So you left your trust at home when you moved to Florida.

• Author: Kern, Jeffrey A.

Florida is a state with great appeal for retirees. Warm weather, absence of state income, intangibles, or estate tax, and favorable creditor protection laws have all played a part in the substantial migration of clients to Florida from states in the northeastern United States for many years. (1) As a result, Florida lawyers will continue to review estate planning documents for clients who have moved here from other states. A number of these clients will have, or will be the beneficiaries of, irrevocable trusts created in these former jurisdictions that need to be reviewed. Many of these "older trusts" will be taxed by those former jurisdictions on certain types of income. Some of these trusts may contain outdated provisions that need to be revised. These might include changes of trustees and their successors, extension of time for outright distributions to descendants, allowance for directed investments, correction of drafting errors, change of the trust from nongrantor tax status to grantor tax status or vice versa, transfer of insurance policies, transfer of the place of administration or the governing law of the trust, and other desired revisions.

This article discusses those circumstances in which it may be possible to modify the provisions of irrevocable trusts established in those former jurisdictions and/or achieve a change of governing law to the state of Florida. For convenience, this article will occasionally refer to the client's former jurisdiction of residence as the "original state" and irrevocable trusts originally created in the client's former jurisdiction as "original trusts." In addition, reference to "living trust" will refer to irrevocable instead of revocable trusts.

Governing Law

The fact that the client who has moved to Florida may be a settlor, beneficiary, or trustee of the original trust will not generally mean that the governing law of the original state has moved here as well. Determining which state's law will apply to an original trust involves an often difficult conflict of laws determination. Although settlors and testators are generally free to designate which state's governing law applies in the trust instrument as long as there is no violation of strong public policy, (2) in the absence of a designation in the trust instrument, "situs" for governing law purposes will generally depend on whether the issue involves: 1) validity (does the trust violate a rule of law such as the rule against perpetuities); 2) construction (identity of the beneficiaries and their interests); or 3) administration (matters dealing with trustees). (3)

The Uniform Trust Code, which has been enacted in modified form in 21 states (including Florida), provides that in the absence of a designation in the trust, the "meaning and effect" of the terms of the trust will be determined by the laws of the jurisdiction "having the most significant relationship to the matter at issue." (4) Common law, which varies from state to state, relies on location of real estate, domicile of the testator, and place of administration in determining in which states governing law applies. (5) However, a determination of whether any specific issue involving a trust fits within the definition of validity, construction, administration, or meaning and effect can be difficult at best.

State Income Tax Issues

In dealing with state income tax issues, each state has its own separate rules for determining whether trusts are taxed, and general rules applicable to governing law do not apply.

Florida is one of seven states that impose no fiduciary income tax. The remaining states impose tax at top rates from three percent to 10.3 percent. The state fiduciary income tax will usually apply to accumulated income and capital gains on intangible assets of nongrantor trusts, because income of grantor taxable trusts will generally be taxed to the grantor for income tax purposes. Distributed income and capital gains of nongrantor trusts will generally be taxed to the recipient and deductible by the trust and accumulated source income, (consisting of income from real estate, or the operation of a business in the original state), will normally be taxed in the original state regardless of what actions may be taken with respect to the trust.

All states that tax the income of trusts base their jurisdiction to tax resident trusts on a combination of one or more of the following factors: 1) residence of the testator of the trust at death for a testamentary trust (resident testator), or residence of the settlor at the time the trust becomes irrevocable for a living trust (resident settlor); 2) residence of the trustee; 3) place of administration; or 4) residence of the beneficiaries. Accordingly, unlike matters relating to validity, construction, or administration, the governing law of the trust is usually irrelevant to the state income tax issues. (6)

States basing their taxing jurisdiction on the residence of the trustee, or the place of administration, will afford the best opportunity for planning, since changing trustees to those residing in Florida, moving tangible and intangible personal property to Florida, and assuring that books and records of the trust are kept in Florida can be readily achievable goals. (7) Conversely, states basing their tax solely on resident testators or resident settlors will be difficult or impossible to plan for, (8) unless accumulated income or capital gains can be distributed to beneficiaries who do not reside in the original state. (9)

A survey of some of the prominent northeastern states that the Florida lawyer is likely to encounter follows:

New York/New Jersey. New York will generally tax a trust on the sole basis of the resident testator or "resident settlor, with an important exception for a resident trust where all of the following conditions are satisfied: 1) all trustees are domiciled outside of New York; 2) all trust assets are located outside of New York; and 3) there is no New York source income." (10) This would require the replacement of all acting New York trustees with trustees who reside in Florida and the movement of any and all personal property (both tangible and intangible) to Florida. (11) Further, since one dollar of New York source income may be fatal, a portfolio review should be made to be sure that there is no New York source income from private equity funds or real estate investment trusts. (12) If there is both New York real property and personal property in the trust, it may be possible to divide the trust, (13) allowing the divided trust containing the real estate to continue to be taxed in New York, and moving the trustees and assets of the divided trust containing the personal property to Florida to enjoy tax-exempt status. (14)

New Jersey has a similar taxing rule (and accordingly, similar planning) as New York. (15)

Illinois/Pennsylvania. Illinois and Pennsylvania will tax the fiduciary income of a trust if the sole connection to the trust is a resident...