The residence of a trust is called the trust “situs” and it may be determined by a combination of factors, including the terms of the trust, the location of the trust settlor, the location of the trustee(s), and the location of beneficiaries. Situs matters because different states have different rules applicable to trusts – and some rules are more favorable than others, depending on your specific circumstances and estate planning goals.
Can I choose my trust’s situs, or am I forced to use my state of residency?
There is a common misconception that one must situs their trust(s) in the jurisdiction of their residency. To the contrary, one can “cherry pick” the best jurisdiction for them given their goals and circumstances, and frequently that is not their residency jurisdiction. As long as the trust is established correctly and has sufficient connections to the chosen situs (e.g., a trustee in that jurisdiction), it can be governed by laws of your choice. By analogy, for decades anyone who created a U.S. corporation did so in Delaware, not because the incorporator resided in Delaware but because Delaware had the best laws for corporations. Similarly, trust settlors can select the best jurisdiction for them given their circumstances.
What are some important considerations that may vary by jurisdiction?
Different states, or jurisdictions, apply different rules to trusts. Choosing the appropriate situs will depend on your personal circumstances and goals. Some of the most common factors weighed in choosing trust situs include:
Taxation. Some states subject undistributed trust income to state level estate taxation; some states do NOT. Whether your trust income will be subjected to such taxation depends on the situs, which, in turn, depends on a combination of factors. Choosing the appropriate situs could result in substantial tax savings.
Applicable Perpetuity Period. The “perpetuity period” refers to the length of time a trust can continue – at the end of the perpetuity period the trust must distribute its assets outright to the then beneficiaries. Thus, if your intention is to benefit subsequent generations, this is an especially important consideration; the longer the applicable perpetuity period, the longer the trust can serve beneficiaries – and the greater the benefit conferred. Funds held in trust can provide creditor protection and insulation from transfer taxation, such as estate and gift taxes. Some states have unlimited, or extremely long, perpetuity periods; other states subject trusts to much shorter perpetuity periods. Choosing the appropriate situs could result in a longer lasting trust, with greater financial and protective benefit for generations yet to come.
Asset and Creditor Protection. One advantage of trust-based planning is that, when done properly, it can offer high levels of asset protection from various forms of financial liability, such as creditor protection, protection from divorce, and protection from civil judgments, both for the trust settlor and beneficiaries. Case law and statutory regulation differs state to state regarding the type and degree of asset and creditor protection afforded by various types of trust-based planning; some states provide substantially more protection against the ability of creditors to pierce through to trust assets or offer shorter “lookback” windows for transfers to trusts. Choosing the appropriate situs could result in greater levels of asset and creditor protection, again both for the trust settlor(s) and beneficiaries.
“Decanting” refers to the ability to pour assets out of an irrevocable trust and into a new trust, with terms or situs that better suit the current circumstances and better serve the beneficiaries. “Directed Trust” rules refer to the ability to give someone other than the trustee (generally called a “trust protector”, “trust advisor”, or “trust director”) power over some (or all) aspects of trust administration. Decanting, and using Directed Trusts generally increases the flexibility of a trust to adapt to changes in circumstances and can prove very useful in protecting the settlor’s intent and the best interests of the beneficiaries. Different states have different rules and regulations regarding decanting and directed trusts; with some states offering more favorable options. Choosing the appropriate situs could result in substantially more flexibility.
What jurisdictions might serve me best?
Choosing the best situs for your trust-based planning needs depends on a number of factors and requires careful attention to, and familiarity with, the rules of various jurisdictions. Alaska, Delaware, Nevada, South Dakota (in alphabetical order) have long been considered favorable jurisdictions, but other states, including New Hampshire, Ohio, Tennessee, and particularly for cryptoassets, Wyoming (in alphabetical order) also have a lot to offer. We have the knowledge and experience necessary to help you determine the appropriate situs, after careful consideration of your unique needs.
If you would like to discuss whether a certain jurisdiction will help you accomplish your family’s legacy planning goals, please reach out to your Client Ambassador to discuss.
The following information is intended for general educational purposes only and should not be construed as legal or investment advice.
In the world of estate planning, few things have had as much impact as email and the internet. These technologies changed the way we interact both personally and professionally, allowing us to exchange ideas and value across borders instantaneously. As internet commerce and communication expanded, the need for secure and confidential information transmission grew, leading to the rise of cryptography and blockchain-based data networks.
Blockchain networks operate without a central server, relying on interconnected peers to verify the validity of data transfers and store transaction records. However, there is no clear incentive for unrelated peers on a decentralized blockchain network to expend resources to validate transactions. Cryptographically secured blockchain tokens, also known as cryptoassets or cryptocurrency, provide incentives for participation on blockchain networks.
