When we think of trust-friendly states, the first ones that typically come to mind are South Dakota, Delaware, or even Nevada. But there’s another state emerging as one of the top few states for trust formation and services, the "Nevada of the East": TENNESSEE.
In the past, states like Tennessee stipulated that a trustee could only administer the trust as it was written, with courts being the only recourse for change. However, exciting newer laws have empowered trustees based in Tennessee with far greater flexibility and advantages in trust administration.
As you’re about to discover, these shifts put Tennessee firmly in the top few trust states. Especially when it comes to asset protection, income tax savings, and decanting (modifying the trust, to improve clarity and administrative flexibility ).
Whether you’re an advisor, estate planner, or trustee looking to take advantage of Tennessee’s significant asset protection and tax savings benefits—or you wish to help clients convert existing trusts to the more favorable Tennessee situs administrative flexibilities—this article will help you discover how to do so quickly and affordably.
3 Significant Advantages
of Tennessee Trusts
Tennessee brings a host of new advantages to advisors looking to maximize trust service offerings and benefits for their clients.
Tennessee offers greater flexibility in a variety of areas, including choosing non fiduciary advisors such as investment manager, distribution advisor and trust protector.
According to Steve Oshins, publisher of the highly regarded State Rankings for Trust Services, Tennessee has become a top 3 state for asset protection.
One reason is because Tennessee permits the creation of “self-settled” asset protection trusts (“APTs”), which are designed to protect client assets from creditors. Out-of-state residents can select Tennessee as the jurisdiction for their APTs. APTs are irrevocable, however, certain rights and privileges (such as receiving distributions) can be retained by the grantor.
Ultimately, this results in very favorable and strenuous asset protection (creditors are barred from reaching the assets within the later of two years after transfer or six months after the creditor knows or reasonably knows of the transfer).
Clients in high liability professions, such as physicians, could use Tennessee's asset protection provisions to their advantage. Your client could establish a Self-Settled Asset Protection Trust and fund it with a portion of their wealth. The Grantor could still enjoy distributions from the trust but after two years, those assets would be off limits to any potential creditors.
You could use Tennessee's asset protection advantages in combination with (or in lieu of a prenuptial agreement) to protect all assets you bring to the marriage or individually acquire while in the marriage.
Another potential example: your teenage dependent is driving and is hit from behind, causing a crash into another individual, who incurs significant injuries. Your child is wrongfully blamed as the cause, and the other victim attempts to sue you for damages. Having a significant portion of your assets in a Tennessee trust can greatly reduce any potential award that could be granted in such an instance.
Major Tax Advantages
Tennessee has no personal or trust ‘state’ income tax. The retained (undistributed) income and net capital gains of TN situs trusts (those drafted under TN law) are subject to federal income tax only. Thus, out of state beneficiaries can avoid their home state income tax on income and gains generated and retained by their TN situs trust. Of course, if trust income and / or gains are distributed to out of state beneficiaries, the distributions must be included in their personal federal and state income tax returns.
This is an area where Tennessee trusts have an advantage, because they avoid state income tax on compounded, undistributed income and net capital gains. — thanks to legislation stating that out-of-state beneficiaries of Tennessee trusts are not subject to tax on trust income and gains.
This tax advantage alone could save trust beneficiaries tens of thousands of dollars annually, and quickly pay for the modest trust formation fee. (More about the low cost to get started in Tennessee in just a moment.)
For instance, let's say a California resident with $500,000 in income forms a trust in Tennessee, with two million dollars in the trust account. The trust earns taxable income of $100,000 over the course of the year. If the income is distributed to the beneficiary, the tax rate would be 37% in federal taxes, and 13.3% in California state taxes, leaving only $49,700 income after taxes.
However, if the trust is set up to retain and compound the income in the trust, the fiduciary income tax rate would be about 35% —and because the income is retained in the Tennessee trust there would be no California state income tax – a savings of about $15,000. That savings is far greater than the cost of creating and administering the trust in the first year alone.
Tennessee also has a highly favorable “decanting statute.” Decanting is a process whereby assets from an irrevocable trust are moved to a new one with updated provisions. There are many potential reasons for decanting, which include:
Improved administrative provisions
Granting a power of appointment
Need to postpone distributions
Enhanced asset protection
The ability to decant a trust gives you significant flexibility, and Tennessee is one of the top states for decanting.
How to Leverage Tennessee’s Jurisdictional
Benefits with a Small Initial Commitment
With Tennessee increasingly becoming a “hot” state for trust services and formation, the demand is also increasing rapidly.
The state income tax benefits alone justify switching many trusts over from a less tax-friendly state to Tennessee.
Coupled with it becoming among the top few states for asset protection and a top decanting state, there are even more reasons to leverage favorable Tennessee trust law .
The challenge is that many Tennessee traditional trust companies or trust departments of banks create high barriers to entry with complex pricing models that aren’t in your best interest.
Thus, as an advisor, you’re forced into an uncomfortable pricing model in order to fully leverage Tennessee’s significant jurisdictional benefits.
Counsel Trust - a New Leader in
Tennessee Trust Services
Counsel Trust was founded in 2002 to primarily provide directed trust services to outside investment advisory firms. . Counsel Trust now oversees about $1.6 billion in total assets.
Over the years it has become evident to Counsel that just a handful of states were offering the most updated, flexible and advanced trust statutes.
Upon deeper research, it became increasingly apparent that of all the states, Tennessee offered the ‘best in class’ laws and regulations among the group of trust friendly ‘directed trust’ states.
The Counsel team also recognized that the Tennessee trust regulators (Tennessee Department of Financial Institutions or TDFI) was — in addition to being very thorough and careful with granting trust charters — quite business friendly.
In September of 2018, Counsel opened a new office in Nashville, Tennessee, after converting its trust charter from Pennsylvania to Tennessee, one of the few “trust-friendly” states in America.
Counsel offers directed trust administration services, powered by SEI’s trust back office accounting system. They also work directly with advisory firms to provide private label trust services, with stellar levels of support and guidance.
Counsel Trust is a rapidly emerging leader in Tennessee-chartered trust services.