Best States for Trusts: How to Choose One That’s ‘Trust-Worthy’

If you’re thinking about starting a trust to help remove assets from your estate, avoid probate, minimize estate taxes, protect your assets from creditors and provide income to your heirs and favorite causes, there are a number of important considerations you may not be aware of, including in which state you choose to establish the trust.

One, the trust doesn’t have to be established in your state. Two, you don’t have to use a corporate trustee (such as a national or local bank trust company) to manage your trust. And three, depending on where the trust is located, you can authorize your financial adviser to manage investable assets in your trust, rather than ceding control of investment management to a bank trust company.

Beyond these considerations, there are other benefits of establishing a trust in a state that has favorable trust laws.

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Generally, the “best trust states” have no state income taxes or estate or inheritance taxes. They allow trusts to last for generations. They offer strong protection of trust assets against creditors and lawsuits. And they make it relatively easy to change trust provisions.

While definitions of “best” may vary, there is a general consensus that seven states stand out in terms of favorability: Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.

Let’s take a closer look at what makes these seven states particularly “trust-worthy.”

Ability to use outside advisers and attorneys

Some states don’t allow financial advisers or estate attorneys to be involved in trust management. In these states, trusts must generally be established with a national or local bank trust company, which handles every aspect of trust administration, from investing to distributions.

However, most states do allow for either directed or delegated trusts, which enable qualified outside professionals to handle certain responsibilities.

For example, grantors who establish a delegated or directed trust can legally authorize their financial adviser to manage their trust assets and their estate attorney to field distribution requests from beneficiaries and pass them along to the corporate trustee. (In many cases, financial advisers take on both roles.)

In these cases, grantors generally choose an independent corporate trustee that is primarily a trust administrator, rather than a traditional bank trust company. A trust administrator is mainly responsible for securing and safeguarding the assets to be held in the trust and distributing them following the provisions of the trust agreement. As a trustee, they have fiduciary responsibility for ensuring that trust assets are managed and distributed in a prudent manner.

Shielding trust income from state taxes

Most trusts have to pay federal taxes on income and capital gains generated by the trust. But properly structured trusts established in the Trust-Worthy Seven don’t have to pay state income taxes. None of these states has estate taxes, either.

Alaska, Nevada, South Dakota, Tennessee and Wyoming don’t tax trusts, period. Delaware doesn’t levy its state income tax on income and capital gains generated by irrevocable trusts with nonresident beneficiaries. And while New Hampshire does have an interest and dividends tax, trusts are exempt.

Keep in mind, however, that beneficiaries who live in states with state income taxes may have to pay these taxes on income and other distributions they receive from any trust, wherever it is established.

Establishing long-lasting trusts

In most states, a trust must legally expire no more than 21 years after the death of the last beneficiary who was alive when the trust was created.

But in some situations, parents want to establish irrevocable trusts that will continue to provide financial support for many future generations, including children who haven’t been born yet.

The Trust-Worthy Seven enable grantors to create these long-lasting “dynasty trusts.” For example, Alaska, South Dakota and New Hampshire allow a trust to last forever. Wyoming trusts have a 1,000-year limit. Trusts in Nevada must end after 365 years. In Tennessee, it’s 360 years. Delaware trusts funded with personal property and investable assets can last forever, but real estate holdings must be liquidated after 110 years.

Protecting assets from creditors and litigants

Most states have laws that shield trust assets from claims by creditors and plaintiffs in lawsuits. These states also don’t allow beneficiaries to use future trust distributions as collateral for loans or use trust assets to directly pay off their personal debts.

But the Trust-Worthy Seven take these protections a step further by providing stronger defense for trust assets against lawsuits filed by creditors, ex-spouses, disgruntled family members and other litigants.

Flexibility to change trust provisions

Sometimes circumstances require changes to a trust. For example, grantors or beneficiaries may want to change designated trustees or financial advisers. They may want to convert a single trust to multiple trusts. They may want to change the terms of a trust. Or they may need to create a special needs trust to provide ongoing financial support to spouses, children or grandchildren with physical or mental disabilities.

In many states, changing trust provisions — particularly for irrevocable trusts — can be difficult, time-consuming and expensive.

The solution to this problem is known as decanting — the act of removing assets from an outdated trust and transferring them into an updated trust.

All of the Trust-Worthy Seven have flexible decanting laws that make it easier for new trusts to replace outdated trusts. The degree of flexibility varies by state. Some place few if any limits under which decanting can occur. Other states allow decanting only if certain conditions are met.

Which state is best?

That really depends on which benefits are most important to you. But, generally, the consensus among advisers and estate attorneys is that the trust laws of South Dakota and Nevada offer the best combination of tax benefits, asset protection, trust longevity and flexible decanting provisions.

If you are thinking of establishing a trust, have a conversation with both your estate planning attorney and your financial adviser — possibly at the same time. Together, they can help you determine which trust structure and jurisdiction make the most sense, given your specific legacy planning objectives.