Every advisor knows having a choice, or an open architecture platform allows them to make wise client choices.
Normally financial advisors are focused on investment choices around open architecture platforms.
But, it should also be linked to trust law or the state trust law best aligned for a client's needs today and for multi-generational planning.
One can debate whether the United States is the best country to live in, but one undeniable fact is that being a nation of states gives residents maximum flexibility in choosing jurisdictions that reflect their financial priorities.
Many states have taken advantage of this competitive milieu by establishing laws that eliminate state income taxes and minimize legal and regulatory burdens for individuals and businesses.
While most of these benefits require people or corporations to reside in these states, there is one notable exception: Trusts.
For advisors who want to win more high-net-worth clients or deepen relationships with existing clients, choosing a state with favorable tax and trust laws can give them a huge competitive edge.
The easiest way to incorporate these options is in testamentary trusts (trusts created when a person passes away inside their will) and/or revocable trusts.
Holtby believes that an advisor’s process for evaluating and selecting states that offer the best benefits for trusts should be similar to the way they use open architecture to recommend investment options for their clients.
After all, most independent advisors will only work with custodians or brokerage companies that don’t limit the asset managers and funds they can use. By that same token, they should also be exercising their right to go beyond their state of residence to choose a corporate trustee in a trust-friendly location that offers the best tax and other advantages for their clients and themselves.
Accordingly, there are five essential characteristics that define a truly trust-friendly state, and only seven states offer all of them: Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
Let’s take a closer look at these characteristics.
No state taxes on trust income
In most states trust income is subject to state income taxes. But in the seven trust-friendly states, trusts never have to pay state income or capital gains taxes. Keep in mind, however, the beneficiaries living in states with state income taxes may have to pay taxes on distributions they receive from these trusts.
Extended (or limitless) expiration dates
Many wealthy clients want their trusts to provide financial support in perpetuity for descendants who haven’t been born yet. In most states, however, a trust expires 21 years after the death of the last remaining beneficiary who was alive when the trust was created.
The seven trust-friendly states enable grantors to fulfill their dynastic wishes. In South Dakota, Alaska and New Hampshire trusts can last forever. In Wyoming trusts expire in 1,000 years. In Tennessee and Nevada their maximum life is 360 and 365 years, respectively. In Delaware, trusts funded with personal property can also last forever, but real estate assets held in the trust must be removed after 110 years.
Strong asset protection
One of the main reasons why people establish trusts is to keep high-value assets such as their home, business or investment assets out of reach of creditors and plaintiffs in civil suits.
All states have spendthrift provisions in their trust laws. These rules prevent beneficiaries from using future distributions as collateral for securing credit and also prohibit trust assets from being used to make direct loan payments to creditors.
But the seven most trust-friendly states add additional asset protection trust provisions, such as stronger shielding of trust assets from lawsuits filed by creditors, ex-spouses and other litigants.
Some of these states take this a step further.
“For example, several states allow separation of beneficiary interests, so that one beneficiary’s share of the trust is inoculated against claims made against another beneficiary. This can be a critical safeguard in cases where several siblings are beneficiaries and one of them has a history of financial or legal troubles,” says Holtby
Advisor-friendly trust company oversight
Many states still require banks or trust companies to serve as corporate trustees for trusts established there. These trustees, which are often bank trust companies, control everything from distributions to investment management. Once a family’s wealth is transferred from their advisor’s custodian into a trust, the advisor no longer has any say over how that money is invested (and no longer receives an advisory fee).
Control, choice, and privacy are but a few advantages an advisor-friendly trust company offers over a traditional bank trust department.
Fortunately, in recent years, many states (including the top seven trust-friendly states) have adopted directed trust provisions. These provisions allow advisors in any state to continue to directly manage investable assets transferred to trusts created in these states. Advisors can also facilitate distribution requests from beneficiaries, or this responsibility can be assigned to the client’s attorney.
States with directed trust provisions give a competitive edge to advisors whose home office and clients are in states that don’t allow directed trusts.
An advisor can work with their client’s trust attorney to establish a trust in one of these states. In many cases, an existing trust can be moved from its current domicile (and bank trust company) to one of the seven trust-friendly states under the administration of an independent advisor-friendly non-bank corporate trustee. Depending on the size of the trust, any legal costs involved in this process can usually be quickly offset by the money the trust no longer has to pay in state income taxes or the higher investment management and administrative fees charged by bank trust companies.
Ability to evolve
While irrevocable trusts are primarily designed for legacy planning purposes, a given trust should be considered a living document that may need to evolve over time.
Situations may arise where the provisions of an irrevocable trust may need to be changed. For example, if the grantor wishes to change beneficiaries or provide more financial support for a family member who has become physically disabled. Or, after the grantor has passed on, beneficiaries wish to divide a single trust into multiple trusts, each representing their own share of the assets they’re entitled to.
The seven trust-friendly states have flexible decanting laws that make it relatively easy to allow assets in the original trust to be moved into a new trust that has been updated to reflect the desired changes.
These decanting laws draw the line between a traditional trust that’s written in stone and a modern trust that’s built to adapt to ever-changing family dynamics and priorities. This flexibility is particularly critical for dynastic trusts that are expected to last for many generations.
Choosing a trust-friendly state
Any of the seven trust-friendly states offer the competitive tax, asset protection, longevity and decanting benefits advisors can leverage to use trusts to continue to manage their wealthy clients’ assets even after they’ve passed on. But which state is best?
There’s only one top choice.
South Dakota trust law has created the most favorable tax and legal environment for advisors who want to establish trusts and manage trust assets for their clients. That’s why Wealth Advisors Trust Company chose to set up shop here. And we’re not alone. More independent corporate trustees are headquartered here in the Mount Rushmore state than in any of the other seven trust-friendly states.
South Dakota thought leadership on trust law has an open secret sauce to make sure it remains in the leadership position – the Governor's Trust Task Force. This task force made up of regulators, lawyers, CPAs, and trustees works together to provide cutting-edge trust law. The South Dakota state legislature works with the Trust Task Force to keep the trust laws evolving with society. That offers advisors a dynamic trust law open-architecture solution.
Open architecture gives advisors the freedom to recommend the most appropriate investment and wealth management products and services for their clients from a broad spectrum of choices. But sometimes, certain options stand out. Selecting a trust-friendly state is one of those situations where the choices are crystal clear.