© Mark Merric, All Rights Reserved.

Commissioned by The First National Bank in Sioux Falls

Sioux Falls, SD

A White PAPer:The Top TRuST JuRiSDiCTioNS

 

 

TABLEOFCONTENTSIntroduction...................................................................................................................................1

I. AssetProtection....................................................................................................................2

DiscretionaryTrustProtection...............................................................................2

ControlArguments.......................................................................................................6

DominionandControl......................................................................................6

AlterEgo.................................................................................................................6

II. AdvancedTrustLaws.........................................................................................................8

TrustProtector...............................................................................................................8

DirectedTrust.................................................................................................................8

ReformationandDecanting......................................................................................8

VirtualRepresentation...............................................................................................9

QuietTrust.......................................................................................................................9

Privacy............................................................................................................................10

III. Migration...............................................................................................................................12

IV. StateTaxation.....................................................................................................................13

V. RuleAgainstPerpetuities...............................................................................................14

Summary.......................................................................................................................................15

SummaryTable..........................................................................................................................17

Biography.....................................................................................................................................18

 

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AWhitePaper:

TheTopTrustJurisdictions ByMarkMerricJuly,2014 ©MarkMerric,AllRightsReservedCommissionedbyTheFirstNationalBankinSiouxFalls,SiouxFalls,SDIn2010,2012,and2014,DanWorthingtonandthisauthorco‐authored,WhichTrustSitusisBest in 2014.1 These articles discussed various trust laws of up to 28 states that hadabolished the rule against perpetuities. In these articles, states based on their trust lawsweredividedintothefollowingfourtiers:

TierOne:“TopFourTrustJurisdictions”Alaska,Delaware,Nevada,andSouthDakota

TierTwo:NewHampshire,Wyoming,Florida,andOhio

TierThree:Tennessee,Utah,andIllinois

TierFour:Theremaining17statesThisWhitePaper focuseson the trust lawsof theTopFourTrust Jurisdictions.Similar topriorarticles,thisWhitePaperusesasummarytableforcomparisonanddiscusseseachofthekeyfiveprovisionsthroughoutthearticle.Acompletetableisalsopresentedattheendofthearticle.Thetablesaredividedintothefollowingmajorcategories:

I. ASSETPROTECTION II. ADVANCEDTRUSTLAWS III. MIGRATION IV. STATETAXATION V. RULEAGAINSTPERPETUITIES

 

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I.ASSETPROTECTIONTheassetprotectionpartoftheanalysisisdividedintotwomajorparts:

1. DiscretionaryTrustProtection2. ControlArguments

DiscretionaryTrustProtection

Alaska

Delaware

NevadaSouthDakota

NotEnforceableRight Yes No No YesCreditorCan’tAttach Yes Yes Yes YesRestatementSecondJudicialReview No Probably Yes YesDefinitionofaDiscretionaryTrust No No Ambiguous Yes

When clients seekassetprotection for their childrenanddescendants, there are typicallytwogroupstheyareconcernedabout:(1)protectingachild’sinheritancefromclaimsofanestranged spouse; and/or (2) claims from thirdparties.With firstmarriagedivorce ratesnowapproaching60percent and subsequentmarriagesmuchhigher, protecting a child’sinheritancefromanestrangedspouseistypicallyamuchgreaterconcernwhencomparedtothird‐partycreditors.Inthisrespect,thereareprimarilytwotypesofassetprotectionunderAmericancommonlaw: (1) discretionary trust protection and (2) spendthrift protection. Discretionary trustprotection originated under English common law and has nothing to dowith spendthriftprotection.Rather, it isbasedon the fact that abeneficiarydoesnothaveanenforceablerighttoadistribution,2)andtherefore,nocreditormaystandintheshoesofabeneficiary.Thebeneficiary’sinterestisnotapropertyinterest3andisnothingmorethananexpectancythatcannotbeattachedbyanycreditor.4Conversely, spendthrift protection began in America approximately 125 years ago. It hasnever been accepted by the English courts. Under American law, except for certainexception creditors such as child support, alimony, governmental claims, necessaryexpensesofabeneficiary,aspendthriftclauseprotectscreditorsfromattachingtheassetsatthetrustlevelandforcingadistributioninsatisfactionoftheexceptioncreditor’sclaim.While almost all discretionary trusts contain (and should contain)5 a spendthrift clause,whenonereadsadiscretionarytrustcase,theanalysisnevergetstospendthriftprotection.Rather, the beneficiary did not have either an enforceable right to a distribution or apropertyinterest,andsincethebeneficiaryheldnothing,nocreditor(notevenanexceptioncreditor) could stand in the beneficiary’s shoes. Therefore, no creditor could reach thebeneficiary’sinterestbyforcingadistributionorattachingthebeneficiary’sinterest.Itisthebeneficiary’slackofanenforceablerighttoforceadistributionthatprovidesthe

 

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keyconcepttoprotectingagainstthefollowingtypesofmaritalclaims:

