Why Location Is Everything When It Comes To Trust Planning
This week’s guest blog features a discussion of how and why the location of a trust established for US-based clients is critical. Thanks to Dennis Delaney of Hemenway and Barnes for this thought-provoking précis on the topic.
There is a good chance that as success takes shape, family business owners will find themselves investigating trusts that can help them safeguard and grow their assets. To effectively advise them, we must understand their needs as leaders in both the business and the family. The type of trust and where it is sited will be important factors when ensuring clients meet their goals.
The location of a trust is more important than many realize. For some reason, while decisions around lifestyle, real estate investment, and business formation all stress “location, location, location,” trust planning does not get the same treatment.
It should. Advising clients on where to establish a trust means understanding potential tax advantages and specific limitations that some states place on trusts. Factors to consider include: how the trust will be taxed, who will maintain control of trust assets, who will make distribution decisions, whether and how to make changes to an existing trust and unique features that certain states offer which might fit a family’s goals.
Taxes are almost always at the forefront of the discussion. Many states, such as New York, California, North Carolina, Illinois, New Jersey, Pennsylvania, Massachusetts and Indiana, levy state income taxes on non-grantor trusts (that is, trusts that bear their own taxes) that reside locally. In Massachusetts, for example, trusts must be established as “non-resident” to avoid Massachusetts income tax. This can be accomplished by selecting a trustee located in a jurisdiction outside Massachusetts, even if the donor lives in-state. Additionally, the laws governing whether a trust “resides” in a particular jurisdiction vary from state to state, making for a confusing patchwork of rules.
Looking for more confusion? Different types of trusts are allowed depending on the state as well. Quiet Trusts, for example, allow donors to specify that the trustee is not obliged (or not even allowed) to notify the beneficiary of the existence of a trust, let alone its value or terms. These vehicles are growing in popularity, but they are not permitted in all states. Likewise with donors looking for a long-term trust that will benefit a large number of generations to come – they may want to establish the trust in a jurisdiction that has eliminated (or never had) the “rule against perpetuities,” which would force the trust to terminate at a future point.
For some, establishing a foreign “off shore” trust might be a suitable option. These trusts are often set up with asset protection as a primary goal and are income tax neutral, meaning that the income tax is passed through the establisher of the trust. If a foreign trust is drafted so that it pays its own income tax, transferring assets to it is treated as a sale for US tax purposes triggering a capital gains tax.
Whether living stateside or abroad, there is no one size fits all solution for our clients, and trust law is steadily adapting to that reality. Different jurisdictions have different levels of flexibility to suit the breadth of trust clients. Understanding the governing laws which impact how a family protects its wealth will ensure that each trust is built on a rock solid foundation – and in the right location — from the very beginning.
About the contributor:
Dennis Delaney is a partner at Hemenway & Barnes, LLP in Boston, Massachusetts, where he represents individuals and their businesses in estate and succession planning and serves as their trustee and executor. He is also a managing director at Hemenway Trust Company, a non-depository trust company based in New Hampshire. For more on this topic, read a longer paper by Dennis entitled “The state of your trust: where should a trust be sited?” Dennis can be reached at [email protected].