The Jurisdiction Independent Trust

Where Should You Set Up Your Trust?

Where is the best place to set up your trust?  Where you live?  In a state that has laws that favor your particular goals and concerns?  In a state with lower tax rates?  How do you know where you want your trust to be domiciled in the future?  Does it matter if your trust is tied to a particular location?  Is there an advantage to a jurisdiction independent Trust?  Are there any benefits to a trust that is portable and has the capacity to move to any jurisdiction?

In the market place of ideas, some states are clearly better than others for certain things.  For example, some states recognize self-settled trusts as an asset protection trust and others do not. Some states have abolished the Rule Against Perpetuities and others have not.  Some states have local estate or inheritance taxes.  Others do not.  Some states have a “marital deduction” for gifts between spouses.  Others do not.  Some states tax trust income while others have no such tax.  Some states presume or impose certain provisions in a trust if the document is silent, others do not.  The list goes on and on.  The answers keep on changing over time.

The answer to the question “which state is best?” is likely to change over time.

The Key Hole View.

Most trusts are subject to the laws of the state where the Grantor resides and where the attorney who drafted the trust practices.  By default, it does not require anything for a trust to be domiciled and taxed in the location where the Grantors live.  It just happens.

Trusts also become more entangled in local law and jurisdiction dependent when they use language that specifically cites or relies on local statute.  This happens in part because many attorneys only represent clients who live in their own local area.  As a result, they simply have no reason to deal with or become aware of the issues facing multi-state clients.  This results in the “key hole view” of trusts — we only see what passes in front of the narrow hole we’re looking through.  Also, drafting a trust that will stand on its own without reference to or reliance upon state statute requires more work.  It is simply easier to draft a trust that uses statute to fill in the blanks.

Such a limited state dependent perspective on trusts increasingly fails to meet the client’s needs. Today more than ever before, attorneys are required to deal with clients that have family members or businesses or properties in multiple states.  Neither the lawyer nor their clients can afford to lock a trust into a single location.

Where is the Lawyer?

In general, a lawyer can only practice law in the state where the lawyer is licensed.  Lawyers licensed in one state cannot open an office or appear in a court in another.  Can a lawyer who practices in one state form a business entity or a trust in another?   The answer is, of course.  Doing so is not only permitted, but required.  The ethical rules governing attorneys continue to be updated to recognize the growing necessity of representing clients with interests in multiple jurisdictions.  When local issues arise, local counsel is necessary.  When federal law is at issue, which dominates most estate planning and all multi-jurisdiction matters, the location of the lawyer’s license is irrelevant.

Particularly since trusts arise by private contract and not by government license, a lawyer sitting in an office in one place can form a trust that has parties and/or provides for beneficiaries and/or owns property in multiple other places.  A jurisdiction independent trust will simply function where permitted and not where prohibited. States compete for business.  A jurisdiction independent trust can vote with its feet.  If one place does not permit the trust to function, it can move to another place that will.

Those who persist in the one state key hole view of trusts, are doomed to limit their practice, and the options of their clients.  This ultimately harms the client.  Estate planners who are able to look at the whole picture across multiple jurisdictions, are able to better serve their clients and offer more effective solutions to solve client problems.

The term “jurisdiction” has long been well defined.  However, the issue of jurisdiction independence is simply not on the radar of legal practitioners.  As of the date this article is first published, a web search of the terms “jurisdiction independence” or “jurisdiction portability” turned up nothing material to this discussion.  As the world grows smaller and as those with assets operate in more and more locations, this issue will increase in significance and more.  The single jurisdiction key hole view of trusts will become a liability.

The Jurisdiction Independent Trust.

Trusts are unlike any other entity.  Corporations, LLC’s, and limited partnerships are all established under state charter.  We form such business entities by making a registration or filing with a state governmental agency. The arise by operation of state law.  The states regulate and control what they are, how they operate, and what they can and cannot do.  These state laws are subject to the political process and are constantly changing.  Those who make the rules can change the rules, and they do.

A Trust, unlike all these entities, is established by private contract.  The point of a trust is its privacy.  Why then, do practitioners surrender the private nature of the Trust and make them dependent upon state law?  This can happen either because a trust instrument is silent upon some point, which then triggers the intervention of local law.  Or, it can happen expressly, such as when a trust instrument invokes a particular statute.  The trouble is, this guarantees obsolescence of the Trust.  As soon as the law changes, or the parties move, the trust no longer functions the same, and its intent may be subverted.  In the end, making a trust dependent upon any particular jurisdiction is short sighted, and may have unintended consequences for the parties to the Trust.

A Jurisdiction Independent Trust is intentionally not dependent upon the laws of any particular location.  This makes it portable and able to operate anywhere and everywhere it may be.  It privatizes the function of deciding what the rules will be that govern the operation of the Trust.

Privatization.

For a trust to be truly jurisdiction independent it takes more than just avoiding reference to or incorporation of state laws.  It requires privatization of functions that are otherwise taken over by the state.  For example, a Jurisdiction Independent Trust will not rely on state courts to adjudicate disputes. Instead, it will have mandatory alternative dispute resolution. This may be in the form of the Integrity Agreement or some other method.  A Jurisdiction Independent Trust will not rely on state law or state court’s to interpret its meaning or intent.  Instead that power will be given either to a Trustee or to a Trust Protector.  A Jurisdiction Independent Trust will minimize its reliance upon the court’s to make changes or enforce its terms and conditions.  Such powers will be privatized and given to a Trust Protector or other third-party with no pecuniary interest in the Trust.  In sum, to the maximum extent permitted by law, a Jurisdiction Independent Trust will operate privately and without reliance upon the mechanisms of the state.

