One of the most important considerations when setting up a trust is determining where it will be housed. Trust situs — where a trust is administered — will likely determine how it is taxed, how benefits are distributed, privacy protections, and even how long the trust itself is active.

A common misconception is that a trust’s jurisdiction will be determined by your place of residence. That’s not necessarily the case, however, as trust jurisdiction can be determined by a variety of factors including the grantor’s state of residence, the location of the assets within the trust, where the beneficiaries are located, or the state where the trust was initially created.

“Trust jurisdiction isn’t just a default based on geography, it’s a very important choice that likely will have impacts to how your trust is structured, taxed, and ultimately distributed,” said Josh Ott, Fiduciary Market Manager for PNC Delaware Trust Company. “Your goals for the trust and the type of trust you’re considering will be primary factors as you determine an appropriate jurisdiction.”

How jurisdiction affects a trust

Setting up a trust involves time and decision-making. Among the many decisions you’ll need to make is the type of trust that is right for you, who will administer it, beneficiaries of the trust, and what kind of assets will compose it. Most of those decisions will apply independent of where your trust is administered, but that doesn’t mean trust jurisdiction shouldn’t be an important consideration; in fact, it’s one of the most important.

Where your trust is housed will determine the state law to which it is beholden. While there have been efforts to standardize trust legislation across states – the Uniform Trust Code, a model law for trust administration, has been enacted, in part, in 36 states – provisions vary widely across the country. Those laws will dictate everything from the type of assets you can include in the trust, how they are taxed upon distribution, how you make adjustments to address changing needs, and the length of time your trust can be active.

Your individual estate planning goals will determine the most advantageous state to administer your trust, and it should be a decision that you arrive at after careful conversation with your financial, tax, and legal advisors. Some states offer specific benefits to trust administration that are worth considering.

Delaware’s trust tradition

The first state to ratify the U.S. Constitution is often also the first that comes to mind when establishing a trust. Delaware’s tax structure, reputation, and history of favorability for trust administration has made it a popular destination for establishing a variety of different trust structures. Some commonly cited
advantages of establishing a trust in Delaware include:

  • Tax Favorability – Delaware’s tax structure can potentially allow non-resident trust beneficiaries the ability to avoid or significantly reduce state income tax liabilities for income generated in the trust. Additionally, trusts can potentially avoid estate and generation-skipping transfer taxes
    across generations due to Delaware’s allowance of perpetual trusts;
  • Privacy – Trust documentation is often kept out of public record through silent trust structures with limited disclosure required to even beneficiaries under certain circumstances;
  • Flexibility – Under certain circumstances, Delaware law allows for the transferring of assets between trusts (decanting) – including trusts with terms different from the original;
  • Perpetual Trusts – Delaware allows for the creation of dynasty trust structures that hold assets in trust in perpetuity, potentially allowing them to avoid estate and generation skipping transfer
    taxes while earning compound returns for the duration of the trust;
  • Asset Protection – Assets held in trust under Delaware law can be protected to varying degrees, including through the use of spendthrift clauses, which protect against potential misuse of funds
    from beneficiaries or others; and
  • The Delaware Court of Chancery – Part of the constitutional court system of Delaware, the Court of Chancery is renowned for its experience and case law in managing trusts. The court is a primary contributor to Delaware’s leadership in corporate and estate litigation and status as
    home to more than two-thirds of the Fortune 500.

History brings experience

To be sure, there are other states that are known as trust-friendly jurisdictions. The established history and favorable legislative backdrop in Delaware make it a favorable jurisdiction, but decisions about where to establish and administer a trust should always be made with the guidance of financial, legal, and tax advisors.

“In many cases the newer jurisdictions don’t quite have the framework or structure yet that Delaware has to manage the complementary services that go along with a trust,” said Kirsten Cataldi, a senior fiduciary advisor with PNC Delaware Trust Company. “Here, we are able to provide a full range of complementary services like taxes, investment management, and asset custody that, when broken out, can add significant cost to the process.”

There are many questions that you’ll need to consider when establishing a trust. For many, the most obvious will revolve around to whom and how your estate is distributed. The answer to those may very well hinge on where your trust is housed. Your financial, legal, and tax advisors can help determine the most advantageous jurisdiction for your unique estate planning needs.