Transferring assets to a trust to reduce tax liability and achieve other goals is a common and straightforward estate planning strategy. Where a trust is set up, however, can impact its effectiveness. Because states have varying trust laws, some jurisdictions may be more favorable for a trust’s situs (or location) than others.
You may have the option of moving your trust to a more favorable jurisdiction, but doing so isn’t as straightforward. In fact, without help from your estate planning advisor, taking this action can be fraught with risks.
Act of moving Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for revocable trusts. In fact, it’s possible to change situs for a revocable trust by simply modifying it.
If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved. If the trust document doesn’t designate a situs or establish procedures for changing situs, then the trust’s situs depends on several factors. These include applicable state law, where the trust is administered, the trustee’s state of residence, the domicile of the person who created the trust, the location of the beneficiaries and the location of any real property held by the trust.
Depending on applicable law, it may be possible to move a trust by replacing the current trustee with a trustee in the desired state and moving the trust’s assets, books and records to that state. The actual process of moving the trust may entail creating a new trust to which the existing trust’s assets are transferred, merging the existing trust into a new trust or modifying the existing trust to designate the new state as its situs.
Benefits and perils of moving There are wide-ranging benefits to moving your trust to another jurisdiction. For example, you may be able to avoid or reduce state income taxes on the trust’s income and capital gains. In addition, you perhaps can take advantage of trust laws that allow the trustee to potentially improve investment performance, extend the trust’s duration or obtain stronger creditor protection for beneficiaries.
On the flip side, moving a trust presents several potential traps for the unwary. If your trust is grandfathered for generation-skipping transfer (GST) tax purposes — for example, if it became irrevocable on or before Sept. 25, 1985 — moving the trust may be considered a trust modification that could trigger GST tax liability. If you move a trust from a state that permits perpetual trusts to one that doesn’t, you may inadvertently limit the trust’s duration. Also, states generally tax all income derived from a source within the state. If your trust holds real estate or interests in a business located in such a state, that state may tax the income regardless of the trust’s situs.
Seek help before taking action Before deciding whether to move your trust to a different jurisdiction, consult your estate planning advisor. Trust laws are complex, and a mistake can result in unintended consequences.
*Randall A. Denha, j.d,, ll.m., principal and founder of the law firm of Denha & Associates, PLLC with offices in Birmingham, MI and West Bloomfield, MI. Mr. Denha continues to be recognized as a “Super Lawyer” by Michigan Super Lawyers in the areas of Trusts and Estates; a “Top Lawyer” by D Business Magazine in the areas of Estate Planning and Tax Law; a Five Star Wealth Planning Professional and a New York Times Top Attorney in Michigan. Mr. Denha can be reached at 248-265-4100 or by email at firstname.lastname@example.org