Content area
Full Text
This article explores some of the tax and nontax advantages of moving a trust, including (1) the logistics of transferring the situs of a trust and (2) drafting suggestions that will provide flexibility for future situs changes.
Many would assume that a trust is administered, taxed, and governed pursuant to the laws of the state in which the trust was created. Perhaps it is this assumption that has given rise to the idea that a trust has an identifiable "situs" or home base. In reality, the concept of trust situs is not so simple. A trust can be administered in one state, governed by the laws of another state, and subject to tax in multiple states.
Many articles and commentaries have described such trusts as having more than one situs. Rather than referring to such trusts as having multiple situs states, it may be more appropriate to think of a trust's "situs" as being the state whose courts have primary jurisdiction over the trust, and to acknowledge that often a trust is governed by or taxed by states outside its situs jurisdiction. Regardless of terminology, it is clear that fiduciaries and drafters alike should not presume that the laws of the state of the grantor's domicile will apply for all purposes. In fact, during the administration of a trust, it is frequently beneficial to reevaluate and even take action to change the laws applicable to a trust.
Changing the tax situs of a trust
State income tax may be a significant expense for trusts that accumulate income as well as for trusts that incur large capital gains. For example, assume Client Smith funds an irrevocable trust (the Smith Trust) with the stock of the Smith family business. Over time, the business greatly appreciates in value and is about to be sold by the Smith Trust at a substantial gain. It would be wise to ascertain prior to the sale whether the Smith Trust would be subject to state tax on the capital gain, and to determine whether anything can be done to reduce or eliminate the tax liability. To do this, one must ascertain which types of trusts will be subject to tax in Client Smith's domicile, and decide what changes can be...