State legislatures are still enacting trust law enhancements to provide greater protection for your client’s wealth.
As more wealthy families cross borders to protect assets, they choose to set up personal trusts in states other than their own to take advantage of favorable trust laws.
According to recent data, 72 percent of U.S. households with more than $1 million in investment assets use trusts as a key component to their estate planning.
The main reasons to cross borders are:
• Some states don't tax assets held in a trust, while distributions might be taxable in your home state.
• Trust codes in some states seek to protect assets from lawsuits and creditors.
• Some states allow "dynasty trusts" which permit future generations to avoid estate taxes.
Over the last few years a growing number of states have revised their trust codes to add features that provide for creditor protection, low or no state income tax and ability to establish a dynasty trust which allows for assets to pass to heirs for generations to come.
Nevada recently revised its trust code to provide for directed trusts. Directed trust statutes provide for an ability for the trustee to appoint an investment advisor to manage assets within the trust. This provides for low trustee fees and minimal trustee liability and provides flexibility to the investment manager ultimately benefiting the client.
Steven J. Oshins, an estate planning attorney and author of several trust laws in Nevada says, "Nevada's new directed trust statute is critical to high net worth investors." He adds, "Nevada now offers everything Delaware offers and more because of the combination of its 365-year dynasty trust law, two-year statute of limitations on self settled asset protection trusts and no taxation."
Alaska revised its trust code to make it more difficult for divorcing spouses to grab trust assets. State trust laws vary widely and clients should compare jurisdictions for features that best fits their needs. Some of the most important trust features include whether or not a state has income tax.
When setting up a trust arrangement having a trust in a state that has no income tax has a definite economic financial impact on your client's family. Therefore, no state income tax is amongst the most important.
Dynasty trusts are important beginning next year when estate taxes resume at a 55 percent tax rate. The general rule is the longer the period of time that the trust can exist the better it is.
Other factors include the number of trust providers or independent trust companies in the state which is an indication of whether a trust center is beneficial to a client and the time zone from New York.
But going out of state for a trust may not always make financial sense, especially for smaller trust accounts. Since the most favorable jurisdictions might be in states where you don't know an individual trustee, you might need to hire a corporate trustee, which can cost about between ½ of 1 % to 1% or less of trust assets per year, depending on the size of the trust.
Moving an existing trust may also involve additional fees and may require court approval, depending on how the trust was originally drafted and state law.
With great states spread around the country, one important factor to consider when seeking a home for a trust is the avoidance of state income taxes. Trust experts say one of the first factors to look for when examining where to set up a trust is whether the assets are subject to state taxes.
The idea is to let trust investments grow for as long as possible free of state taxes, which can save significant sums of money, especially in high-tax states such as New York and California. (Beneficiaries, however, may be taxed on distributions, depending on whether their home state has an income tax.) Alaska, Delaware, Florida, Nevada, South Dakota, and Wyoming are attractive because they don't impose any taxes on trust assets.
The following chart, the Best States for Trusts gives you a thumbnail view of which states are best. It is divided into three tiers Tier 1 being the best, Tier 2 being good and Tier 3 being marginal. Given that Alaska, Delaware, Nevada, South Dakota are in Tier 1 they are probably your best choices for trust business.
The Best States for Trusts
Tier
State*
State Income Tax
Directed Trust Statute
Asset Protection Trust
Dynasty Trust Ability
Number of Trust Cos.
Time Zone (from NY)
1
No
Yes
Yes
1000 yrs.
3
(-) 4
1
Residents
Yes
Yes
Perpetual
32
(-) 0
1
No
Yes
Yes
365 yrs.
26
(-) 3
1
No
Yes
Yes
Perpetual
39
(-) 1 / 2
2
No
Yes
No
360 yrs.
9
(-) 0
2
Residents
Yes
Yes
Perpetual
19
(-) 0
2
No
Yes
Yes
1000 yrs.
2
(-) 2
3
Yes
Yes
Yes
1000 yrs.
7
(-) 2
3
Yes
No
No
Perpetual
3
(-) 2
3
Residents
No
No
Perpetual
2
(-) 0
3
Yes
No
Yes
1000 yrs.
2
(-) 2
3
Residents
No
No
Perpetual
4
(-) 1
*States: links to State Trust Statutes Data: January 2010
© 2010 TheTrustAdvisor.com (781) 319-7748
States bidding for trust business often will not tax those assets they are betting on increased economic activity which will bring other prosperity to the state such as job creation, corporate tax revenue collected from trust companies, corporate tax assessments from the trust companies.
It is for this reason that state legislatures continue to sharpen their pencils and enact new laws designed to attract wealthy baby boomers and their parents' estates for future generations. Trust accounts have been an important port of the investment landscape.
For wealth management organizations advisors can gain additional income and provide more value to their service by bundling trust services within investment management. Last year several advisory firms launched their own trust companies in order to be better positioned to provide these services.
This includes Wealth Advisors Trust Company and Dominion Trust Company in South Dakota, both new launches targeting wealthy clients from a wealth-friendly trust state. This trend was featured in an Investment News Article last summer, More Advisory Firms Expected to Start Trust Companies.
Trusts can be created for a variety of other purposes including avoiding probate, passing on a family home to heirs, protecting money from creditors, caring for disabled child or even providing for a pet after one dies. Trusts continue to grow in popularity thanks to the aging population and more aggressive trust marketing by financial firms and the concerns about maximizing trusts' growth performance.
Asset protection trusts have gained in popularity as marketing vehicles for advisors over the last several years with Alaska, Delaware, Nevada and South Dakota being the most popular jurisdictions. Doctors, business executives and other professionals have become increasingly interested in these trusts, advisors say. With these you transfer assets into a trust run by an independent trustee who can give your client distributions from time to time. These trusts if set up properly are in most cases able to keep the assets of the trust out of reach of creditors.
Jerry Cooper, senior editor, The Trust Advisor Blog.
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