Kevin Wong, CPA
08.16.21 | T&E Chat
You and your spouse have decided that the both of you are done with the city life and now want a change of scenery. There is a town in another state that both of you absolutely adore and have long planned to retire there. You decide this is the perfect time for the move. However, while looking through your assets, you realized you had a trust set up in your current state of residence. What would happen to the trust then if you decide to move?
There have been many people moving or contemplating a move to another state in recent years. With the onset of the pandemic, this has sped up the timeline for many. Though trusts may have already been set up in the original jurisdiction, it may be desirable to move the trust to a more favorable jurisdiction. Before moving a trust across state lines, one must consider the limitations, risks, and benefits of doing so and obtain professional advice.
Nuts and bolts to consider when moving a trust
Different from an individual where they typically would pay taxes to their state of domicile, a trust, on the other hand, would pay taxes to its state of situs. Moving a trust to another state means changing its situs from one state to another. Moving a trust to a state with more favorable tax laws could be desirable but should not be the only reason for considering a move. There should be other reasons, such as:
- Stronger protection against creditors for the beneficiaries,
- Improved investment performance by the trustee due to favorable trust laws,
- Reducing fees and administrative expenses, and
- Extending a trust’s duration.
Can the trust’s situs be easily changed?
For a revocable trust, changing the situs should be a relatively simple matter. It may be possible simply by modifying it. Another option would be revoking the trust and establishing a new one in the new jurisdiction.
It may not be as simple a matter for an irrevocable trust. Whether it can be moved or not would depend, in part, on the language in the trust document. For many trusts, the trust documents will specify the state laws under which it is governed, and moving the trust would not change this. However, some trusts expressly prohibit the trustee or beneficiaries from moving the trust to another jurisdiction.
If the trust does not have established procedures for changing its situs nor a situs designated by the trust documents, then the trust situs usually depends on several factors, including:
- the applicable state laws,
- domicile of the settlor,
- state of residence of the trustee,
- where the trust is administered,
- location of the beneficiaries, and
- location of real estate property held by the trust.
If the trust document does not expressly authorize the trustee or beneficiaries to move the trust to a new state as its situs, it would first have to establish a new trust in the new jurisdiction. It would then transfer the assets or merge the existing trust into the new trust.
Whether a move is allowed will depend on the trust’s terms and applicable state laws. Court approval or consent from all beneficiaries may also be required.
It may be very beneficial from a tax perspective to move a trust to a state with low or no state income taxes and possibly to a state that does not have a state estate/inheritance tax (important if you are a high-net-worth individual). Looking beyond tax savings, one would still need to assess the limitations, risks, and overall benefit of doing so. Laws governing trusts are complex and vary from state to state. We encourage you to have a discussion with your trusted advisor to assess the risk and benefits of moving your trust.
Questions? I can be reached at 212.331.7441 | firstname.lastname@example.org or contact your Berdon advisor
Kevin Wong is a Senior Tax Manager in the Personal Wealth Services Group of Berdon LLP with nearly 10 years of professional experience. He works closely with high net worth individuals on matters involving their personal income tax, family businesses, and fiduciary, gift and estate taxes.