Secrets for successfully decanting trusts

Moving a trust to another state can extend its life or reduce a client's income taxes

Jan 14, 2014 @ 4:35 pm

By Darla Mercado

+ Zoom

What do you do when you have an irrevocable trust in a state with hefty income taxes or weak creditor protection laws? Create a new one in a new jurisdiction.

Decanting an irrevocable trust is an estate-planning technique that's picking up steam among attorneys and estate planners. Essentially, decanting a trust involves distributing the assets from an old one to a new one with more favorable terms that will better meet the needs of the client. Currently, about 20 states have statutes that permit the technique.

There are a number of planning scenarios that could call for decanting: For instance, a case in which a trust has staggered distributions to the beneficiary at different ages. Perhaps it's better to decant and create a dynasty trust so that multiple generations can benefit from divorce, creditor and bankruptcy protection, according to Steven J. Oshins, an attorney at the Law Offices of Oshins and Associates.

Moving the assets of a trust from one state to another also falls under decanting.

William R. Fleming, managing director in the personal financial services division of PricewaterhouseCoopers, pointed to three reasons why clients might consider this strategy.

First, clients may want to move a trust because of situation in which certain state rules could be interpreted in favor of the trustee or the beneficiary. “Rights under state law may enhance or supersede the powers within the trust document itself,” said Mr. Fleming. “Depending on the state, it may be more trustee or beneficiary friendly.”

A second reason to move a trust: Some states have favorable laws on perpetuities for dynasty trusts. In Florida, for instance, trusts can last as long as 360 years.

Finally, state income taxes are a driver in the decision: Clients might want to move a trust to a jurisdiction with no state income taxes.

There are a series of steps clients and their estate planners should consider when it comes to picking out a state.

First, make sure the trust has a provision that permits the trustee to move to another jurisdiction. If the trust can be moved, then there should be no problem making that move in writing and ensuring that a co-trustee or sole trustee in the new jurisdiction is appointed, Mr. Oshins noted.

If the trust document doesn't have a provision in it that permits a move, then depending on whether the current jurisdiction allows decanting, the client can decant the trust to include a provision that will allow the move — and then move the trust.

Though having the provision makes it easy to move the trust, it doesn't necessarily protect against state long-arm statutes that will continue to tax the trust even after it's in a new jurisdiction, said Mr. Oshins. For instance, some states might instead tax the trust based on the residency of the grantor who set it up. Regardless where that trust ends up, it's still subject to the state income taxes of the grantor's residence.

In that case, “you're better off moving out of the state if you want to set up a large trust,” said Mr. Oshins. “Perhaps buy a summer home in a no-state-income-tax jurisdiction and then make a large gift into your trust.”

Another thing to watch out for when evaluating states is what the move could mean not just for the creator of the trust, but the trustee and the beneficiary from a tax perspective. “What's common is if we have trustees move to California, we get them to resign [their trusteeships] right away,” said Mr. Fleming. “California will tax the trustee if they are a resident.”

When decanting a trust, clients also must bear in mind how they will report it on a tax return and ensure they know where any applicable tax payments are going, as well as the new trust ID number, Mr. Fleming said.

At the beginning of this year, Mr. Oshins launched his first annual trust decanting state rankings chart, a list of 22 jurisdictions ranked based on seven criteria:

1. Does the state permit decanting in its statutes?

2. Does the state statute permit the decanting of trusts with ascertainable standards for distributions — a standard that defines the property as being used for the health, education, maintenance and support?

3. Does the state statute require the trustee to send notice to the trust's beneficiaries?

4. Does the state statute permit a trust with an ascertainable standard to be decanted into a discretionary trust (which provides greater credit protection)? And does the statute permit the trustee to remove a mandatory income interest (a provision that requires an income distribution to a beneficiary)?

5. Does the state statute permit the trustee to decant into a trust that empowers the beneficiary to assign assets to someone who wasn't already a beneficiary of the first trust?

6. Is the state a favorable jurisdiction for dynasty trusts?

7. Is the state a favorable jurisdiction for domestic asset protection trusts?

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Sep 26

Webcast

Investing 2017: Industry at a Crossroads

The advice industry is at a unique inflection point, as the way clients are investing has changed dramatically: Technology has evolved, access to innovative products has changed, and the active vs. passive debate continues to rage on. Advisers... Learn more

Featured video

INTV

Women's retirement needs and the opportunity they present for advisers

Assistant managing editor Lorie Konish speaks with contributing editor Mary Beth Franklin about the unique planning considerations for women as they prepare for income needs later in life.

Latest news & opinion

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

Is LPL's deal sweet enough for NPH's 3,200 reps and advisers?

They will have to decide if the signing package they are being offered by LPL makes sense. A lot is hanging in the balance.

Eduardo Repetto to leave Dimensional Fund Advisors

Gerald O'Reilly, currently co-CIO, will take over as co-CEO with David Butler.

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

7 ways advisers fixed clients' biggest financial dilemmas

Sometimes it takes creativity, along with knowledge and outside help, to get a client out of a jam.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print