Much is said about asset allocation, but asset location is equally important. Here’s how progressive trust laws in select states might help you achieve your estate-planning goals.
So you’ve got the “who,” “what” and “why” of your estate-planning strategy down pat. You’ve selected loved ones as beneficiaries, carefully chosen assets to transfer to the trust and made a plan to help reduce tax liability and avoid probate.
But if you haven’t considered the “where,” you might be missing out. That’s because various states in which your trust could be located — otherwise known as situs (pronounced “sigh-tus”) — maintain different trust laws affecting everything from taxation to term.
“There are some states that have made a real effort to modernize their trust laws in the hopes of attracting more business to their jurisdiction and creating a tie with wealthy individuals who might otherwise look elsewhere,” says Mike Ott, Central Region President for The Private Client Reserve. He cites Alaska, Delaware, Nevada, South Dakota and Ohio as some of the nation’s most trust-friendly states. “Situs opportunities should be of interest to individuals in those states as well as individuals in other states who might be interested in creating a trust or moving one.”
Situs opportunities exist primarily for individuals and families with irrevocable trusts, which are created by grantors who agree to give up ownership and control of the trusts and the assets inside them. There are few opportunities for revocable trusts, which allow the grantor to change the document, revoke the trust and take back the assets into his or her own name, Ott says.
“Revocable trusts are typically pass-through from an income tax standpoint,” he says. “Income and deductions show up on your 1040, so there’s no real opportunity to save anything from a tax standpoint; it’s still going to be taxed as if it were in your own name no matter where it’s located.”