taxation of trusts and the vital importance of selecting the proper trust situs
TRANSCRIPT
TAXATION OF TRUSTS AND THEVITAL IMPORTANCE OF SELECTING THE PROPER TRUST SITUS
David Warren, President & CEOBridgeford Trust Company
TAXATION OF TRUSTS AND THEVITAL IMPORTANCE OF SELECTING THE PROPER TRUST SITUS David Warren, President & CEO
Bridgeford Trust Company
“The choice of a state in which to establish a trust is as critical as the
decision to create one.”
Elizabeth Mathieu, President of Neuberger & Berman
INTRODUCTION•Trust laws vary significantly from state to state.• A few states are “in a race” to establish the most progressive laws
in an attempt to capture trust business.•Tier 1 Trust Jurisdictions*
oSouth DakotaoDelawareoNevadaoAlaska
*Trusts & Estates Magazine, January 2014 Issue
WHAT ARE THE FACTORS CONSIDERED WHEN DETERMINING TOP TIER TRUST JURISDICTIONS?•Asset Protection
•Taxation
•Privacy Rules
•Rule Against Perpetuities
•Modern Trust Laws
ASSET PROTECTION•Hot topic over the past 10 years and it is not going away. • Very compelling planning tool for high risk individuals and
pre-marital planning.• Only a few states allow for self-settled asset protection
trusts including South Dakota and Delaware. •Fraudulent conveyance (look-back):
• South Dakota – 2 years.• Delaware – 4 years.
TRUST MATTER PRIVACY• Very important issue for high net worth families and closely held
business owners.
•South Dakota – Total Seal Forever.
•Delaware – Seal for 3 years then Open to Public.
•Pennsylvania – Open to Public.
MODERN TRUST LAWS•Directed Trusts vs. Delegated Trusts
•Trust Protector
•Reformation and Decanting
•Control
DYNASTY TRUST• Definition – A trust that is not subject to the rule against
perpetuities and, therefore, lives forever.
• Driven by state law.
• South Dakota law allowed for the first Dynasty Trust in the nation in1983 by abolishing the rule against perpetuities.
DYNASTY TRUST• Dynasty Trusts avoid federal taxation on trust assets forever because
there is never a forced distribution of assets.
• Very important planning tool that protects family wealth over generations.
• Not all states have abolished or Amended the Rule Against Perpetuity, clearing the way for dynasty trusts.
• Dynasty trust States are not created equally.
TRUST TAXATION• Income retained in a trust is taxed in most states at applicable
income tax levels.
• A handful of states do not have an income tax and, therefore, do not tax retained income in trusts, including South Dakota and Delaware.
• There is a simple, compelling and often untapped tax planning opportunity by properly situsing a trust in a state that does not have an income tax or tax trusts.
TRUST TAXATION• Resident Trust – A trust with situs and trust administration in a
jurisdiction other than where the settlor, beneficiaries, or co-trustees reside.
• Sourced v. Non-Sourced undistributed trust income.
• Clear trend in case law across the country denying state authority to tax retained income in a resident trust.
TRUST TAXATION• At least three states have generated appellate court case law indicating that it is a
violation of the Commerce Clause of the United States Constitution and due process for a state to tax a resident trust properly sitused and administered in another state.
McNeil v. Commonwealth of Pennsylvania, Pennsylvania Commonwealth Department of Revenue
Residuary Trust A U/W/O Fred E. Kassner v. the New Jersey Division of Taxation Kimberly Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue
TRUST TAXATION• A compelling tax planning opportunity exists in certain states for
dynasty trusts to avoid federal income taxation through a forced distribution AND avoid state taxation on undistributed income.
• The opportunity to create a trust in, or move an existing trust to a jurisdiction that has dynasty trust provisions and does not tax undistributed income clearly will have a very substantial impact on the value of trust assets over generations.
TRUST TAXATION• Under modern trust laws, moving existing trusts to a more favorable trust
Jurisdiction is relatively simple and does not usually require Court involvement.
• Many states, such as Pennsylvania, have rules in place to easily and efficiently change trust situs.
• Trust protector or trustee direction written direction to change situs.• Engage decanting statute.• Petition the Court.
WHAT IS DECANTING? Decanting is the distribution of assets from an irrevocable trust into
a new trust with different, and presumably more desirable and flexible provisions, leaving the unwanted provisions in the original trust and not binding on the trust assets.
Decanting has emerged as a powerful planning tool for planners relative to adapting family wealth plans to changes in the wealth planning landscape and family dynamics, without the need for Court intervention.
INSURANCE PREMIUM TAX• States levy an insurance premium tax upon insurers, both domestic and foreign,
for the privilege of engaging in the business of providing insurance in the state.
• Most states Insurance Premium Tax is between 150 and 250 basis points.
• South Dakota’s Insurance Premium tax is the lowest in the nation at 8 basis points.
• The purchase of insurance through a South Dakota Trust will result in substantial premium tax savings.
THE VITAL IMPORTANCE OF CHOOSING THE CORRECT TRUST JURISDICTION
