There are several reasons why you may want to move a trust to a more favorable jurisdiction. For instance, to avoid or reduce state income tax on the trust’s accumulated ordinary income or capital gains. However, before doing so, it’s critical to understand the risks.

Revocable trust vs. irrevocable trust

Many people retire to states with more favorable tax laws. But just because you move to a state with no income or estate taxes doesn’t mean your trusts move with you. Indeed, for individual income tax purposes, you’re generally taxed by your state of domicile. The state to which a trust pays taxes, however, depends on its situs.

Moving a trust means changing its situs from one state to another. Generally, this isn’t a problem for a revocable trust. In fact, it’s possible to change situs for a revocable trust by simply modifying it. Or, if that’s not an option, you can revoke the trust and establish a new one in the desired jurisdiction.

If a trust is irrevocable, whether it can be moved depends, in part, on the language of the trust document. Many trusts specify that the laws of a particular state govern them, in which case those laws would likely continue to apply even if the trust were moved. Some trusts expressly authorize the trustee or beneficiaries to move the trust from one jurisdiction to another.

If the trust document doesn’t designate a situs or establish procedures for changing it, then the trust’s situs depends on several factors. These include applicable state law, where the trust is administered, the trustee’s state of residence, the domicile of the person who created the trust, the location of the beneficiaries and the location of real property held by the trust.

Identifying the risks

Moving a trust presents potential risks for the unwary. For example:

  • If you move a trust from a state that permits perpetual trusts to one that doesn’t, you may inadvertently limit the trust’s duration.
  • Some states tax all income derived from a source within the state. If your trust holds real estate or interests in a business located in such a state, that state may tax the income regardless of the trust’s situs.
  • In some cases, conflicting state laws may cause the same income to be taxed in more than one state.

Also consider other taxes that may have an impact, such as intangibles tax, property tax, and tax on dividends and interest.

Making the right move

Depending on your circumstances, moving a trust may offer tax savings and other benefits. Keep in mind, however, that the laws governing trusts are complex and vary considerably from state to state. Newburg CPA can help you with estate planning, compliance, and determining whether moving a trust is the right move for you.