ESTATE AND GIVING
Review the locations that may provide a leg up when it comes to flexibility, asset protection and tax minimization.
You have your pick of where to establish a trust. While creators and beneficiaries can live anywhere, the trustee – whether friend, family or a corporation – generally must operate in the same state as the trust. Not a major hurdle to overcome.
Four states have laid solid groundwork for favorable trust legislation, namely Alaska, Delaware, Nevada and South Dakota. New Hampshire, Tennessee and Wyoming, among others, are striving to make a case as well.
So which state’s the fairest of them all? That depends on the features you value most.
More than half the states allow trusts to last either indefinitely or hundreds of years. Extending the lifetime of trusts helps insulate trust assets from creditors, as well as transfer (e.g., gift and estate) taxes. Since this is a very complicated area and there are still limits and legal challenges to the idea of a “forever” trust, talk to your advisor and trust attorney to better understand the potential risks.
Pro tip: For even more flexibility, consider states that also have “decanting” statutes that allow a trustee to remove or modify trust provisions by “pouring” or distributing assets into a new trust.
For asset protection
A handful of states (19 at last count) have established asset protection trust statutes that may safeguard your property from liability, divorces, civil judgments and creditors. The laws vary, but it’s worth considering one of these states when establishing your trust.
You may not be surprised that the big four made the list, along with Connecticut, Indiana, Hawaii, Michigan, Mississippi, Missouri, New Hampshire, Ohio, Oklahoma, Rhode Island, Tennessee, Utah, Virginia, West Virginia and Wyoming.
To minimize taxes
Several states don’t tax undistributed trust income: Alaska, Florida, New Hampshire, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming. However, other states offer more nuanced tax mitigation.
The tax picture is based on a multitude of factors, so professional tax advice is the way to go here. States that tax trusts on factors other than the creator’s legal domicile provide much more flexibility in changing the trust’s residence for state income tax purposes. Keep in mind, too, that dynasty trusts can limit estate taxes as long as the assets remain in trust.
Pro tip: Since the laws and rankings change often, consider giving your trustee the flexibility to change the trust situs (domicile) to a more state-tax friendly location at some point in the future.
This chart, based on research from estate attorney Steven Oshins, provides a good summary of favorable trust legislation, but there’s no substitute for professional advice as you navigate complicated waters.
Shaded states have no state income tax.
Sources: retirementwatch.co; ultimateestateplanner.com; fdic.gov; The New York Times; oshins.com; Raymond James research
*As of September 2020. 11th Annual Domestic Asset Protection Trust State Rankings Chart; 8th Annual Dynasty Trust State Rankings Chart; 7th Annual Trust Decanting State Rankings Chart; 6th Annual Non-Grantor Trust State Income Tax Chart.Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.