Selecting a Trust Situs: What Should a Trustee Consider?, 1021 COBJ, Vol. 50, No. 9 Pg. 38
| Author | BY REBECCA KLOCK SCHROER AND MARGOT EDWARDS |
| Position | Vol. 50, 9 [Page 38] |
FEATURE TRUST AND ESTATE LAW
BY REBECCA KLOCK SCHROER AND MARGOT EDWARDS
Choosing a trust situs involves several considerations, both at the inception of a trust and during its ongoing administration. This article reviews situs considerations, including a trustee's duty to consider a transfer of situs and options for completing a transfer.
With
Nevada and Wyoming in close proximity to Colorado, the
question often arises whether trustees should move a
trust's principal place of administration (or situs) to
one of these states for more favorable asset protection or
income tax treatment. In recent years, Colorado has provided
clarity and flexibility in trust administration through
various legislation, including the Colorado Uniform Directed
Trust Act (2014), the Colorado Uniform Trust Decanting Act
(2016), and most recently the Colorado Uniform Trust Code
(CUTC) (2019 and 2021).
A number of factors should be considered when choosing a trust situs, both when forming a trust and during its ongoing administration. This article discusses relevant considerations when evaluating trust situs, including circumstances in which trustees may have a duty to maintain a situs in a certain state or transfer situs to another state.
Initial Situs Selection
The settlor's location is often chosen as the initial situs, especially for testamentary trusts created in wills and revocable trusts that become irrevocable upon the settlor's death. But other relevant factors may include preferential state law; state income tax; and locations of the trustee, trust assets, and beneficiaries.[2]
A setdor's existing relationship with a trustee may significantly impact the settlor's situs choice. In addition, the setdor and/or the trustee may have professional advisors, including attorneys and accountants, who will serve in connection with the trust administration. Having a trusted advisory team in place can greatly increase the settlor's comfort with implementing the trust plan and promote efficiency in the trust administration. Trusted advisors should ensure that the settlor considers all relevant situs options and makes a decision based on the key factors that the settlor considers important.
Trustee's Ongoing Duty to Consider Situs
Under the CUTC, "[a] trustee is under a continuing duty to administer the trust at a place appropriate to its purposes, its administration, and the interests of the beneficiaries."3 Trustees should take the following steps to meet this mandate.
First, a trustee must consider the trust's purposes, which requires analyzing the settlor's intent.[4] For example, the settlor may have created a special needs trust to provide assistance to a beneficiary without affecting the beneficiary's eligibility for government benefits. In this circumstance, it may be best to have the trust administered in the same state where the beneficiary resides with a trustee who understands that state's government assistance programs. Or the settlor may have created a directed trustee arrangement to separate the trustee's investment and administrative functions.5 In this case, the trustee would need to consider whether this arrangement could be maintained if the trust's situs were transferred to a new state. In addition, a trust may have been created under a specific state's statutory scheme, such as one allowing a domestic asset protection trust (DAPT), which requires the trust to remain in that jurisdiction.6
Second, the trustee should consider whether the situs is appropriate for the trust's administration.7 This inquiry may involve practical and logistical issues. For example, if the sole beneficiary of the trust lives in Colorado, it might not make sense to administer the trust in California. Likewise, if the trust's sole asset is a ranch in Colorado, it might not be efficient to administer the trust in Delaware. While it is possible to administer a trust under such circumstances, the efficiency of administration may suffer.
Third, the trustee should consider the beneficiaries' interests.8 This refers to the beneficial interests provided in the trust's terms.[9] For example, a trustee might consider moving the trust to a state that does not impose an income tax to save that expense, as discussed below. In addition, it could be beneficial to move the trust to a state with strong asset protection laws to protect beneficiaries from divorce and creditors.
Unless substantial changes occur after the trust's creation, the trustee likely has no affirmative duty to transfer the trust situs to a different state. "Ordinarily, absent a substantial change or circumstances, the trustee may assume that the original place of administration is also the appropriate place of administration."[10] However, as discussed above, if circumstances have changed or there is a compelling reason to transfer situs, the trustee should likely consider a transfer. "A trustee may have a duty to move the situs of the trust if to do so would substantially further the interest of the beneficiaries, would not be in contravention of the terms of the trust, and would be both possible and practical."[11]
When
evaluating whether a trust situs should be transferred to
another state, it is important to understand the laws of both
states.12 For example, if "[t]he state in
which the trust was established . . . might attempt to
continue to tax the income of the trust even after all the
trustees and all the beneficiaries had moved
elsewhere,"
After a
trust is formed, situs is typically where the trustee is
located.
If the trust beneficiaries wish to change the situs and there is a compelling reason to do so, they may be able to remove the trustee if the trustee refuses to resign. A trustee's change to the place of administration or the relocation of beneficiaries or other developments "may result in costs or geographic inconvenience serious enough to justify removal of a trustee."15 Similarly, if a trustee relocates and situs should stay in the original state, that trustee may have a duty to resign to allow a new trustee to continue to administer the trust.
Duty to Inform and Report
When considering a situs transfer, one issue that varies by state is the trustee's duty to provide information to the beneficiaries. In Colorado, this duty is codified in the CUTC, and only certain portions of the duty can be changed by the trust's terms.16 The mandatory duties in Colorado include the duty to provide notice of the existence of an irrevocable trust, the trustee's identity, and the right to request trustee's reports to current or permissible distributees of such trust at any age, or to other qualified beneficiaries of such trust who have attained age 25.[17]In addition, the trustee must respond to a qualified beneficiary's request for reports and other information reasonably related to the trust.18 A trustee's report includes a list of the trust's assets, liabilities, receipts, and disbursements; trustee compensation; and a list of market values, if feasible.19
Other states may require more or less disclosure and may have a different definition of the type of beneficiary that is entitled to such information. Accordingly, a trustee should consider whether transfer to a new situs that requires additional disclosure may be contrary to the settlor's intent.
State Income Tax
Trustees should consider state income tax and related factors when analyzing trust situs. It may be possible to create substantial tax savings by modifying the location where the trustee administers the trust.
Grantor trusts are taxed in the state where the grantor resides, so...
To continue reading
Request your trial