PORTFOLIO

Choosing a Domestic Jurisdiction for a Long-Term Trust (867)

Tax Management Portfolio, Choosing a Domestic Jurisdiction for a Long-Term Trust, No. 867, explores two important developments in trust law that emerged late in the 20th century.

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DESCRIPTION

Tax Management Portfolio, Choosing a Domestic Jurisdiction for a Long-Term Trust, No. 867, explores two important developments in trust law that emerged late in the 20th century. The first was the recognition of the tax and nontax benefits of creating long-term or “dynasty” trusts. The second was the recognition of the benefits that a client may achieve in many situations by creating trusts in a state other than the state of his or her residence.
After covering some preliminary matters, this portfolio summarizes the federal income and transfer tax attributes of long-term trusts. It next discusses a client's freedom to choose a jurisdiction for a new trust, the ability of courts to disregard that selection, and factors for clients to consider in making such a choice. The portfolio then addresses ethical and practical concerns, relocating existing trusts, and the use of dynasty trusts by nonresident aliens. The Worksheets contain illustrations, state law charts, and a sample trust form.
This portfolio is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.
This portfolio may be cited as Nenno, 867 T.M., Choosing a Domestic Jurisdiction for a Long-Term Trust.


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AUTHORS

RICHARD W. NENNO, ESQ.
Richard W. Nenno, Esq., is a Managing Director and Trust Counsel in Wealth Advisory Services at Wilmington Trust Company, Wilmington, Delaware. Mr. Nenno has over three decades of estate planning experience, is admitted to the practice of law in Delaware and Pennsylvania, and is a Distinguished Accredited Estate Planner. Prior to joining Wilmington Trust in 1982, he was an associate in the Estates Department of the Philadelphia law firm of Ballard, Spahr, Andrews & Ingersoll.
Mr. Nenno is a cum laude graduate of Princeton University with an A.B. degree from the Woodrow Wilson School of Public and International Affairs, and he earned his J.D. degree from Harvard Law School.
Mr. Nenno is recognized as a national speaker and published authority on estate planning issues. He has spoken at the University of Miami Heckerling Institute on Estate Planning, the ALI-ABA Planning Techniques for Large Estates Conference, the IBA/ABA International Wealth Transfer Practice Conference, the Notre Dame Tax and Estate Planning Institute, the AICPA Advanced Estate Planning Conference, the NYU Institute on Federal Taxation, and the Southern California Tax and Estate Planning Forum. He is a member of the Delaware State Bar Association (Past Chair: Estates and Trusts Section); Estate Planning Council of Delaware, Inc. (Past President); American Bar Association, Section of Real Property, Trust & Estate Law (Chair: Non-Tax Estate Planning Considerations Group) and Section of Taxation; Philadelphia Bar Association.
Mr. Nenno is a contributor to Asset Protection: Domestic & Int'l Law & Tactics (2009), and co-author of 868 T.M., Domestic Asset Protection Trusts.

