Location, location, location could be just as important for a trust as it is for a real estate deal.
States have varying rules for trusts, so it can make a big difference where the trust is formed and where the trustee and grantor are located, according to Hemenway & Barnes LLP, a trust and estate law firm in Boston that also manages $3.5 billion in assets for ultra-high-net-worth families.
When approaching setting up a long-term, irrevocable trust, many high-net-worth families both think and act locally, rather than weighing the options presented in the different states that could better carry out their trust goals, says a white paper prepared by Hemenway & Barnes, The State of Your Trust: Where Should a Trust be Sited?
Several factors should be considered when deciding where to form the trust, the white paper says.
“A financial advisor with a client who wants to set up a trust should look for a state with modern, flexible trust laws,” says Dennis Delaney, partner at Hemenway & Barnes. “It may be that siting the trust in the donor’s home state is the best decision but it may not. Your trust need not live in the same state as you.”
A variety of kinds of trusts can be created. They are often created to minimize estate taxes, but “it is also important to think through how the trusts will be taxed for state income-tax purposes. Some states apply income tax to trusts, which can be avoided by establishing a trust as a non-resident. Often times, selecting an out-of-state trustee will be enough to qualify as a non-resident, but the rules vary from state to state. For example, the location of the trust beneficiaries or trust assets may also play a role.”
In some cases, the creator of the trust may want to have different people administer parts of the trust. Some states allow that; others don’t. Some states also allow trust protectors who oversee the trustee and can even have the right to dismiss the trustee.
“You might want that trust protector to be one of your lineal descendants if the trust is to continue for future generations,” says Delaney. Some states allow such an arrangement, others do not.
Similarly, the creator of the trust may want to change the trust provisions if the family or business circumstances change. Some states allow this through a procedure called decanting, in which the assets of a trust are distributed into a new trust. Some states prohibit decanting, others limit it.
In some instances the trust creator may want to keep the existence of a trust secret from the beneficiaries for a period of time. State laws vary on whether recipients can be kept in the dark and for how long.