There are many factors to consider when setting up a trust account – who to choose as your trustee, how to invest the assets, what guidelines to establish for distributing the assets over time, and so on.
An important factor you should also consider is where to set up the trust. State laws differ in how they treat trust taxes, privacy, and protection of assets, and some are distinctly friendlier than others.
In recent years, states such as Delaware, Alaska, Nevada, New Hampshire, South Dakota, and Wyoming have modified their trust laws to make them more attractive to investors looking to minimize trust taxes, shield assets from creditors, and protect an individual or family’s privacy.1 Each of those three factors plays a key role as part of a well-rounded estate planning strategy.
A minority of states, including Nevada, Alaska, and South Dakota do not tax trust income at all.1 In Delaware, there are no taxes for income and capital gains accumulated in the trust – or distributed from the trust – for out-of-state beneficiaries.2 In New Hampshire, out-of-state beneficiaries are also free from paying any state tax.1 Compare this with California and New York, where state income tax on top earners is 13.3% and 12.7%, respectively.3 Those taxes can really add up over time and potentially put a dent in your family’s wealth.
This is especially important for business owners who want to shield their assets from creditors once the business is passed along to heirs. On a family level, this could mean protecting the assets from the heir’s creditors and can also provide a layer of protection for the family in the event of a divorce.1 Delaware’s laws, for instance, provide for rigorous enforcement of spendthrift provisions, meaning the beneficiary’s creditors cannot reach the trust assets.2
States have various rules about the need to disclose trust information to trust beneficiaries. The concern for some families is that if the trust beneficiaries know everything about the trust, they may lose motivation to work hard and focus on education. In other cases, a family may simply wish to keep their wealth a private matter for personal reasons.1 Delaware offers another benefit here, in that there are no public recording or filings for assets held in a Delaware trust.3
Setting up a trust account in another state can be accomplished using an in-state attorney. The in-state attorney can draft trust documents and have an attorney licensed in the “trust friendly” state verify that they comply with and take advantage of the state’s trust laws.1
Our Wealth Managers can evaluate your financial and estate planning situation to help you determine if such a move might make sense for you. Give us a call today at 1-800-541-7774 to discuss your situation and learn more with one of our Wealth Managers.
Seton is a CERTIFIED FINANCIAL PLANNERTM professional and Vice President of Investments at WrapManager, Inc.
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To the extent this presentation includes any state or federal tax advice, the presentation is not intended or written by WrapManager, Inc. to be used, and cannot be used, for the purpose of avoiding federal tax penalties. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance.