SOURCE: McManus & Associates

August 20, 2013 09:00 ET

Top 10 Considerations When Choosing a State for Siting a Trust

Top AV-Rated Attorney Sheds Light on Important Questions to Answer Before Moving Assets

NEW YORK, NY--(Marketwired - Aug 20, 2013) - State laws vary widely regarding the jurisdiction over trusts, with some more favorable for purposes of asset protection, access to trust-owned assets and creditor protection than others. McManus & Associates -- Tri-State-Area-based estate planning law firm -- today released a recording of the latest edition of its Educational Focus Series, "Top 10 Considerations for Domestic Asset Protection Dynasty Trusts." During the free lesson, Founding Principal and top AV-rated Attorney John O. McManus shares expert guidance on crucial considerations when choosing where to site your trust. For the full replay, visit the firm's website:

"The notorious granddaddy for asset protection states within the United States is Delaware," commented McManus. "The state has always welcomed people who want to run businesses while having some level of protection against creditors and predators. Delaware is also a favorite for having a trust in place."

Top 10 Considerations for Domestic Asset Protection Dynasty Trusts

1. What is a self-settled trust? When can the grantor list himself or herself as a beneficiary?

a. Many states say you cannot have your cake and eat it, too -- if you have access to your assets, so do your creditors.
b. In asset protection jurisdictions, the trust property is not subject to voluntary or involuntary transfer, and the grantor does not have an enforceable right to receive a distribution. This allows the grantor to list himself or herself as a beneficiary of the trust AND cause the trust property to be excluded from the estate for estate tax purposes.

2. How do state income taxes affect the choice of situs for my trust?

a. Income tax is paid based on the jurisdiction in which one lives. The top 10 jurisdictions do not impose state income taxes upon non-grantor trusts when the grantor is not a resident of the state.
b. Choose a state that says you can create a trust and also be a beneficiary.
i. If you're a New York resident, have New York assets and create a New York trust, then the laws of New York are applicable. How does one get his or her trust to be in a state other than New York? The trustee has to hail from the state that is an asset-protected state (trust home is the home of the trustee). Without connections to the state, one must have an institution serve as the trustee.
c. Understand what the protocol is for getting assets out of the trust.
i. Complete gift: Pushed officially out of estate for estate tax purposes, assets given in trust. This can be "defective" -- the grantor pays tax on income earned by the trust and maintains the option of swapping out trust-owned assets or decanting one trust into a new one with revised provisions.
ii. Incomplete gift: allows flexibility and greater access, but upon death, assets could be included in the estate (not moved off balance sheet for estate purposes).
d. Make sure that the trust is drafted so that a trustee can be removed.

3. What variation is there in state legislation regarding creditors and Statute of Limitations?

a. In the best asset protection jurisdictions, such as South Dakota and Nevada, a creditor's only remedy is to prove that a fraudulent conveyance occurred to intentionally hinder, delay, or defraud the creditor. Consider the state that has the best clause in efforts to try to defend against lawsuits.
b. The creditor must also file a claim within two years of the transfer and six months after knowing of the transfer.

4. Are certain exemptions made for specific types of creditors?

a. Certain asset protection states, such as Delaware, Hawaii and New Hampshire, have a tort creditor exception (i.e. professional malpractice), which serves to extend the statute of limitations to bring an action.

5. What are the standards for proving fraudulent transfers?

a. Most asset protection states require that the creditor prove that there is clear and convincing evidence (greater than 70 to 80%) that a transfer was fraudulent.
b. You must have other reasons as proof for moving the assets.

6. What role do the courts play regarding actions involving a Trust?

a. All states have statutes regarding the jurisdiction over the actions involving a trust situs in their state. Alaska, Delaware, Nevada, Ohio and South Dakota all have statutes that prescribe that their courts have exclusive jurisdiction over actions involving a trust sited in those states.
b. Lawsuits can come about outside the state where the trust is among unfriendly judges.
c. Note: It's not just what the laws are; it's also the level of sophistication the judges have. Alaska, for example, is relatively new to the game of asset protection.

7. Does the state require an Affidavit of Solvency upon the transfer of assets?

a. Nevada, South Dakota and Delaware do not require an Affidavit of Solvency indicating that the grantor of the trust has retained direct possession of a certain percentage of his or her assets. This makes it far easier to make transfers to trusts in these states.
b. States like Alaska do require an Affidavit of Solvency -- such states do not want to know that you have taken all your assets and moved them to a trust in Alaska only to find that you are insolvent.

8. How does the rule against perpetuities affect choice of situs? How long can I have my trust last?

a. Historically, the rule was that you could only have it last for your lifetime and the lifetime of your family that was alive when you created the trust, plus an additional 21 years.
b. Alaska, Delaware and South Dakota, however, permit perpetual trusts.

9. What observations can be made regarding trustee fees in each of the most favorable states?

a. One can expect to pay $2,500-$3,000 in annual Trustee commission to retain a trust company, with the most prestigious and elite service providers billing a minimum of $20,000 or more.
b. South Dakota and Delaware each have in excess of 50 trust companies.

10. What are some of the other miscellaneous trust enhancements in the most favorable states?

a. It is possible in Alaska, Delaware, Nevada and South Dakota to restrict disclosure of the trust to its beneficiaries.
b. It is also possible in these states to divide the duties of the trustee so that a separate "Investment Trustee" or "Investment Advisor" may direct the trust company regarding the assets.
c. Finally, each of these states passed a decanting statute, which permits the trustee to transfer assets from an existing trust to a new trust having the same beneficiaries but through which some of the administrative or other provisions may be different.

"Some people have put assets off-shore, because they're more difficult to collect if there's a lawsuit -- but we recommend that our on-shore clients keep assets on U.S. soil," said McManus. "When you move assets off-shore, the IRS looks at it as a way of trying to avoid income tax -- even though such assets are still subject."

McManus added, "The government is going after trusts that are off-shore, requiring additional disclosures and holding advisors who make related recommendations to have a higher level of responsibility. Why risk it when there are wonderful options for on-shore protection?"

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About McManus & Associates
McManus & Associates, a trusts and estates law firm, was formed in 1991 by John O. McManus to provide the high quality experience of the largest firms coupled with the intimacy and efficiency of a specialized boutique firm. Over 20 years later, McManus & Associates continues to earn its reputation for integrity, intellectual ability, efficiency, and enduring relationships.

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