1. Willthebeneficiary’strustinterestbeconsideredmaritalpropertysubjecttodivisioninadivorce?

2. Willanestrangedspousebeabletoforceadistributionthroughaminorchildbeneficiary?

3. Willundistributedincomebeimputedbyacourtinthecomputationofabeneficiary’schildsupportoralimony?

The first issue is currentlya concern in ten states,6where remainder interestshavebeendeemedtobemaritalproperty.Whetheracurrentdistributioninterestwillbeconsideredaproperty interest under most state laws generally depends on whether or not thebeneficiary has an enforceable right to a distribution.7 This becomes a bit of a complexanalysis beyond the scope of this article. However, onemay simply draft out of the anyproperty interest issuebyutilizationofadiscretionarydynasty trust–provided local lawhasaSecondRestatementinterpretation.Thesecondissueisabitmoresubtle,butispresentineverystatewheneveraminorchildbeneficiaryholdsanenforceablerighttoadistribution.Inthissituationanestrangedspousecanstandinthechild’sshoesandsueforadistributiononbehalfoftheminor.Assumetheclient creates a trust where distributionsmay bemade to his child, Bob, and his child’sdescendants.Bobhastwominorchildren(TedandCarol).Bob’sestrangedwife,Alice,hassomeformofcustodywiththetwochildren.Aliceisnotabeneficiaryofthetrust.Bobhasfully paid any child support and nomaintenance is owed to Alice. Can Alice still sue thetrusteepursuanttothedistributionstandardonbehalfofherminorchildren?Ofcourseshecan,ifthedistributionstandardgivesthechildrenanyenforceablerighttoadistribution.ItshouldberepeatedthatAliceisnotsuingforchildsupportormaintenance,andsheisnotsuing forapropertydistribution.Rathershe is suingsolelydue toherchildrenhavinganenforceablerighttoadistribution. Diagramofthisstructure:

Bob'sEstrangedSpouse‐Alicesuingforadistribution

TedCarolBob’sChildBob’sChild

Trustee

Beneficiaries: Bob

IrrevocableTrust

 

 

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Thegoodnewsisthatalmosttheentiredomesticrelationsbarhasyettofigurethisout.Thebadnewsisthatmoreandmoredomesticrelationsattorneysarelearningabouttrustlaw.The better news is that by drafting a discretionary trust that does not give a minorbeneficiary the ability to force a distribution, Alice has no more rights than the childbeneficiary.Therefore,evenstandinginthechild’sshoes,shecannotforceadistribution.While this part of the article deals with third party trusts, this author frequently sees arelateddraftingconcernindomesticassetprotectiontrusts(i.e.,self‐settledtrusts).Inthissecondexample,thesettlor,Mary,namesherselfandherchildrenasbeneficiariesandfundsaDAPTwith separate property. The distribution standard states the “Trustee shallmakedistributionsforhealth,education,maintenance,andsupportorsomeotherstandardthatcreatesanenforceablerightunder local law.Later,Marydivorces,andestrangedhusbandPeter sues onbehalf of theminor children for a distributionpursuant to the distributionstandard.Again,ifaminorchildcanforceadistribution,somayPeterstandingintheminorchild’sshoes.The third issue is the concern that a court will impute undistributed income in thecomputationofchildsupport.ThisistheexactresultinthecaseofDwightv.Dwight.8Thisalsoappears tobeanew issuethat thedomesticrelationsattorneyshavenotraiseduntilrecently.Unfortunately,thedeductivelogicisrelativelystraightforward.Ifabeneficiaryhasan enforceable right to a distribution, just because a beneficiary does not ask for adistributiondoesnotappeartobeareasontoexcludeitfromchildsupportormaintenance.Further,acourtmaymakeananalogytoaspecialneedstrust.Intheeventthatabeneficiaryhas an enforceable right to adistributionwithoneof these trusts, thebeneficiaryhas anavailableresourceandisdisqualifiedfromgovernmentalbenefits.In addition tomarital property claims, estranged spouses suing on behalf ofminor childbeneficiaries and the imputation of income for child support or alimony, there are otherareas where planners want to make sure a beneficiary cannot force a distribution.Regardingclaimsby the federalgovernment, ifabeneficiaryhasanenforceableright toadistribution, he or she has a property interest under federal law, and the trust may beattachedbya federal super creditor.9 In addition to theassetprotection issues, there areestateinclusionissuesforself‐settledtrustsandpossibleestateinclusionissuesforspousalaccess trusts if certainbeneficiariesholdanenforceableright toadistribution.Foraself‐settledestateplanningtrust(i.e.theAlaskaRainyDayTrust™),10asoneofthekeyissuestoavoid estate inclusion, the settlor/beneficiary cannot hold an enforceable right to adistribution.11Withaspousalaccesstrust,ifaspouse/beneficiaryholdsanenforceablerighttoadistributionandthetrust(orlocallaw)doesnotincludeanUpjohnsavingsclauseoraprovisiontolooktothebeneficiary’sresourcesincludingthesettlor’sobligationofsupport,thereagainisapossibleestateinclusionissue.12Theassetprotectionplanningkey to almost all of the aforementioned issues is todraft adiscretionary trust where the beneficiary does not have an enforceable right to adistribution.13UnderEnglishcommonlaw,theRestatementofTrusts(“RestatementFirst”),

 

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theRestatement(Second)ofTrusts(“RestatementSecond”),aswellasalmostallcaselawon point, all of this law was relatively consistent, and estate planners could draft adiscretionarydistributionstandardwithrelativecertaintysothatabeneficiarydidnothaveeither an enforceable right to a distribution and the beneficiary did not hold a propertyinterest. Unfortunately, with almost no case law to support its position, the Restatement(Third)ofTrusts(“RestatementThird”)reverseshowacourtshouldinterpretadistributionstandardso that itwill almostalwayscreateanenforceable right inadiscretionary trust.Manyestateplannersbelieve that thenational versionof theUniformTrustCode followstheRestatementThird’spositionregardingthis issue. InresponsetothisproblemcreatedbytheRestatementThird,states(includingsomeUniformTrustCodestates)arebeginningto respondwith statutes codifying the Restatement Second in this area. Absent a statutecodifying the Restatement Second of Trusts in this area, even if a state has strongRestatementSecondcaselaw,acourtmayreverseitspositionandinadvertentlyadopttheRestatementThird’snewviewofdiscretionarytrusts.Inthisrespect,astatutecodifyingtheRestatementSecondistheonlysuremethodtopreservetheassetprotectionofacommonlawdiscretionarytrust.When drafting a discretionary trust statute, the following four key areas need to beincluded:

1. Thedefinitionofadiscretionarytrustsoplannerswillknowthecorrectdistributionlanguagethatshouldbeused.2. Thelegalramificationsofadiscretionaryinterest.Inotherwordsthestatutestatesthatthebeneficiarywhoholdsadiscretionaryinterestdoesnotholdapropertyinterestoranenforceablerighttoadistribution.3. TheRestatementSecondelevatedjudicialreviewstandardforadiscretionaryinterestwhereajudgewouldonlyreviewthetrustee’sdistributiondecisionifthetrusteeacted(1)withanimpropermotive(2)dishonestyor(3)failedtotouseitsjudgment.144. Nocreditormayattachadiscretionaryinterest.