TABLE OF CONTENTS

Portfolio Description

Authors

Technical Advisors

Description

Detailed Analysis

I. Initial Considerations

A. Background

B. Advisability of Creating Trusts

1. Reasons to Create a Trust

2. Reasons Not to Create a Trust

C. Advisability of Creating Perpetual Trusts

1. Reasons to Create Perpetual Trusts

2. Reasons Not to Create Perpetual Trusts

D. Advisability of Creating Trusts in Another Jurisdiction

1. Reasons to Create Trusts in Another Jurisdiction

2. Reasons Not to Create Trusts in Another Jurisdiction

E. Market Trends and Observations

1. Market Trends

2. Observations

II. Federal Tax Implications of Perpetual Dynasty Trusts

A. Introduction

1. Scope

2. Initial Observations and Planning Considerations

B. The Exempt Dynasty Trust

1. Introduction

2. Illustrations

C. The Grandfathered Dynasty Trust

1. Introduction

2. Exercising a Limited Power of Appointment

D. The Nonexempt Dynasty Trust

1. Introduction

2. Federal Transfer Tax Advantages of Leaving Nonexempt Assets Outright

a. Annual Exclusion Gifts

b. Previously Taxed Property Credit

c. Marital Deduction

d. GST Exemption

e. Qualified Disclaimers

3. Federal Transfer Tax Advantages of Keeping Nonexempt Assets in Trust

a. Tax-Free Gifts Are Possible

b. Tax May Be Avoided

c. Longer Tax Deferral

d. Tax on Double Skip Is Lower

e. Total Tax Might Be Lower

f. Assets Will Be Protected from Gift Tax and Reinstatement of Other Taxes

4. Choosing Between the Federal Estate Tax and the GST Tax

E. Federal Income Tax Implications

F. Tax Dangers when Exercising Powers over Trusts

1. Introduction

2. The GST Regulations

a. Grandfathered Dynasty Trusts

(1) Exercise of Limited Power of Appointment by Beneficiary

(2) Other Modifications

b. Exempt Dynasty Trusts

(1) Exercise of Limited Power of Appointment by Beneficiary

(2) Other Modifications

c. Nonexempt Dynasty Trusts

3. Sections 2041(a)(3) and 2514(d) - The Delaware Tax Trap

a. Introduction

b. History

c. Analysis

d. Application to Nonexempt Dynasty Trusts

e. Application to Grandfathered Dynasty Trusts and Exempt Dynasty Trusts

f. Definition of "Power of Appointment"

