By Steven J. Oshins, Esq., AEP (Distinguished)

Most advisors stick to using their own home state’s trust laws and fail to take advantage of other states’ more favorable laws.

This would be like forming business entities in your home state rather than going to traditional best states such as Nevada or Delaware. This analogy should put in perspective how much is lost for the client by failing to maximize the use of more favorable trust laws.

What This Means for the Clients

The clients of advisors who fail to use out-of-state trusts often can’t modify preexisting irrevocable trusts without going to court and petitioning for a trust modification. They often have no decanting statute and they often fail to check their preexisting trusts to determine whether there is a change of situs provision enabling them to move the trust situs to take advantage of another state’s laws to easily change the trust terms through a trust decanting.

Their clients are often also limited to the common law rule against perpetuities period for their trusts. Many clients are fine with that duration, but many would love to know that they can extend their trusts for a longer period of time without estate taxes.

Their clients also often fail to do any elaborate asset protection planning. Sometimes they do no asset protection planning at all, and other times they simply contribute assets to a charging order protected entity such as a limited liability company. Thus, with charging order protection, neither they nor their creditor can access the assets in the business entity. That’s much better than doing no planning, but they can do much better….by using an out-of-state asset protection trust.

Their clients often pay state income taxes on income earned by their non-grantor trusts and they pay state income taxes on income off of income-producing assets they own personally or in their revocable trust. Although state income taxes can sometimes be avoided, they pay them anyway simply by failing to consider an out-of-state trust.

Advisors Who Use Out-of-State Trusts: What Their Clients Get

Advisors who use out-of-state trusts often take advantage of the opportunities provided by the first-tier trust jurisdictions.

Thus, they can modify an irrevocable trust by having the trustee distribute the trust assets into a brand new irrevocable trust using the state’s decanting statute. They can set up new irrevocable trusts knowing that they might change their mind about some aspect of it in the future and be able to ask the trustee to decant the new trusts.

They can set up long-term dynasty trusts that avoid estate taxes either perpetually or for some period of years that is as good as forever.

They can set up a domestic asset protection trust whereby they are a beneficiary of their own asset protected trust. This might be combined with a charging order protected entity such as a limited liability company. This is far superior planning to simply setting up a charging order protected LLC since, if the trust holds up, the settlor can live out of the trust as a self-created trust fund baby without interference by the creditor. Even better, the trust can be designed using a hybrid version which is a third-party trust (with far superior asset protection) that can be turned into a regular domestic asset protection trust at a later date.

They frequently also move third-party non-grantor trusts to a first-tier zero income tax state and make changes using decanting statutes to avoid or save state income taxes. They also sometimes move their own assets or assets owned by their revocable trust into a special type of trust called an incomplete gift non-grantor trust to save state income taxes.

Summary

Any conclusion that an estate planning advisor located in a top-tier trust jurisdiction has a competitive advantage is missing the big opportunity. It’s the advisors that are located in jurisdictions with little or no favorable laws that so easily can use these planning advantages to beat their local competitors in order to interest the higher net worth individuals and turn them into clients.

RELATED EDUCATION

If you found this article interesting, you might also be interested in these other educational programs and products by Steve Oshins:

• The Spousal Lifetime Access Trust: A Gifting and Creditor Protection Technique
• Fear Factor: “Protecting Assets by Getting into the Creditor’s Head and Controlling His Mind”
• 2023 Trust Decanting Update
• Fixing Old “B” Trusts
• Trust Situs After Kaestner: Saving State Income Taxes Using Non-Grantor Trusts
• The NING Trust: Saving Significant State Income Taxes for Your Clients in High State Income Tax Jurisdictions
• DINGs and NINGs: Technical and Planning Issues
• Steve’s FREE State Rankings Charts

ABOUT THE AUTHOR

Steve Oshins, AEP (Distinguished) is a member of the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011. He was named one of the 24 “Elite Estate Planning Attorneys” and the “Top Estate Planning Attorney of 2018” by The Wealth Advisor and one of the Top 100 Attorneys in Worth.  He is listed in The Best Lawyers in America® which also named him Las Vegas Trusts and Estates/Tax Law Lawyer of the Year in 2012, 2015, 2016, 2018, 2020, 2022 and 2024. He can be reached at 702-341-6000, ext. 2 or soshins@oshins.com.  His law firm’s website is www.oshins.com