Theauthorfindsthatoftheabovefour,themostimportantfactorneededinthestatuteisanaffirmative statement that a discretionary interest is neither a property interest nor anenforceableright.Second,thestatuteprovidesthatnocreditormayattachadiscretionaryinterest, and third the statute provides for a Restatement Second Sections 187 and 122judicial review standard. Finally, the fourth factor of importance is the inclusion of astatutorydefinitionofadiscretionaryinterest.South Dakota has codified the most complete discretionary trust law having all fourelements. Alaska recently passed a statute containing all but the third element of adiscretionarytrust15‐elevatedjudicialreviewstandardforadiscretionarytrust.Nevada’sstatutecontains thesecondandthirdelementsmissing themost importantelement–notstatingthatthebeneficiaryofadiscretionarytrustcannotforceadistribution.TheNevadastatutealsoprovideslittletodefineadiscretionarytrustinterest,leavingthisissuetofuturecaselaw.

 

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Some may take the position that Delaware’s approach is novel because it cites theRestatementSecondofTrustsforinterpretations.Conversely,otherstakethepositionthatdoing so leavesmore than a considerable amount of room for judicial interpretation. Forexample, one Uniform Trust Code proponent has taken the position that the ThirdRestatement of Trusts is founded in the Second Restatement. While the author wouldstrongly disagreewith this interpretation and find the Third Restatement to be a radicaldeviationfromcommondiscretionarytrustlaw,Delaware’sfailuretospecificallycodifytheelementsofadiscretionary trust leads toconcernhow theDelawarecourtswill interpretdiscretionarytrustlaw. ControlArguments

Alaska

Delaware

NevadaSouthDakota

DominionandControl No No Yes YesAlterEgo No No Yes Yes

DominionandControlA new area where trial attorneys are attempting to pierce both discretionary andspendthrift protection is “dominion and control.” For example, with little, if any, legalsupport for its position, the Restatement Third takes the position that any creditor mayattach a sole trustee/beneficiary’s interest. However, there are other factors, particularlywhencombined,whereacourtmayholdthatabeneficiaryhasdominionandcontroloveratrust.Forexample,thebeneficiarymayholdanunconditionalremoval/replacementpower,appointafriendorcloserelativeasatrustee,abeneficiaryholdsageneralorspecialpowerof appointment, the trust has only one or a primary beneficiary of the trust, or thebeneficiaryisamanager,president,orgeneralpartnerofanentityownedprimarilybythetrust.SouthDakotahasgonethefarthestinthisareabyprovidingthattheseelementsandmore,eitheraloneorincombination,donotconstituteafindingofdominionandcontrolbya court.16 Nevada and Oklahoma also adopted substantially similar legislation. Delawaretook a different approach. Its statute provides that a creditor has no more rights thanprovidedbythetrustdocument itself.Ononehand, forso longas thedraftingattorney isawareofthetypeofcreditorlanguagethatneedstobeaddedtoaDelawaretrust,thismayprove to be a novel approach. On the other hand, whether this approach will prevent aDelaware court from utilizing the equitable dominion and control remedy is uncertain.Alaskahasnotaddressedthisissue.AlterEgoCloselyrelatedtotheconceptofdominionandcontrolisthedoctrineofholdingthetrustasthealteregoofasettlororabeneficiary.FollowingtheapproachofaDAPTstatute,South

 

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Dakotalawstatesasfollows:Notwithstandinganyotherprovisionoflaw,noactionofanykind,includinganaction to enforce a judgment entered by a court or other body havingadjudicativeauthority,maybebroughtatlaworinequityforanattachmentorotherprovisionalremedyagainstpropertythatisthesubjectofaSouthDakotatrustorforavoidanceofatransfertoaSouthDakotatrustunlessthesettlor'stransfer of property was made with the intent to defraud that specificcreditor.17

SouthDakotahasappliedthesamerestrictiononattackingclaimsthatseveralDAPTstateshavethat inessencesaystheonlyremedyacreditorhasagainstaSouthDakotatrust isafraudulentconveyance.Inadditiontothisprovision,SouthDakota,Oklahoma,Indiana,andNevadaallhaveprovisionsstatingthatacourtmaynotfindasettlorofanirrevocabletrustmaybedeemedtobethealteregobythecombinationofanydominionandcontrolfactorsthatarelistedintheirrespectivestatutes,plus:(1) Isolatedoccurrenceswherethesettlorhassignedchecks,madedisbursements,

orexecutedotherdocumentsrelatedtothetrustasatrustee,wheninfactthesettlorwasnotatrustee

(2)Makinganyrequestsfordistributionsonbehalfofbeneficiaries(3)Makinganyrequeststothetrusteetohold,purchase,orsellanytrustproperty18In this respect, SouthDakotahas the “best”protectionagainst analterego typeof claimsfollowedbyNevada.

