow trust agreements to be sealed for a certain period, but most states do not have this option.
Perpetual Trust – If you have a “dynasty trust” where you want the trust to benefit more than two generations, consider the allowable duration of the trust agreement. Some states allow trusts to be perpetual, some states only allow trusts to exist for a certain period.
Setting up a trust that matches the family goals and benefits family members can be a daunting task, and there are many factors to consider in choosing the right state to establish your trust. The Tax Warriors® at Drucker & Scaccetti can guide you through this decision-making process so you can set up the trust that lets you best care for your family. Contact us if you are considering creating a trust. We’ll help you navigate the process with ease.