Bitcoin is widely believed to be the first successful decentralized blockchain network with a secure token-based economic incentive model. Since its launch in 2009, Bitcoin has spawned an entire economy with thousands of cryptoassets and separate blockchains, with a global economy measured in trillions of dollars.
Estate planners must be familiar with cryptoassets and blockchain technology, as their clients may have wealth comprised of these assets. There are many unanswered questions regarding the treatment of these assets in estate planning documents, as well as transfer and valuation issues.
For further discussion of these topics, read the full article that appeared in theEstate Planning Magazine. It is a primer on digital assets and strategies for their transfer. As these technologies continue to evolve, they will undoubtedly have a significant impact on the fields of law and finance, emphasizing the importance of expertise in this area.
Estate Planning in the Era of Digital Wealth by Matthew T. McClintock, Vanessa L. Kanaga and Jonathan G. Blattmachr originally appeared in Estate Planning, a Thomson Reuters publication.
The following information is intended for general educational purposes only and should not be construed as legal or investment advice.
During the 2008 recession, many families took advantage of the down markets and leveraged gifting options to reduce taxes. 2022 once again provided such an opportunity. How long this environment will last is difficult to predict, but with high exemptions combined with depressed asset values caused by rising interest rates and fears of inflation and/or a recession, this moment in time may be the best strategic gifting opportunity for years to come.
Advantages of the Current Estate and Generation-Skipping Transfer (GST) Tax Exemptions Since 2000, the federal estate tax and generation-skipping transfer tax exemptions have steadily increased:
$675,000 in 2000 $1,000,000 in 2005 $3,500,000 in 2009
$10,000,000 in 2017 (indexed for inflation)
In 2022, the inflation adjustment increased the exemption to $12,060,00 per person; in other words, this is the maximum amount a U.S. citizen or resident can give away or die owning in 2022 without paying gift or estate tax. Alternatively, if an estate were to exceed this limit, a 40% federal estate tax rate would apply to the excess amount. (The GST tax is in essence a second layer of estate tax for transfers that skip a generation or more.)
In addition to federal taxes, some states do levy inheritance or estate taxes, but many places, such as California, Colorado, and Wyoming, do not.
How Much Wealth Can Be Gifted Without Tax Liability? The amount you can gift free of tax depends on the current lifetime exemption at the time of the gift or upon your death. If you make lifetime gifts exceeding $16,000 per recipient per calendar year, you must file a gift tax return and allocate a specific amount of your estate and GST exemptions toward that gift. Significantly, the Internal Revenue Service (IRS) has made it clear that making lifetime gifts when an exemption limit is high will not result in any tax if the exemption is lower when you die. The gift keeps its exemption limit that was current at the time of your gift. Under the current law, unless Congress intervenes, this exemption is scheduled to fall back or “sunset” to $5 million indexed for inflation (roughly $6 million in 2022) on January 1, 2026. Given the current historically high exemptions and the possibility that these exemptions will be much lower in the future, lifetime gifts that use some or all your exemption are best. Any asset transferred, plus its appreciation from the date of transfer, will not be treated as a countable estate asset since it now belongs to the recipient.
Leveraging Gifts in a Down Market
There are two specific types of gifts typically used to transfer wealth during the current down market: Making Individual Annual Gifts for the maximum Gift Tax Exemption Amount 2022 had an annual $16,000 per person limit. This gift tax annual exclusion applies to all gifts made to the recipient during the tax year – including birthday gifts, holiday gifts, and any other gifts during the year. Annual exclusion gifts may be made in the form of cash or any other property, and they may be made outright or in trust(s).
Make Lifetime Gifts Using All or Part of Your Lifetime Maximum Exemption
One of the best methods for creating generational wealth is by not gifting cash but making large lifetime gifts of assets that are likely to increase in value significantly over time. When asset values are depressed, it can be particularly advantageous to make carefully structured, leveraged gifts, usually into protective long-term trusts. As depressed or discounted assets are gifted into protective trusts, the future increase in the value of those assets will be out of the donor’s estate for federal transfer tax purposes. Further, those protective trusts may allow the family’s wealth to avoid estate and GST tax for many generations.
Capital Gain Tax Considerations
Careful gift planning should take into consideration not only the federal transfer tax implications, but also the impact the gift may have on capital gain tax when the asset is later sold by the donee. Capital gain tax is a specific type of income tax levied on any increase in value from the date the owner acquired the property and the date the owner disposes of the property. The value of the property when the owner initially acquired the property is the owner’s “basis.” In the case of gifts made by the owner to a donee during the owner’s lifetime, the donee receives the donor’s basis in the property. (This is called “carryover basis.”)