 

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II.ADVANCEDTRUSTLAWS

Alaska

Delaware

NevadaSouthDakota

TrustProtectorStatute Yes Yes Yes YesDirectedTrustStatute Yes Yes Yes YesReformationStatute Yes Yes Yes YesDecantingStatute Yes Yes Yes YesVirtualRepresentation Yes Limited Limited YesQuietTrustStatute

YesLimitedLifeofSettlor

YesSilent

AdvisorsNo Yes

PrivacyLawStatute

MustOutweighPublicBenefit

MustOutweighPublicBenefit

Limit3Yrs

MustOutweighPublicBenefit

YesSealedin

Perpetuity

TrustProtectorAdvanced trust lawsare laws thatprovide flexibilityaswell as theopportunity to reformoldertruststhatdonothavemanyoftoday’sflexibletrustprovisions.Forexample,priorto1996,theconceptofaTrustProtectorwasutilizedinmostcommonlawnations–excepttheU.S.19TheprotectorconceptdidnotcometoAmericauntiloneofthemostprominentU.S.estateplanningattorneysco‐counseledonanoffshoretrust,andhesawtheconceptcouldbeexpandedbyplacingcertaintaxsensitivepowersinathirdpersonwhocouldmodifythetrust in certaincircumstances.Forexample, thepower toamend the trust in theeventofchangestothetaxcodethatdirectlyaffectthetrustisatypicalprotectorpower.DirectedTrustOnadifferentnote,someclientswishtosplittheadministrativepowersofthetrustee.Theywish for the trustee to be responsible for the distribution decisions, but prefer a trustadvisor to be responsible for the investment decisions. This is known as a directed truststatute.ReformationandDecantingReformation and decanting statutes are used tomodify older trusts that typically do notprovide foraprotectorwithamendmentpowers. If a trust comes froma jurisdiction thathasadifferentruleagainstperpetuities that the jurisdiction that it ismoving to, the trustwillneed tobereformed.20The judicialprocessof reformation is typicallyusedwhen thetrustneedstobetweakedtoconformtothelawofthenewtrustjurisdiction.Conversely,adecantingstatuteisusuallyusedwhentheobjectiveisforamajoroverhaul.Forexample,

 

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the author reviewed a trust created by a very wealthy family in the late 1960’s. It wasprepared by one of the top New York firms, and it was approximately 20 pages long.Naturally the trustdidnothaveprotectorprovisions, removal/ replacementpowersovertrustees,segregateddynastytrustsbyeachfamilymemberandtheirdescendants.Sincetheauthor’s average irrevocable trust is typically 110 plus pages, tomove from an old trustdesigntoamoderntrustdesignwouldbemuchbetteraccomplishedbyusingadecantingstatute.TheauthorfindstheTopFourTrustJurisdictionsarerelativelysimilarwhenitcomestoadirected trust statute, trust protector statute, and reformation statutes. Also, Delaware,Nevada, and South Dakota are relatively similar regarding their decanting statute. Theexception here is Alaska. Alaska requires notice to the settlor if living, to anyone withtrusteeremovalpower,andtobeneficiaries,unlessthetrustspecificallyexemptsnotice.Theauthordoesnotfindnoticetobeamajorissueasalmostalwayssuchnoticewouldbegiventoalivingsettlorandthetrustbeneficiaries.Also,addingtheadditionalnoticetosomeonewiththepowertoremoveatrusteedoesnotseemtobeamajorrequirement.Conversely,ifit is the desire to convert a mandatory distribution interest or a support interest into adiscretionary interest, then Delaware, Nevada, and South Dakota allow such conversion.However,Alaskadoesnot.21VirtualRepresentationThe concepts of reformationanddecantingare veryeffective tohelpmodifyolder trusts.However,thereexiststheissueofprotectingthecurrentandfuturebeneficiariesofthetrustbefore reformation or decanting. Naturally, a court has little concern with protecting abeneficiarywhen thebeneficiary consents to the reformationordecanting.However, thisbecomesaproblemwhenthetrustisadynastytrustandthefuturebeneficiaryhasnotbeenbornor isaminorandcannot legally consent.Avirtual representationstatute solves thisissuebyallowinglivingbeneficiariestorepresenttheunbornbeneficiaries.Under South Dakota’s virtual representation statute,22 service of process when notifyingbeneficiaries is generally limited to persons in being and parties to the proceeding. Thecourt shall appoint a guardian ad litem to represent or protect the persons who mayeventuallybecomeentitledtoaninterest,ifitdoesnotappearthatthereisapersoninbeingorascertainedashavingthesameinterest.Further,underSouthDakotalawitmaynotbenecessary to serve the potential appointees of a power or appointment nor the takers indefaultoftheexerciseofageneralpowerofappointment.Alaskahasacomparablestatute,whereDelawareandNevada’svirtualrepresentationstatutesaremorelimited.QuietTrustDoesanymomordadwanttheirkidstogrowuptobe“trustbabies”?Thecommonsenseanswer is “no.”However, if a child isaware that therearesubstantial trustassets to takecareofsuchchild,manytimesthiswillnegativelyaffectthechild’sworkethics.Further,the

 

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largertheamountpotentiallyavailabletoachildthroughatrust,generallythegreaterthepotentialtrustbabyproblembecomes.Inthisrespect,almostallwealthyparentscreatingatrustwishtohavetheoptionofwhenthey inform a child or grandchild of his or her beneficial interest in a trust. Conversely,undercommon law,a trusteewasgenerallyrequiredto informabeneficiaryofhisorherbeneficial interest at age ofmajority. TheTop FourTrust Jurisdictions have reversed thecommon law rule by allowing the trust to waive notice requirements regarding theexistence of the trust and its assets to beneficiaries. The ability to waive notice tobeneficiariesisreferredtoasa“quiettrust.”SouthDakotahasthemostcomprehensivequiettruststatutethatallows(1)thesettlor;(2)trust protector; and/or (3) advisor to expand, restrict, eliminate, ormodify the rights ofbeneficiaries to receive trust information.23Delaware is similar to SouthDakota except itdoes not expressly allow a trust protector or advisor to modify notice to beneficiaries.Alaskaallowswaiverofnoticeonlyduringthesettlor’slife.Thisisparticularlytroublesomefordynasty trustswhere the trust assets aredivided into separatedynasty trusts at eachgenerational level, sometimes referred to as a “beneficiary controlled trust.”24 After aseparate dynasty trust is created for the benefit of each child of the settlor, the child istypically the primary beneficiary and does not want his or her children (the settlor’sgrandchildren) to become trust babies. Therefore, the child does notwant the trustee togivenoticetohisorherchildrenofthetrustforsomeperiodoftime.Alaskalawdoesnotprovideforrestrictingnoticeaftertheinitialsettlor.Nevadaissilentontheissueofnoticetobeneficiaries,leavingittothecourtswhetherwillfollowcommonlawandrequirenotice.PrivacyNoonewishesfortheirfamilylaundrytobeopenrecordforthepublic.Therefore,privacyinfamilylitigationoranycourtactioninvolvingthetrustishighlydesired.SouthDakotahasthemostfavorableprivacylawstatingasfollows:

“Theprivacyofthosewhohaveestablishedacourttrustorothertrustshallbe protected in any court proceeding concerning the trust if the actingfiduciary,thetrustor(ifliving),oranybeneficiarysopetitionthecourt.Uponthe filing of such a petition, the instrument on which the trust is based,inventory, statement filed by any fiduciary, annual verified report of afiduciary, final report of a fiduciary, and all petitions relevant to trustadministration and all court orders thereon shall be sealed upon filing andmay not be made a part of the public record of the proceeding, but areavailable to the court, to the trustor, to any fiduciary, to anybeneficiary, totheirattorneys,andtosuchotherinterestedpersonsasthecourtmayorderuponashowingoftheneed.”25

 

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AlaskaandNevadahavegeneralcourtsealingstatutesnotspecifictotrusts.Underthesestatutes,thecourtmustconcludethelegitimateinterestofconfidentialityoutweighsthepublicinterestindisclosure.Forexample,AlaskaR.ofAdmin.37.6(2014)provides:

“Thecourtmaylimitpublicaccessasdescribedaboveifthecourtfindsthatthepublicinterestindisclosureisoutweighedbyalegitimateinterestinconfidentiality,includingbutnotlimitedto:

(1)riskofinjurytoindividuals;(2)individualprivacyrightsandinterests;(3)proprietarybusinessinformation;(4)thedeliberativeprocess;or(5)publicsafety.

(c)LeastRestrictiveAlternative.‐‐Inlimitingpublicaccessthecourtmustusethe least restrictive means that will achieve the purposes of these publicaccessrulesandthereasonableneedsassetoutasthebasisfortherequest,withoutundulyburdeningthecourt.”

Delawarealsodoesnothaveaprivacystatutespecificallyrelatedtotrusts,anditappearstohavetheleastconfidentialityoftheTopFourTrustJurisdictions.Del.Ch.Ct.R.5.1(bstates:

“(1) Except as otherwise provided in this Rule, a Document shall not receiveConfidentialTreatmentunlessthepersonseekingConfidentialTreatmentshall have first obtained an order of this Court specifying the information orcategories of information for which good cause exists for ConfidentialTreatment(“ConfidentialInformation”).ADocumentshallreceiveConfidential Treatment only if and to the extent that it contains ConfidentialInformation.(2) For purposes of this Rule, “good cause” for Confidential Treatment shallexistonlyifthepublicinterestinaccesstoCourtproceedingsisoutweighedbythe harm that public disclosure of sensitive, non‐public information wouldcause. Examples of categories of information thatmayqualify as ConfidentialInformation include tradesecrets;sensitiveproprietary information;sensitivefinancial, business, or personnel information; sensitive personal informationsuchasmedicalrecords;andpersonally identifyinginformationsuchassocialsecuritynumbers,financialaccountnumbers,andthenamesofminorchildren.”

Inadditiontotherequestingpartyhavingtheburdentoprovegoodcausethatappearstobelimitedtosomespecificcategoriesofinformation,theperiodofconfidentialityonlylastsforthreeyears.Attheendofthethreeyears,therequestingpartymustprovegoodcausetoextendtheconfidentialityperiod.

 

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III.MIGRATION

Alaska

Delaware

NevadaSouthDakota

Migration NoStatute NoStatute Statute Statute

Most trust instruments are silent on whether the trustee should look to a beneficiary’sresourcesbeforemakingadistribution.UndertheRestatementFirst,RestatementSecond,andmost common law, if a trust instrumentwas silent, then the trustee did not have anobligation to look toabeneficiary’s resources indeterminingwhetheror theamountofadistribution. Rather, the assumption is that the settlor wanted to treat his or herbeneficiaries equally, regardless how well a beneficiary did in his or her personal life.Unfortunately,theRestatementThirdreversescommonlawandpriorrestatementsinthisarea,byrequiringatrusteetolooktoabeneficiary’sresourceswhenthetrustinstrumentissilent.Whileitisnotcertain,itishighlyprobablethattheUniformTrustCode(“UTC”)alsoadoptsthisposition.Assumeforexamplethatmomcreatedatrustforthebenefitofherthreechildren,thetrustinstrumentwassilentastowhetherthetrusteeshouldlooktothebeneficiaries’resources,and state law followed thegeneral common law thatdidnot require the trustee todo sowhenatrust instrumentwassilent.NowthebeneficiarieswishtomovetooneoftheTopFourJurisdictionstotakeadvantageoftheirmuchmorefavorabletrustlaws.Wouldsuchabeneficiaryeverconsenttosuchachangeifitwouldhavetheeffectofdecreasinghisorherbeneficial interest? In this respect, a state statute that codifies the2ndRestatementview,where a trustee is not required to look to a beneficiary’s resources in determining theamountofthedistribution,becomesveryimportanttowhetherabeneficiaryshouldbeinfavorofachangeinthegoverninglawandplaceofadministrationofthetrust.Atpresent,SouthDakotaandNevadahaveaddressedthispotentialmigrationissuecreatedby theRestatementThirdby codifying theRestatement Second.Alaska andDelaware aresilentontheissue.

