CHANGING TRUST SITUS THOMAS M. FORREST PRESIDENT, U.S. TRUST COMPANY OF DELAWARE DATE May 7, 2013 Changing trust situs Choice of law When creating a new trust, a grantor can and should designate the law of the trust state that will govern matters of validity, construction and administration. What happens down the road when the grantor may be deceased and the children/grandchildren read about other benefits a trust may receive in another jurisdiction? The following presentation will provide the reasons for changing trust situs, the benefits that may be achieved and the challenges and roadblocks that may occur during the process. (Presentation will focus on Delaware but many of the issues also apply to other states as well) 2 Reasons for moving trusts Administration Favorable trust laws Administrative flexibility Avoidance or minimization of accounting requirements and other administrative costs Modify trust administrative provisions Dynasty trust provisions The availability of a total-return unitrust statute
Privacy Investment/tax opportunities Ability to designate an independent investment advisor to manage the trust assets Allocation of fees and expenses between Income and Principal Better investment flexibility Reduce or eliminate state fiduciary income tax Privacy/confidentiality reasons Greater assurance that trust assets will be secure from creditor claims Trust alternatives Concentrated positions in trust 3 Why do clients choose Delaware? Flexible trust structures Favorable trust laws Directed Trusts Use of Investment Advisors Use of Distribution Advisors Use of Protectors Trust Decanting Equitable Adjustments Asset Protection Trusts Dynasty Trusts
Total Return Trusts Purpose Trusts Advantageous tax laws Trust-friendly environment No Delaware state income tax on trusts* No intangibles or excise taxes High regard for privacy and confidentiality Well-respected Court of Chancery Industry-leading and innovative body of trust law * Provided beneficiaries are not residents of Delaware 4 Delaware: a history of pro-trust legislation 1986 Administrative trusts Delaware adopted Modern Portfolio Theory for trust investing and authorized trustees to follow the investment directions of an investment advisor named in the trust instrument, without liability for the investment results. 1997 Domestic asset protection trusts 2003 Trust decanting
The Qualified Dispositions in Trust Act authorizes self-settled asset protection trusts designed to protect assets from a clients future creditors claims while allowing the grantor to retain certain interests in the trust, such as the ability to receive discretionary distributions. While no court has considered the effectiveness of such a trust, Delaware offers this progressive option for clients seeking domestic asset protection strategies. Delaware created a mechanism for a trustee of an irrevocable trust to modify the terms of the trust by creating an entirely new trust and transferring the existing trusts assets to the new trust. This is a powerful tool for a trustee to have when administering long-term trusts to deal with constant legal, tax, investment or beneficiary changes that occur over time. 1995 Dynasty trusts 2009 Power to adjust
Delaware repealed the Rule Against Perpetuities, enabling grantors to establish trusts that span generations and limit transfer tax exposure. Delaware law permits a trustee to adjust between principal and income to the extent the trustee considers necessary to administer a trust fair, reasonable and impartially among the beneficiaries both current and remainder. 2000 Total return unitrusts Delaware enacted the first total return unitrust statute allowing grantors to establish a unitrust and trustees to convert existing trusts to a unitrust thus aligning the investment interests of both current beneficiaries and remaindermen. 5 MOVING TRUSTS TO DELAWARE 6 Changing the situs of a trust There are several methods to change the situs of a trust: For example, lets assume a trust in one jurisdiction wants to change the situs to Delaware for its directed investment advisor provisions: 1 The trust instrument includes broad language for the removal and appointment of trustees and does not restrict residence of trustees, and includes all other language necessary under
the Delaware directed trust statute, and allows the trustees to change situs to select the trusts governing law. Trust can me moved with the exercise of the removal and appointment provisions. 2 Same scenario as above, except the trust instrument does not include the Delaware administrative provisions, such as directed trusts with respect to investments. The trust resides in a state which does not have a non-judicial reformation statute, decanting statute, nor provisions for discretionary distributions. Removal and appointment clause can be exercised naming a Delaware trustee. A petition to modify the trust will have to be filed with The Delaware Court of Chancery. Same scenario as above, except the trust instrument includes language for trustees discretion to distribute principal. Trust can be moved to Delaware and then the trustee can decant the trust into a new trust with all the required directed trust language. 3 7 Changing the situs of a trust (continued)