This is one expression of the legal perspective that might drive the formation of a Jurisdiction Independent Trust:

Private Contract.  The purpose of this Trust is to lawfully control and administer private property and all associated private property rights through private contract and arrangements without the intervention or use of force by the State, the courts, any governmental authority, or any other third-party.  Grantor desires that all appropriate and lawful private solutions and remedies be employed and exhausted in priority first, and that resorting to or invoking the intervention of the State and/or the courts be used as a last resort only.

Rule of Law.

Does such independence from local law render the trust vulnerable to attack or corruption?  In the real world, bad things happen.  We have states and state governments in order to protect the rights and privileges of the citizens and persons who reside under the protective care of the state’s borders.  Trusts, as productive and responsible participants in the state, must comply with lawful duties and at the same time will have claim upon the state to protect its interests.  The point of jurisdiction independence is that the trust may move, and may operate in more than one place at a time, and may find one jurisdiction more favorable than another.

This is another expression of the legal principals that operate upon a Jurisdiction Independent Trust:

Rule of Law.  Grantor intends that this Trust exist by virtue of the natural rights of the parties to contract and that its existence is not dependent upon any license or grant of permission from a state or governmental authority.  Nevertheless, Grantor desires that the Trust claim and receive the full protection and benefit of the Rule of Law.  Accordingly Grantor desires that the Trust be a means of compliance with all applicable laws, and that it be interpreted, construed, applied and operated in conformance with all laws to which it is subject, and that all unlawful activity be avoided and prohibited.  Grantor recognizes that the law may differ from one location to another, and desires the Trust to comply with all applicable laws in whatever jurisdictions it may operate, and to elect where possible to operate in those jurisdictions which have laws that protect and enable the Trust to carry out its purposes.  Nothing in this Trust relieves any party to the Trust from the obligation to honor and obey the law or from the consequences for failing to do so.

How Do I Change My Trust’s Jurisdiction?

Most trusts are what is technically known as a “grantor trust” which means they are disregarded for income tax purpose on both a federal and local level.  This means they don’t file separate tax returns.  This is generally preferred because the tax rates for trusts get higher faster.  Even irrevocable trusts for the benefit of other family members often include intentional “defects” that cause them to be taxed to the grantors for that very reason.

Without special effort, a trust is simply going to be taxed in the place where the grantors live and work.  To cause a typical trust to be taxed anywhere else requires the trust to be separately taxable (which is generally at a higher rate), and a trustee in the target location (which has a cost and dilutes control).  It may also require moving assets to the target location.  Changing the law that governs a trust may or may not result in changing where the trust is taxed.  The point is, a jurisdiction independent trust gives you access to the full range of choices available under the law.

With a jurisdiction independent trust, “moving” a trust to a new state can be as simple as an appropriate document in keeping with the terms of the trust declaring that it is now governed by the laws of the new location.

Who Needs A Jurisdiction Independent Trust?

Not everyone needs a Trust that can operate in multiple jurisdictions or move from place to place.  For some, a simple trust operating under local law will be sufficient and appropriate.  For others, however, a Trust that can function independent of any one particular place is vital.  Who in particular will benefit from such a structure?  Among others, these are the likely candidates:

• Those who are ever going to move from the place where they initially set up their trust.
• Those who already own property or operate businesses in multiple jurisdictions.
• Those who have family members or parties to the trust living in multiple jurisdictions.
• “Large” estates
• Those who are doing multi-generational “dynasty” or “legacy” trust planning
• Those who wish avoid forcible termination of their Trust under any Rule Against Perpetuities
• Those who are using a Trust for wealth preservation or risk management
• Those who are using a Trust for commercial activity or ownership of business interests
• Those who are using a Trust to protect their privacy
• Those who simply prefer private voluntary contractual remedies to the use of force by the State.
• Those who wish to reserve to themselves the decision making process for their estate rather than surrendering that power to the politicians

Who Makes the Decisions?

“Privatization” is a vigorously debated concept in the public arena.  To some, and in some instances, it may be a poison to be avoided.  There are certainly some governmental functions that have a nasty backlash when privatized.  At the same time, privatizing certain social functions may be a way of downsizing to reduce the cost and the level of government intrusion into private life.  Some argue that local, voluntary, generous charitable impulses have lifted more people from poverty that centralized, institutionalized and coerced re-distributions of wealth.  When it comes to a trust, the point is the person setting up the trust is able to decide when and how certain aspects of the trust will be handled privately as opposed to relying upon intervention by the state.  Who do you trust more to decide what will happen with your estate:  yourself or the politicians?

When practitioners do not know about or discuss these issues with their clients, they are not giving their clients the full benefit of the available solutions.  One of the key questions to address in planning a trust and its jurisdiction issues is how private do you want your trust to be?

Do Something

When I review trusts for people, the trust’s reliance or dependence upon any particular jurisdiction is one of the features I look for.  When I talk through this issue with the Settlor or Grantor of the trust, I explain this principal and its potential consequences, then I ask “do you care?”  Those who are not concerned about jurisdiction dependencies, may be perfectly happy with a trust tied to a particular location.  When it matters, I recommend up-grading or updating the governing documents to a Jurisdiction Independent Trust.

Is your trust jurisdiction independent and/or portable?  Do you care? Would you like to have your trust reviewed or get help?