III. Clients' Ability to Choose a Jurisdiction For a Trust

A. Introduction

B. Restatement Approach

1. Introduction

2. Type of Asset

3. Type of Trust

4. Type of Question - Definitions

a. Validity

b. Administration

c. Construction

d. Restraints on Alienation of a Beneficiary's Interest

5. Type of Question - Effectiveness of Designation

a. Validity

(1) Trust of Movables Created by Will

(2) Trust of Movables Created Inter Vivos

(3) Substantial Relation to the Trust

(4) Strong Public Policies

(5) Most Significant Relationship

(6) Trust of Land Created by Will

(7) Trust of Land Created Inter Vivos

b. Administration

(1) Trust of Movables Created by Will

(2) Trust of Movables Created Inter Vivos

(3) Trust of Land Created by Will

(4) Trust of Land Created Inter Vivos

c. Construction

(1) Trust of Movables Created by Will

(2) Trust of Movables Created Inter Vivos

(3) Trust of Land Created by Will

(4) Trust of Land Created Inter Vivos

d. Restraints on Alienation of a Beneficiary's Interest

(1) Trust of Movables Created by Will

(2) Trust of Movables Created Inter Vivos

(3) Trust of Land Created by Will

(4) Trust of Land Created Inter Vivos

6. Type of Question - Summary

7. Pour Overs by Will

C. UTC Approach

D. Suggested Language

IV. Beneficiaries' Ability to Defeat Client's Selection of a Jurisdiction For a Trust State

A. Introduction

B. Obstacle 1: Home State Court Might Lack Jurisdiction

1. Introduction

2. In Rem Jurisdiction

3. Personal Jurisdiction - General Principles

4. Personal Jurisdiction - Trustee Concerns

5. Rules in Federal District Court

6. Implications

C. Obstacle 2: Home State Court Should/Must Decline Jurisdiction

1. Restatement Approach - Movables

2. Restatement Approach - Land

3. UTC Approach

4. Federal District Court

D. Obstacle 3: Home State Court Should Apply Trust State Law

1. Restatement Approach - Movables

a. Introduction

b. Sections 269 and 270 - Validity

(1) Introduction

(2) Questions of Validity

(3) Substantial Relation to the Trust

(4) Strong Public Policy

(5) Most Significant Relationship to the Matter at Issue

c. Sections 271 and 272 - Administration

d. Section 268 - Construction

e. Section 273 - Restraints on Alienation of Beneficiaries' Interests

2. Restatement Approach - Land

3. UTC Approach

a. In General

b. Application

(1) Place of Trust's Creation

(2) Location of Trust Property

(3) Trustee's Domicile

(4) Testator's/Trustor's Domicile

(5) Beneficiaries' Domiciles

(6) Policies of Forum State - Trust State Not the Forum

(7) Policies of Forum State - Trust State as the Forum

(8) Policies of Nonforum State

(9) Justified Expectations, Certainty, Predictability, and Uniformity of Results

c. Comments

d. Rights of Creditors

4. Rules in Federal Court

E. Obstacle 4: Trust State Court Might Not Have to Give Full Faith and Credit to Judgment of Home State Court

1. Respect Due Statutes

2. Implications

3. Respect Due Judgments

V. Factors to Consider in Selecting a Trust State

A. Introduction

B. Favorable Trust Climate

C. Clients' Objectives

1. Introduction

2. Permitted Provisions

3. Modification or Termination of a Trust

a. Introduction

b. Beneficiaries' Power to Amend or Terminate a Trust

c. Decanting Power

d. Change of Situs

4. Preventing Modification or Termination of a Trust

a. Introduction

b. Lifetime Proceedings

c. No-Contest Clauses

5. Striking a Balance

D. Trust Duration

1. Introduction

2. Perpetuities Statutes

3. Creating a Long-Term Trust

a. Introduction

b. Trust of Movables

(1) Trust Under Will

(2) Pour Over to Existing Trust

(3) Revocable Trust Funded During Life

(4) Irrevocable Trust Funded During Life

(5) UTC Approach

c. Trust of Land

d. Planning Point

4. Rule Against Accumulations

E. State Income Tax

1. Introduction

a. Background

b. Problem

c. Scope

2. Rules for Taxation of Trusts

a. Introduction

b. Bases of Taxation

c. Trust Created by Will of Resident

d. Inter Vivos Trust Created by Resident

e. Trust Administered in State

f. Resident Trustee

g. Resident Beneficiary

3. Determining Whether Imposition of Tax is Constitutional

a. Introduction

b. Trust Created by Will of Resident

(1) U.S. Supreme Court Cases

(2) State Court Cases

c. Inter Vivos Trust Created by Resident

(1) U.S. Supreme Court Cases

(2) State Court Cases

d. Trust Administered in State

(1) U.S. Supreme Court Cases

(2) State Court Cases

e. Resident Trustee

(1) U.S. Supreme Court Cases

(2) State Court Cases and Ruling

f. Resident Beneficiary

(1) U.S. Supreme Court Cases

(2) State Court Cases

4. Specific State Considerations

a. New York

b. New Jersey

c. Connecticut