 

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IV.STATETAXATION

Alaska

Delaware

NevadaSouthDakota

NoStateIncomeTaxAppliedtoTrust Yes ResidentsOnly

Yes Yes

InsurancePremiumTax 10bps 200bps 350bps 8bps

Statetaxationhastwoprimarycomponentswhenselectingatrustjurisdiction:1.Doesstatelawimposeanincometaxonthetrustincome?2.Ifthetrustisanirrevocablelifeinsurancetrust,whatisthestatepremiumtax?Foratrusttobesubjecttostateincometax,itmustbeclassifiedasanon‐grantortrustthatisaccumulatingincome.Incomefromagrantortrustistaxedtotheindividualwhocreatedthe trust inhisorher state.Therefore, state income tax rulesarenota situsdeterminingfactor for a grantor trust. Also, if all the income is distributed to a beneficiary, suchbeneficiaryistaxedonsuchincomeinhisorherstateofresidency.Inthiscase,stateincometax rules are also not a situs determining factor. Conversely, almost all large trustsaccumulatesomeifnotmostofthetrustincome.Further,evenifatrustisinitiallyclassifiedas a grantor trust, upon the settlor’sdeath, itwill almost always change toanon‐grantortrust.Withthesetrusts,asignificantstateincometaxsavingsmaybeobtainedbysitingthetrustinaTopTrustJurisdiction.Alaska, Nevada, and South Dakota do not have a state income tax. Delaware only taxesDelawareresidents.Very fewtrustswillhaveaDelawarebeneficiary.Therefore, formostpracticalpurposes,theTopTrustJurisdictionsdonothaveanystateincometax.Asecondtaxtoconsiderwhendeterminingthesitusofatrustinvolvesthemostcommontrust created forestateplanningpurposes ‐ the irrevocable life insurance trust.The statepremiumtaxonthelifeinsuranceheldbythetrustbecomesafactor.Thestatepremiumtaxoninsuranceisgenerallyexpressedinbasispoints.100basispoints=1%.SouthDakotahasthelowestinsurancepremiumtaxat8basispointsor0.08%,followedbyAlaskaat10basispoints or 0.10%. Conversely, Delaware and Nevada have significantly higher stateinsurancepremiumtaxeswithDelawareat2%andNevadaat3.5%.

 

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V.RULEAGAINSTPERPETUITIES

Alaska

Delaware

NevadaSouthDakota

AbolishedCommonLawRule Yes Yes Yes Yes

MurphyCaseLawYes

1,000POA Yes Yes265Yrs Yes

The rule against perpetuities is a common law doctrine that generally states an interestmustvestwithintheperiodofalifeplus21years.Abolishingtheruleagainstperpetuitiesisimportantforthreereasons:

(1) Wealthy families wish to create dynasty trusts that last longer than onegeneration

(2) Futuretransfertaxesmayavoidedwithgenerationskippingexemptdynastytrusts

(3) Forallclients,adynastytrustprovidesanaddedlayerofassetprotection26Thereareprimarilythreeapproaches,listedfrombesttoworstmethods,toabolishtheruleagainstperpetuities(“RAP”): 1. TheMurphymethod 2. TheTerm‐of‐YearsApproach 3. TheOptOutmethodTheMurphymethodistheonlymethodthathasbeentestedinTaxCourt.27Thishasledafewcommentators toquestion theothermethods.Thismethodaddressesboth theRAP’stimingandvestingelementsasappliedtothegenerationskippingtransfertax,whichinturndetermines whether the trust assets will pass estate tax free generation to generation.Conversely,whiletheMurphymethodistheonlymethodthathasbeentestedbythecourtsfor abolishing the rule against perpetuities, most commentators are of the opinion theTerm‐of‐YearsApproachshouldalsowork.DelawareandSouthDakotahavepureMurphymethodsforabolishingtheRAP.*AlaskaalsousestheMurphymethod,unlessthetrustcontainsapowerofappointment.ThenitchangestoaTerm‐of‐YearsApproach.NevadausesaTerm‐of‐YearsApproach.Forajurisdictionseekingtoattracttrustbusiness,usingaTerm‐of‐YearslimitationontheRAP creates a competitive disadvantage, particularly for states with the shorter term ofyears.OnceatrustiscreatedinaTerm‐of‐Yearsstate,possibleestateinclusionissuesarisewhenitmigratestoastatewithaperpetualperiod.Forthisreason,itmaybemoreprudenttositeatrustinastatethathasabolishedtheruleundertheMurphyapproach.

 