In the case of gifts made after the owner’s death (for property included in the owner’s estate), under current law the recipient’s basis in the property is reset at the asset’s value on the owner’s date of death. This is often called a “step-up” in basis.
When contemplating whether to make gifts during life or at death, it is important to compare the implications of capital gain tax with the implications of the estate tax.
Learn More About Gifting Your Assets Intelligently
Estate planning requires careful consideration of tax in all its forms, but also requires consideration of a process and structure to prepare heirs to responsibly grow into the gifts and inheritance they will someday receive. Bespoke Services helps affluent individuals and families strategically protect and enjoy the wealth they’ve worked hard to build.
The following information is intended for general educational purposes only and should not be construed as legal or investment advice.
Stephan Livera Podcast: UHNW Bitcoin Strategies Matthew McClintock, executive managing director of Bespoke Group joined Stephan Livera on his podcast to chat about Bespoke’s multi-family office and private trust company services for ultra-high net worth US clients. They discuss:
What level of wealth qualifies for a family office?
What are the concerns of Bitcoin-affluent families?
What kind of structures can they use?
Benefits of these structures
Trade offs of the approach
How the Sovereign Individual thesis may play out
Should UHNW Americans consider staying out of these structures?
What’s needed from a technology and culture perspective?
Check out the podcast on Apple, Android, or by clicking the link below.
Navigating generational wealth is like navigating a complex maze – probably one you’ve never seen before. It’s easy to find yourself alone, confused, a little intimidated and claustrophobic. You can’t tell what’s behind each turn.
Is it a dead end?
A U-turn?
What is lurking around the corner?
Are you walking around in circles just wasting time?
What opportunities are you missing by choosing one path over another?
The maze represents the difference between where you are and where your legacy is. It’s the path from the life you have today to the life you want the most for yourself and for the most important people and causes in your world. You may have hints of what’s possible, but you don’t know how to achieve it. You’re not sure how to measure the tradeoffs, and how to get from here to there.
Maybe you saw your parents work their way through their own maze. Maybe they stumbled around a bit, and maybe they found a guide to help them through. Maybe they made some progress but they got stuck along the way, never realizing the full potential of their legacy. Maybe they sacrificed important relationships on the way to their destination. Maybe they spent more fretful nights than they really needed to – maybe they still are.
Your maze is different. In fact, every maze is different. They all have the same traps, but the solution through the maze is as unique as the hero in the middle. If you’re like most successful entrepreneurs, you may not even realize you’re lost in a maze. Until you wake up one day to find yourself in the middle of a labyrinth that grew up around you.
What traps are lurking in the maze? In the context of legacy wealth, they are legion.
Avoidable Taxes. We’re reminded every April (and in most cases, at least every quarter) the tangible cost of financial success. Navigating the tax code effectively is essential to reducing the erosion of your wealth from avoidable taxes.
Opportunity Costs. Many entrepreneurs don’t think about protecting wealth until after a big exit, or after their balance sheet reflects their success. The most effective time to plan is when values are low, before the velocity of your wealth accelerates. There are always planning options available after the wealth is built, but there’s natural leverage in planning when values and markets are soft.
Custodial and Jurisdictional Risk. Uncertain regulatory environments and exchanges masquerading as custodians can expose your wealth to unlimited loss. Chasing “yield” without fully understanding counterparty or other risks often ends very badly for investors.
Creditors. It’s easy to think of a potential creditor as some stranger on the street. In reality, most creditors first start out as friends, business partners, lovers, or spouses. They’re often someone you sought out, connected with, built a friendship, and entered into an intimate relationship. You were going to build the next best thing, take over the world together, or maybe raise a family. It’s much more effective to protect wealth BEFORE problems arise. Mitigating creditor risk is an essential part of navigating the maze.
Unprepared Heirs. At what point does it make sense to drop hundreds of thousands of dollars – or millions of dollars – into a kid’s lap? (The correct answer is probably, “Never.”) Strategic inheritance planning helps preserve family wealth while helping the most important people in your life flourish and become the best possible version of themselves. That doesn’t mean hiding wealth from your loved ones, but it does mean limiting the opportunities for hard-fought wealth to be squandered by poor decisions, bad luck, unhealthy lifestyles, or immature relationships.
There are many more risks – as well as innumerable opportunities – you’ll encounter as you navigate your maze. We built Bespoke to help successful entrepreneurs and families navigate the maze of risk and opportunity in a constantly changing world.
Let us be your guide.
The information in this blog post is intended for general educational purposes only and should not be construed as legal advice.