4 5 6 Same scenario as above, except the trust instrument includes principal distribution language that qualifies under the home states decanting statute. Trustee can decant into new Delaware directed trust. The trust instrument does not include language for the removal and appointment of trustees and the home state does not have non-judicial settlement or decanting statutes, which might be utilized. Beneficiaries will need to petition the home state court for removal of current trustee and appointment of new trustee. Some state courts may include in any reformation granted a change of situs to Delaware and may even include the directed trust language. If not, once the home state court order is received, then the beneficiaries will need to file a trust reformation petition in the Delaware Court of Chancery for inclusion of the Delaware administration provisions. The trust instrument includes language for the removal and appointment of trustees but does not include the Delaware administrative provisions, such as directed trusts with respect to investments. Trust resides in a state which does permit non-judicial settlements. Trust can be moved to Delaware with a modified
trust agreement prepared by local counsel under the non-judicial settlement statute for that state. Other Side agreements (not recommended), merger statute (not recommended) 7 8 Consent petitions Rule 101: Party submitting the consent petition shall file contemporaneously an appendix of exhibits including but not limited to: The current trust instrument; The terms of the proposed modifications of the trusts governing instrument; A black lined version of the proposed modified trust agreement indicating plainly the differences from the current trust instrument; A clean version showing how the proposed modified trust instrument will read if the consent petition is granted; Any orders relating to the trust instrument; A family tree or other document showing the relationship to the trustor of those having a beneficial interest in the trust; and 9 Consent petitions (continued) Consents or statements of non-objection to the relief sought in the petition from all whose interest in the trust is affected by the petition, which may include, but shall not be limited to, consents from: i. Trustees and other fiduciaries, unless they have otherwise signified their consent or non-objection to the petition by acting as a petitioner or accepting a fiduciary position;
ii. Trust beneficiaries, who will generally be those with a present interest in the trust and those whose interest in the trust would vest, without regard to the exercise or non-exercise of a power of appointment, if the present interest in the trust terminated on the date the petition is filed; iii. The trustor of the trust, if living; and iv. All other persons having an interest in the trust according to the express terms of the trust instrument (such as, but not limited to, holders of powers and persons having other rights, held in a nonfiduciary capacity, relating to trust property). 10 Decanting 3528 Title 12 Delaware Code (a) Unless the terms of the instrument expressly provide otherwise, a trustee who has authority (whether acting at such trustee's discretion or at the direction or with the consent of an adviser), under the terms of a testamentary instrument or irrevocable inter vivos trust agreement, to invade the principal of a trust (the "first trust") to make distributions to, or for the benefit of, 1 or more proper objects of the exercise of the power, may instead exercise such authority by appointing all or part of the principal subject to the power in favor of a trustee of a trust (the "second trust") under an instrument other than that under which the power to invade is created or under the same instrument, provided, however, that, except as otherwise provided in this subsection (a): (1) The exercise of such authority is in favor of a second trust having only beneficiaries who are proper objects of the exercise of the power; (2) In the case of any trust, contributions to which have been treated as gifts qualifying for the exclusion from gift tax described in 2503(b) (26 U.S.C. 2503(b)) of the Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.) (hereinafter referred to in this section as the "I.R.C."), by reason of the application of I.R.C. 2503(c) (26 U.S.C. 2503(c)), the governing instrument for the second trust shall provide that the beneficiary's remainder interest shall vest and become distributable no later than the date upon which such interest would have vested and become distributable under the terms of the governing instrument for the first trust;
(3) The exercise of such authority does not reduce any income or unitrust interest of any beneficiary of a trust for which a marital deduction has been taken for federal tax purposes under I.R.C. 2056 or 2523 (26 U.S.C. 2056 or 2523) or for state tax purposes under any comparable provision of applicable state law; and (4) The exercise of such authority does not apply to trust property subject to a presently exercisable power of withdrawal held by a trust beneficiary who is the only trust beneficiary to whom, or for the benefit of whom, the trustee has authority to make distributions. 