  15

SUMMARYWhen ranking trust jurisdictions, different commentators have different views regardingthe factors tobe consideredaswell ashow these factors shouldbe ranked.28This articlediscussedthefollowingfiveareas: (1)theruleagainstperpetuities,(2)statetaxation,(3)advancedtrustlaws,(4)assetprotection,and(5)trustmigration.Whichareaswillbemoreimportanttoaclientsearchingformorefavorabletrust lawswillnaturallydependonthefactsofeachclient.Regardlessofthespecificfactsofeachcase,somegeneralcommentsmaybedrawnfromtheaboveanalysis.As farasassetprotectionofabeneficiary’s interest, SouthDakotahas thebestdiscretionarytrustlegislation,followedbyAlaska,andthenbyNevada.Withregardofpreventing alter ego and/or dominion and control arguments, South Dakota has thestrongestlawfollowedbyNevada.In the area of migration of trusts, only Nevada and South Dakota have addressed theproblem created by the Restatement Third of Trusts – that beneficiariesmay be treatedunequally based on their own resources when changing trust situs. The trust protector,directed trust statute, reformation statutes of the Top Four Jurisdictions are relativelysimilar. Thedecanting statutes are also relatively similar, except forAlaska thatdoesnotallowamandatory interestoranascertainable interest tobeconvertedtoadiscretionaryinterest.Noonewantshisorherchildtobecomeatrustbaby.Forthisreason,mostparentsdonotwantachildtolearnofthetrustanditsassetsuntilthechildhasachievedacertainlevelofmaturity. Therefore, quiet trust statues that do not require that the beneficiary be givennotice regarding the trust, trust assets, or other trust information becomes an importantsiting factor.SouthDakotahas themostcomprehensivequiet truststatute thatallows(1)thesettlor;(2)trustprotector;and/or(3)advisortoexpand,restrict,eliminate,ormodifytherightsofbeneficiariestoreceivetrustinformation.29DelawareissimilartoSouthDakotaexcept it does not expressly allow a trust protector or advisor to modify notice tobeneficiaries.TheAlaskastatuteonlyprovidesforonegeneration,andNevadalawissilentonwhetheritreversesthecommonlawrulethatrequiresnotification.Generally,thelargerthetrustassets,thegreaterdesireforprivacy,asnofamilywishestohave their dirty laundry open for the public to read. South Dakota is the only state thatprovidesthatalltrustcaseswillbesealedinperpetuity.Delawareallowsforthetrusttobesealedforthreeyears.AlaskaandNevadaleaveituptothecourt’sdiscretionwhetherthetrustjudicialactionwillbesealedoropentothepublic.TheTopFourTrustJurisdictionsforallpracticalpurposes30donotimposeastateincometax on the trust. Therefore, they are neutral regarding this trust situs factor. Conversely,significantsavingsonthestatelifeinsurancepremiumtaxmaybeobtainedforirrevocablelifeinsurancetrustssitedinSouthDakotaorAlaska.Finally,Alaska,Delaware,andSouthDakotausetheMurphymethodtoabolishtheruleagainstperpetuities.Nevadausesthe

 

  16

term‐of‐yearsapproach,however,mostcommentatorsdonotfindanygenerationskippingtransfer tax issue with the term‐of‐years approach. The issue with the Term‐of‐Yearsapproachiswhetheritwillcreateanestateinclusionissueifthetrustmovesfromaterm‐of‐yearsjurisdictiontoanotherstateinthefuture.

 

  17

THETOPFOURTRUSTJURISDICTIONSSUMMARYTABLE

July2014

Alaska Delaware Nevada SouthDakota

ASSETPROTECTION

DiscretionaryTrustProtection

NotEnforceableRight Yes No No Yes

CreditorCan’tAttach Yes Yes Yes YesRestatementSecondJudicialReview No Probably Yes Yes

DefinitionofaDiscretionaryTrust No No Ambiguous Yes

ControlArguments

DominionandControl No No Yes Yes

AlterEgo No No Yes Yes

ADVANCEDTRUSTLAWS

TrustProtectorStatue Yes Yes Yes Yes

DirectedTrustStatute Yes Yes Yes Yes

ReformationStatute Yes Yes Yes Yes

DecantingStatute Yes Yes Yes Yes

VirtualRepresentation Yes Limited Limited Yes

QuietTrustStatute

YesLimitedLifeofSettlor

YesSilent

Advisors

No Yes

PrivacyLawStatute

MustOutweighPublicInterest

MustOutweighPublicInterest

Limit3Yrs

Must

OutweighPublicInterest

YesSealedin

Perpetuity

MIGRATION NoStatute NoStatute Statute Statute

STATETAXATION

NoStateIncomeTaxAppliedtoTrust YesResidentsOnly Yes Yes

InsurancePremiumTax 10bps 200bps 350bps 8bps

RULEAGAINSTPERPETUITIES

AbolishedCommonLawRule Yes Yes Yes Yes

MurphyCaseLawYes

1,000POA YesYes

265Years Yes

©MarkMerric,AllRightsReservedCommissionedbyTheFirstNationalBankinSiouxFalls,SiouxFalls,SD

 

  18

LawFirmofMarkMerric,LLC4155E.JewellAve.,Suite500

Denver,CO80222(303)800‐4369;(303)261‐8374Mark@InternationalCounselor.comwww.InternationalCounselor.com

MarkMerric, JD,MT,CPA In addition to being an attorney,MarkMerric holds aMasters ofTaxationandheisaCertifiedPublicAccountant,aswellasanAdjunctProfessorattheUniversityofDenver’s, LawSchoolGraduate Tax Program. Hehas been quoted in Forbes,Wall Street Journal,Investor’sNews,OntheStreet,theDenverBusinessJournal,OilandGasInvestor,andtheSiouxFallsBusinessJournal.Mr.Merricisaninternationalspeakerpresentingatover425seminars,andhehaspublishedover70nationalarticles.Mr.MerricisthemanageroftheLawFirmofMarkMerric,LLCand a manager for the Alliance of International Legal Counselor, LLC. Prior to practicing as anattorney,MarkMerricdevelopedastrongbusinessbackgroundworkingforaFinalFourAccountingFirm.

Heisalsoaco‐authorofthefollowingthreetreatises:

TheAssetProtectionPlanningGuide:AState‐of‐the‐ArtApproachtoIntegratedEstatePlanning,CommerceClearingHouse(CCH)treatise,firstedition;

AssetProtectionStrategies,AmericanBarAssociation(twochapters);and Asset Protection Strategies Volume II, American Bar Association published Apr. 2005 (MM

responsiblefor1/5ofthetext). 

 

  19

                                                            1 Worthington & Merric, Trust and Estates, Jan 2010; Jan. 2012; and Jan 2014. These articles may be

downloadedathttp://www.internationalcounselor.com/bestsitusfortrustarticles.html.

