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

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