11 Decanting 3528 Title 12 Delaware Code (continued) (b) The exercise of the power to invade the principal of the trust under subsection (a) of this section shall be by an instrument in writing, signed and acknowledged by the trustee and filed with the records of the trust. (c) The exercise of the power to invade the principal of the trust under subsection (a) of this section shall be considered the exercise of a power of appointment (other than a power to appoint to the trustee, the trustee's creditors, the trustee's estate, or the creditors of the trustee's estate) and shall be subject to the provisions of Chapter 5 of Title 25 covering the time at which the permissible period of the rule against perpetuities begins and the law which determines the permissible period of the rule against perpetuities. (d) The provisions of this section shall not be construed to abridge the right of any trustee who has a power of invasion to appoint property in further trust which arises under any other section of this chapter or under another statute or under common law. (e) When exercising the authority granted under subsection (a) of this section, the trustee and any adviser directing or consenting to the trustee's exercise of such authority shall be held to the standard of care and the standard of liability applicable to the trustee and any such adviser when making outright distributions, free from trust, to or for the benefit of 1 or more permissible distributees. (f) This section shall be available to any trust that is administered in this State. 12 Moving trusts Some Uniform Act States with nonjudical settlement agreement statutes (as of April 2013): Alabama 19-3B-101
New Jersey 3B:31-11 Arkansas 28-73-101 New Mexico 46A-1-111 Arizona Title 28 28-73-101 North Carolina 36C-1-101 District of Columbia 19-1301 North Dakota 59-09-01 Florida 736-0101 Ohio
5801.01 Kansas 58a-101 Oregon 130.001 130.045 UTC 111 Illinois 760 Pennsylvania 20 Pa. Cons. Stat. 7701-7799.3 Iowa Title 15 633A.6308 South Carolina Title 62 62-7-101 Maine 18-B, 111, 411 Tennessee
35-15-111 Massachusetts Chapter 203E, Article 1, 111 Utah Title 75, Ch. 07: 75-7-110 Michigan 7111 MCL 700.7101 Virginia 55-541.11 Minnesota Chapter 501B. 154 Vermont Title 14A 101 (111 & 411) Missouri 456-001.111 Washington RWC 11.98.039
Nebraska 30-3801 Wisconsin With consent of settlor 701.12 New Hampshire Chapter 564-B Uniform Trust Code Wyoming 4-10-101 13 State fiduciary income tax Delaware does not impose state income taxes on an irrevocable trusts accumulated earnings and capital gains if there are no beneficiaries living in the state. Several other states also do not tax income or capital gains. The income tax treatment varies widely from state to state: The following factors determine the taxation of trusts for state fiduciary income tax purposes: If the trust was created by the Will of a testator who lived in the state at death; If the trust is administered in the state; If one or more trustees live or do business in the state; If the trustor of an inter vivos trust lived in the state when he or she placed assets in the trust or when the trust became irrevocable; or If one or more noncontingent beneficiaries live in the state.
14 Roadblocks Challenges to moving trusts From the clients perspective: From the trustees perspective: Lack of appropriate language in document Uncooperative trustees Uncooperative beneficiaries Court intervention Administrative Situs Peierls case Decanting Potential Trustee liability State laws Cost of moving Fee Issues Lack of understanding of Delaware or other state benefits Court intervention State laws Cost of moving Application of multiple state laws to trusts Other consents, releases etc. Application of multiple state laws to trusts 15 Disclosure This presentation is designed to introduce you to the products and services available through U.S. Trust, Bank of America Private Wealth Management, is provided for informational purposes only, and
is not issued in connection with any proposed offering of securities. This presentation is not used with regard to any specific investment objectives, financial situation or particular needs of any specific recipient and does not contain investment recommendations. Bank of America and its affiliates do not accept any liability for any direct, indirect or consequential damages or losses arising from any use of this presentation or its contents. The information in this presentation was obtained from sources believed to be accurate, but we do not guarantee that it is accurate or complete. The opinions expressed herein are made as of the date of this material and are subject to change without notice. There is no guarantee the views and opinions expressed in this presentation will come to pass. Other affiliates may have opinions that are different from and/or inconsistent with the opinions expressed herein and may have banking, lending and/or other commercial relationships with Bank of America and/or its affiliates. All charts are based on historical data for the time periods indicated and are intended for illustrative purposes only. Past performance is no guarantee of future results. IMPORTANT: The material presented is designed to provide general information about ideas and strategies. It is for discussion purposes since the availability and effectiveness of any strategy is dependent upon your individual facts and circumstances. Performance figures should be utilized only in a one-on-one presentation with clients or prospective clients accompanied by the appropriate disclosure statement. Taxable accounts may have varying performance due to each individual accounts tax status. Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy. Investment products: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value U.S. Trust, Bank of America Private Wealth Management operates through Bank of America, N.A. and other subsidiaries of Bank of America Corporation. Bank of America, N.A., Member FDIC. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. This presentation may not be reproduced or distributed by any person for any purpose without prior written consent. 2013 Bank of America Corporation. All rights reserved. | ARU2L6V2 | PPT-02-12-0491 FOR FIDUCIARY USE ONLY. 16
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