2 Restatement(Second)ofTrusts,Section155(1)andcomment(1)b.

3 Merric,How toDraftDistributionStandardsForDiscretionaryDynastyTrusts,EstatePlanningMagazine,3/09 endnote 41 lists cases from 16 states noting that a discretionary distribution interest is not apropertyinterest.

4 Id.,endnote42listscasesfrom18statesnotingdiscretionaryinterestscouldnotbeattachedatcommonlaw.PleasenotethattheRestatement(Third)ofTrustsandtheUniformTrustCodereversecommonlawinthisareaallowingacreditortoattachadiscretionaryinterest.However,fiveUTCstates,havemodifiedthenationalversionoftheUTCtoretaincommonlawinthisarea.

5 Absent a spendthrift provision, the UTC Section 501 allows any creditor to attach present and futuredistributionsofanytrust,includingadiscretionarytrust.TheRestatementThirdalsotakesthisposition.Thisisachangefromthemajorityruleasdiscussedinendnoteiv.

6 Merric,HowtoDraftDiscretionaryDynastyTrusts–PartIII,EstatePlanningMagazine,April2009,pg.13‐15.

7 Merric,SouthernCaliforniaTaxandEstatePlanningForum2012,DiscretionaryTrustOutline.

8 Dwightv.Dwight,756N.E.2d17(Mass.Ct.ofApp.2001).

9 Merric,Bland,Monasky,BewareofFederalSuperCreditors,Trusts&Estates, July2010. Merric,StartingPlaceofAssetProtection:DraftingDiscretionaryDynastyTrusts,Thirty‐FifthAnnualNotreDameTaxandEstatePlanningInstitute,Oct.1–2,2009,pg.50‐51.

10 Theterm“RainyDayTrust”istrademarkedbyAlaskaTrustCompany.

11 Merric,Self‐SettledEstatePlanningTrusts,SteveLeimberg’sEstatePlanningEmailNewsletter#1391.

12 Merric&Goodwin,SpousalAccessTrustsParts I‐III,Steve Leimberg’s Estate PlanningEmailNewsletter#1334(8/08),1352(10/08),&1379(12/08)

13 One of the other issues discussed above was a remainder interest being considered a future maritalpropertyinterestundersomestateslaws.Thesolutiontothisissuewastodraftdynastytrusts.

14 Restatement (Second) Sec. 187 comment j. and Section 122. While this is judicial standard of reviewadoptedbyallcourts,itisbyfarthemostcommondiscretionarytrustjudicialreviewstandardwithcourtsfrom 14 states and two other countries using it. See Merric,How toDraftDistribution Standards ForDiscretionaryDynastyTrusts,Merric,EstatePlanningMagazine3/09.

15 AS§34.40.113.

16 SDCL§55‐1‐32and§55‐1‐33.

17 SDCL§55‐1‐44.

18 SDCL§55‐1‐33.Italicsadded.Notethekeyuseoftheword“or”whererestrictingcreditorremediestoafraudulentconveyanceappliesbothtotransferstothetrustaswellaspropertyheldbythetrust.ThisisakeydifferencebetweentheSouthDakotastatuteandtheNevadastatutethatonlyappliestotransferstothetrust.NRS§166.170(3).

19 KeithBruce‐Smith,MurrayHallam,JeremyArnold,JaneDearle,andSamanthaMorgan,InternationalTrustPrecedents,publishedbySweet&Maxwell2001

20 Fromagenerationskippingtransfer taxexemptionperspective, the lengthof timepermittedbefore thetrustwillbesubjecttothegenerationskippingtransfertaxexemptionwillnotbeextendedbychangingthesitusofthetrust.However,protectionofaremainderinterestbyturningthetrustintoadynastytrustmaybeaccomplishedwithareformationordecantingatrust.

 

  20

                                                                                                                                                                                                  21 Conversely,SteveOshinshastakenthepositionthatthisfactorincombinationwithnotallowingtheconversionofamandatoryinterestoranascertainablestandardinterestintoadiscretionaryinterest

to rank Alaska and Wyoming as 8th as a decanting statute. Steve Oshins, Steve Oshins ReleasesDecantingStateRankingCharts,SteveLeimberg’sEstatePlanningNewsletter#2179,January7,2014.

22SDCL§55‐3‐32.

23 SDCL§55‐2‐13.

24 Theterm“BeneficiaryControlledTrust”istrademarkedbyRichardOshins,SteveOshins,andNoelIce.

25 SDCL§21‐22‐28.

26 Regardingtheassetprotectionfeatureofadynastytrust,moststatelawsclassifyaremainderinterestasaproperty interest. While spendthrift protection would prevent a creditor from attaching a remainderinterest, inmany states the remainderproperty interest is still consideredmarital property eligible fordivisionintheeventofdivorce.

27 EstateofMurphyv.Commissioner,71T.Cm671(1979),acq.1979‐2C.B.2.

28 Steve Oshins in his 2nd Annual Dynasty Trust State Ranking Chart uses the factors of the rule againstperpetuities(30%weight);state incometax(30%weight);spendthrifttrusteffectiveagainstdivorcingspouse (12.5%weight)or childsupport (2.5%weight);domesticassetprotection trust ranking(10%)weight; decanting statute (7.5%weight); directed trust statute (5%weight) and reputation and otheradjustments(2.5%weight).HeconcludesthatSouthDakotaranksfirst,followedbyatiebetweenAlaskaandNevada,andDelawareranksseventhplace fordynastytrust law.SteveOshins,DynastyTrustStateRankingsChart,SteveLeimberg’sEstatePlanningNewsletter#2020,November1,2012,chartupdatedtosecondeditiononOshin’swebsite.

29 SDCL§55‐2‐13.

30 TheexceptionisDelawareifatrustbeneficiaryisaDelawareresident.