What you should consider before starting a trust in a particular state.
Wealthy individuals have long favored trusts to fulfill a variety of purposes within their estate plans.
“Trusts provide a framework to allow individuals to leave a legacy for family members and to fund charitable causes and cherished projects in a tax efficient manner. Trusts can and often are established and funded during an individual’s lifetime or can be established at death," says Laura Mandel, president of The Northern Trust Company of Delaware. “In addition, unlike a will, a trust is not a public document that is required to be filed in probate court. Consequently the details of the trust’s beneficiaries, terms and assets remain private.”
The establishment of a trust involves both tax and non-tax considerations. Many clients choose to locate trusts in certain states – Delaware and Nevada, for example – to capitalize on the income tax advantages those states can provide for trusts.
Mandel shares what clients should consider before establishing a trust in a particular state.
Wealth: Are laws governing trusts the same in each state?
Mandel: No. Each state has its own laws and regulations, and like any business or personal matter, some states are more progressive and flexible than others. For example, state laws regarding trusts’ terms vary. Some states allow third parties to serve as “advisors” with responsibility for specific duties such as investments – duties typically held by the trustee of a trust. State laws on taxation of trusts vary also. Delaware does not tax income accumulated or capital gains held within a trust for nonresident beneficiaries. Nevada imposes no income tax on trusts.
Wealth: Can individuals establish trusts in states where they don’t live?
Mandel: An individual may establish a trust in any state, and many clients have created trusts in multiple states to serve a variety of purposes. The key is to achieve one’s overall goals.
For example, trusts established in Delaware may remain confidential for a period of time. This could be attractive for an individual who has named a young beneficiary but wants to ensure that the beneficiary matures to a certain age before receiving notice of the trust.
In Nevada, trusts may last up to 365 years, and in Delaware trusts can be perpetual. This long-term approach allows the trust to leverage gift, estate and generation-skipping tax exemptions to ensure the wealth is distributed over many, many generations. The current gift, estate and generation skipping tax exemptions are at historically high levels and are adjusted for inflation each year under current law.
We advise clients to consider current needs and long-range plans in all aspects of their lives: lifestyle, capital assets, family and philanthropy. Our Life Driven Wealth Management approach helps clients identify core intentions; trusts can be structured to reflect those values and desires.
Wealth: Is it complicated to set up an out-of-state trust?
Mandel: Regardless of the unique benefits, the requirements for establishing an out-of-state trust are fairly simple: The trust must be legally created and administered in that state.
Establishing the trust can be done with a qualified attorney who specializes in trusts and wealth transfers in the desired state. Once engaged, this person will collaborate with any attorneys and other advisors working on the overall estate plan.
Administration may be handled by a company that’s located solely in the state or by a company, such as The Northern Trust Company, with physical locations in many states and separate subsidiaries in Delaware and Nevada.
As with any trust, perhaps the most challenging requirement for individuals is following through on the transfer of assets to the trust. A trust is simply an empty vessel that offers few benefits unless it holds assets. Northern Trust, working together with clients’ advisors, can help determine which assets are best suited for transfer, with tax matters factoring into the equation.
Wealth: How complicated are out-of-state trusts for beneficiaries?
Mandel: Regardless of where the trust is established, issues around the distribution of its assets generally stem from the level of communication shared by the person who created the trust. Some individuals are open with beneficiaries regarding how the trust is structured and why it is structured in a particular manner. Others are reluctant to share details with beneficiaries out of concern that the concept of future wealth may change present behaviors.
Understanding that concern, we explain to clients that there are ways to discuss potential trust distributions without getting into the details. This allows them to share their vision for the estate plan with the beneficiaries, but with the added context of how the trustee's role can help meet the client’s long-term legacy goals.
In addition, the relationship with the trustee should include regular update meetings. This allows the trustee, who will be the point person for the trust in relation to beneficiaries, to thoroughly understand the client’s wishes and desires for their legacy.
Wealth: Are there disadvantages to setting up a trust in another state?
Mandel: No, as long as the trust documents are properly drafted and valid, and the trust is properly administered in the state. Some states, such as Delaware and Nevada, have trust and estate attorneys who are more experienced in working with trusts for nonresidents. So interactions between attorneys in those states and attorneys in other states tend to be smoother.