Put simply, trust situs is where a trust is located. However, a trust can hold assets in many states so situs does not simply mean where trust assets are located—although place of administration of personal property can be a factor considered by courts. (Real property is typically governed by local law.) Trust situs generally refers to the jurisdiction which is the primary jurisdiction for the trust, for purposes of litigation.
A trust also has a tax situs, which is where trust property is subject to taxation. States that tax the income of trusts base their jurisdiction to tax resident trusts on a combination of one or more of the following factors: 1) residence of the testator of the trust at death for a testamentary trust (resident testator), or residence of the settlor at the time the trust becomes irrevocable for a living trust (resident settlor); 2) residence of the trustee; 3) place of administration; or 4) residence of the beneficiaries. For planning purposes, it is generally easier to move personal property and trustees than it is to move beneficiaries.
A trust’s tax situs is often the same as the trust situs, but sometimes it is not and sometimes the trust is taxed by multiple states. Each state has different rules. Some tax if the settlor resided in the state at the time the trust became irrevocable. Some, like California, will tax the trust if either trustee or beneficiary resides in the state. In the latter case, income tax may be reduced or eliminated if the beneficiary or trustee moves to a state that does not tax trust income. Tax may also be reduced by appointing a co-trustee located in another state that does not tax trust income. It may even be possible for the trustee to remain in California and eliminate the state income tax completely by transferring trust assets to an LLC held by the trust, resigning as trustee in favor of a trustee in another state, and taking over management of the LLC.
In addition to reducing state income tax, another goal of moving a trust to another state jurisdiction may be to take advantage of laws allowing a directed trust, i.e., a trust with trust assets concentrated in a single holding such as a family business, or a few such holdings, which allows for the trustees to avoid prudent investor rules requiring diversified investments, and to appoint special advisors to manage these specific assets, possibly reducing trustee liability.
Trust remodeling may be another reason to move a trust. There is an ongoing need for modifications to the many irrevocable trusts in existence, especially now that many jurisdictions have repealed the rule against perpetuities. Trusts are living longer but with stale provisions. Modifications may be sought, for example, to allow: appointment of advisors to direct the trustee on investments and distributions; appointment/removal of trustees and advisors; change of situs and law governing administration; changes in beneficial terms, such as removing a spendthrift’s withdrawal right; converting grantor trust to non-grantor status for income tax reasons; division of pot trust into separate shares; correction of mistake or ambiguity; ratification of prior administration; changes in trustee standard of care; changes to indemnity provisions; for retirement trusts, elimination of certain beneficiaries for longer stretchout. Trust remodeling may be accomplished in most states with judicial intervention upon petition for either reformation to correct a mistake (operates retroactively), or upon petition for instruction or construction to clarify ambiguity (operates prospectively). In some states that allow decanting, trusts may be remodeled without court intervention. In these states, either by statute (e.g. NY, DE) or common law, a trustee allowed to distribute principal to a beneficiary is also allowed to distribute the assets in further trust, i.e., to “decant” the assets of an old irrevocable trust to a new one. For states that have adopted the Uniform Trust Code (UTC), modification may be achieved with consent of all of the beneficiaries provided it is not inconsistent with a material purpose of the trust.
A trust may be moved to take advantage of laws providing greater asset protection. This is particularly true with regard to a self-settled trust which under common law and the law of most states, even if irrevocable, does not provide any asset protection to the settlor. Although more than a dozen states now recognize self-settled asset protection trusts, these laws have not been tested much in the courts and it is uncertain how effective they will be, especially in bankruptcy court. Setting them up (or moving them) long before they are needed may increase their effectiveness.
A trust may be moved to a jurisdiction which allows a trustee to convert an income trust to a total return unitrust, to provide more support with a payout between 3% and 5%, or which allows a trustee the power and flexibility to adjust between income and principal in order to more adequately provide.
Suppose a trust is drafted poorly, for example if under the instrument a settlor or beneficiary is given a power that may have adverse tax consequences. Some states (e.g. FL, DE, NY, PA, and UTC states) have tax savings/disabling statutes that will operate to limit the power to a permissible one with no adverse tax consequence.
To protect the trust against it being contested, it may be moved to a jurisdiction allowing in terrorem (no contest) clauses. California allows such clauses, but some states go further and allow premortem validation clauses under which a trust can be produced while the settlor is still alive, with a strict time limit for any challenges.
Another reason for moving a trust might be to take advantage of the law in some states under the UTC which allows the settlor to modify the trustee’s duty to inform the beneficiary so that the beneficiary is not informed about the value of the trust assets, for example, until age 25. The settlor may want to do this to prevent the beneficiary from losing motivation to get through college, should investments perform much better than expected.
The trust instrument should be drafted to include a mechanism for changing trust situs and governing law. If it does, that change will be effective. If not, court petitions may be required in both states. Some states are more flexible than others, following the UTC rule that allows beneficiaries to agree on changing situs and governing law.
Changing the trust situs is not likely to change the law governing validity and construction of the trust. Formal validity (compliance with formalities necessary for trust creation), substantial validity (e.g. does not violate rule against perpetuities), intrinsic validity (e.g., capacity), and construction (presumed intent where actual intent not clear), are all determined under choice of law principles using facts and circumstances (settlor’s intent, domicile, etc.) which have already occurred. The many issues relating to administration are more prospective however, and a change in trust situs will probably result in a change in the governing law of administration to the law of that situs. With most of the activity in the new situs, the contacts are greater and the trust is more substantially related to the new situs. Applying the law of the state of origin to those activities in the new situs could have unintended, negative consequences, especially if those involved are not familiar with the law of the state of origin. A change of governing law to the law of the new situs will normally be effective unless it is contrary to the settlor’s intent, or if it is somehow contrary to public policy, for example if it would interfere with a spouse’s right to community property.