d. Illinois

e. California

f. Idaho and Virginia

g. Delaware

5. Planning, Ethical, and Other Issues

a. Introduction

b. Trust Created by Will of Resident

c. Inter Vivos Trust Created by Resident

d. Trust Administered in State

e. Resident Trustee

f. Resident Beneficiary

g. Filing Position

h. Self-Settled Trust Option

i. Source Income

j. Ethical Concerns

F. Investment Return

G. Division of Responsibilities

1. Introduction

2. Restatement of Trusts Approach

3. UTC Approach

4. Protective Approach

5. No Statute

6. Delaware's Experience

7. Caselaw

8. Commentary

9. Applicable Law

10. CRTs and Advisers

11. The Protector

H. Asset Protection - Third-Party Trusts

1. Introduction

2. Discretionary Trusts

a. Restatement (Second) of Trusts Approach

b. Restatement (Third) of Trusts Approach

c. UTC Approach

d. State Statutes

3. Spendthrift Trusts

a. Restatement (Second) of Trusts Approach

b. Restatement (Third) of Trusts Approach

c. UTC Approach

d. State Statutes

4. Subsequent Protection

5. Applicable Law

I. Asset Protection - Self-Settled Trusts

1. Introduction

2. State Statutes

3. Applicable Law

4. Protection for Distributions

5. Crummey Powers

6. Income Tax Reimbursement Clauses

7. Lifetime QTIP Trusts

J. Power to Adjust and Total Return Unitrust Statutes

1. Introduction

2. The Problem

3. Statutory Changes

4. Federal Tax Safe Harbors

5. Observations

6. Delaware's Experience

K. Court System

1. Introduction

2. Administrative Costs

3. Confidentiality

4. Recourse to Highest Court

5. Availability of Declaratory Judgment

L. Surviving Spouses' Rights of Election

M. Insurable Interest of Trusts

N. Noncharitable Purpose Trusts

VI. Ethical and Practical Concerns When Creating a Dynasty Trust in a Trust State

A. Background

B. Ethical Principles

C. Malpractice Concerns

D. Practical Considerations

VII. Moving a Dynasty Trust to a More Favorable State

A. Introduction

1. Background

2. Reasons to Move a Trust

3. Roadblocks to Moving a Trust

4. Comments

B. What Law Applies?

1. Restatement Approach - Introduction

2. Restatement Approach - Trust of Movables - Law Designated

a. Trust Under Will

(1) Validity

(2) Administration

(3) Construction

(4) Restraints on Alienation

b. Trust Created Inter Vivos

(1) Validity

(2) Administration

(3) Construction

(4) Restraints on Alienation

3. Restatement Approach - Trust of Movables - Law Not Designated

a. Trust Under Will

(1) Validity

(2) Administration

(3) Construction

(4) Restraints on Alienation

b. Trust Created Inter Vivos

(1) Validity

(2) Administration

(3) Construction

(4) Restraints on Alienation

4. Restatement Approach - Trust of Movables - Delaware's Experience

5. Restatement Approach - Trust of Movables - Summary

6. Restatement Approach - Trust of Land

7. UTC Approach

C. Effecting the Move

D. Moving to Carry Out Clients' Objectives or to Facilitate Amendment or Termination of a Trust

E. Moving to Create a Perpetual Trust

F. Moving to Avoid State Income Tax

1. Introduction

2. Trust Created by Will of Resident

3. Inter Vivos Trust Created by Resident

4. Trust Administered in State

5. Resident Trustee

6. Resident Beneficiary

G. Moving to Provide More Investment Flexibility

H. Moving to Provide Greater Protection From Creditor Claims

I. Moving to Avoid Accounting Requirements and Administrative Costs

J. Moving to Use the Power to Adjust or to Convert to a Total-Return Unitrust

K. Federal Transfer Tax Consequences of Moving

VIII. The Nonresident Alien Dynasty Trust

A. Introduction

B. Gift and Estate Tax Rules

C. GST Tax Rules

D. Location of Property

E. United States as Trust Situs


WORKING PAPERS

Working Papers

Table of Worksheets

Worksheet 1 Exempt Dynasty Trust Illustrations*

Worksheet 2 Charitable Lead Unitrust Illustrations*

Worksheet 3 State Uniform Trust Code Statutes*

Worksheet 4 State Perpetuities Statutes*

Worksheet 5 Bases of State Income Taxation of Nongrantor Trusts*

Worksheet 6 State Prudent Investor Rule Statutes*

Worksheet 7 State Directed Trust Statutes*

Worksheet 8 State Third-Party Trust Statutes*

Worksheet 9 State Self-Settled Trust Statutes*

Worksheet 10 State Power to Adjust and Unitrust Statutes*

Worksheet 11 State Liability Systems Ranking*

Worksheet 12 State Noncharitable Purpose Trust Statutes*

Worksheet 13 Generation-Skipping Trust Agreement*

Bibliography

OFFICIAL

Treasury Regulations:

Treasury Rulings:

Legislative History:

Uniform Laws:

State Constitutions:

State Statutes:

Cases:

UNOFFICIAL

Books and Treatises:

Periodicals:

1988

1989

1997

1998/1999

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010