Understanding the Law – Relocating a Trust

Sometimes after setting up a trust, circumstances occur that change our goals for that trust. Recently, we wrote about how to fix a broken trust which occurs when a trust no longer serves the purpose for which it was established. However, a broken trust is not always the only reason a trust might need to be modified. Depending on the circumstances surrounding your trust, there are several factors to consider when deciding whether or not to move a trust.

Common Reasons to Move a Trust

One of the most common reasons for creating a trust is to take advantage of more favorable tax consequences related to trusts. As such, one of the most common reasons to want to move a trust is to take advantage of more favorable tax-related trust laws in another state. Some other reasons for moving a trust might include:

  •      Taking advantage of trust laws in a different state that allow a trust to improve its investment potential;
  •      Wanting to extend the potential lifetime of a trust by moving the trust to a state that allows “dynasty trusts”;
  •      Wanting to take advantage of the opportunity to use more favorable trust laws to protect a trust from potential creditors; and
  •      Reducing the fees related to administration of the trust.

If you are moving from one state to another, keep in mind that your trust will not automatically move with you and you may want to consider if the laws in the state you are moving to are more beneficial for your trust. If they aren’t, it may be a good idea to keep your trust where it is.

Determining If Your Trust Can Be Moved

Generally, most revocable trusts can be easily moved by simply changing the location of the trust. If for some reason the state in which your revocable trust is located or other factors related to your revocable trust prohibit you from moving it to a new location, you have the option to revoke the trust and then establish a new one in the location of your choice. Irrevocable trusts can be a bit trickier in that whether they can be moved depends on the language used in the creation of the trust. With an irrevocable trust, even if you change the location of the trust it will likely still be governed by the laws of the state in which it was created unless the trust contains language regarding changing locations that complies with state law and states otherwise.

Some trusts are drafted in a way where they their language is silent on the location of the trust. In such cases, several different factors are used to determine the location of the trust that can include:

  •      The location in which the trust is administered;
  •      The trustee’s state of residence;
  •      The state of residence of the person that drafted the trust;
  •      The location of the trust’s beneficiaries and any real property contained within the trust; and
  •      Applicable state law as it relates to any of the above factors.

Sometimes, moving a trust can be as simple as replacing the trustee with a new trustee residing in the state where you would like to move the trust to. Determining whether or not your trust can be moved ultimately depends on applicable state law and the language of the trust in question.

Potential Dangers of Moving Your Trust

It is important to be knowledgeable of the applicable laws of the state in which your trust was created as well as the applicable laws in the state you are considering moving your trust to. The difference in laws could have a large impact on your trust. For instance, you may be moving your trust from a state that allows perpetual trusts to one that does not, which can limit the duration of the trust.

Moving the trust could also count as a modification of the trust, which may trigger certain taxes that would otherwise remain dormant. If your trust contains real estate or other assets in one state that taxes those assets and the state you are considering moving your trust to taxes trust assets located in other states, you could subject yourself to double the tax liability for some assets within the trust. An experienced estate planning attorney can help you explore the potential consequences of moving your trust from one state to another.

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