Melinda Merk, Esq.

Senior Vice President/Regional Trust Advisor

SunTrust Bank

Private Wealth Management

Vienna, VA

(703) 442-1534

melinda.merk@suntrust.com

William H. Lunger, Esq.

Martin & Lunger, P.A.

Wilmington, DE

(302) 888-2504

whlunger@martinlunger.com

Elizabeth King

Senior Fiduciary Officer

The Northern Trust Company of Delaware

Wilmington, DE

(302) 428-8725

ek51@ntrs.com

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What is trust situs and how is it determined Reasons for changing trust situs How to change trust situs

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Administrative Situs – principal place of administration – affects matters such as:◦ Powers and duties of a trustee◦ Permitted investments/Prudent Investor Act◦ Applicable Principal and Income Act (including power to adjust

and convert to unitrust)◦ Creditor’s rights/spendthrift protection◦ Trustee compensation◦ Removal and replacement of trustee◦ Modification and termination of a trust

Tax Situs – where the trust is taxable for state fiduciary income tax purposes◦ Resident vs. non-resident trust◦ Trust can be a resident trust of more than one state

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State law governing validity and construction of a trust may be different than administrative or tax situs◦ Governing law is usually specified in the trust document◦ Change of administrative situs generally does not alter the

governing law re: validity and construction (except as otherwise expressly provided under the trust document )

Validity refers to issues such as:◦ Whether a trust was properly executed/capacity/competency◦ Whether a trust violates the Rule Against Perpetuities

Construction pertains to questions such as:◦ Identity of the beneficiaries if the trust document is silent (e.g.,

whether adopted or illegitimate children are considered descendants)

◦ Takers in default if trust document is silent

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Usually determined by the law of the state specified in the trust document to govern administration of the trust◦ Restatement (Second) of Conflict of Laws, as well as the Uniform

Probate Code (UPC) – enacted in 17 states, generally do not require any minimum contacts with the designated jurisdiction

◦ Uniform Trust Code (UTC) - enacted in various forms in 24 states including VA, DC, and FLA Provides that “without precluding other means for establishing a sufficient

connection with the designated jurisdiction” the terms of the trust designating the principal place of administration are “valid and controlling” if The trustee resides in or has a principal place of business in the jurisdiction, or If all or part of the trust administration occurs in the jurisdiction

Public policy exception – law of the designated jurisdiction will not apply it if is contrary to at strong public policy of the jurisdiction having the most significant relationship to the matter at issue

Generally allows a trustee to transfer the trust’s principal place of administration without court approval, provided the trustee gives at least 60-days notice to qualified beneficiaries and no beneficiary objects within such time period Notice requirement can be waived in the trust document

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“The principal place of administration of this trust and any trust created hereunder shall be [State X]. The trustee of this trust and any trust created hereunder shall have the authority, in the exercise of sole and absolute discretion, to transfer the trust’s principal place of administration, [without any notification to any beneficiary of such trust], if the Trustee believes it to be in the best interests of the trust to do so.”

“Upon a change of place of administration of this trust, the law of [State X] shall continue to govern its validity and construction, but the law of the new situs shall govern the administration thereof.”

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If the trust document is silent with respect to the initial situs of administration, or with respect to the law that will apply upon a change of situs:

◦ UPC provides that the principal place of administration is the trustee’s usual place of business where the records pertaining to the trust are kept, or at the trustee’s residence if he has no such place of business

◦ UTC provides that usually the law of the trust’s principal place of administration will govern

A trust’s principal place of administration ordinarily will be the place where the trustee is located If an institutional trustee has trust operations in more than one state, other

factors such as the place where the trust records are kept or trust assets held, or the place where the trust officer responsible for supervising the account is located, may be considered

◦ Based on the above, a change in the place of the trust’s administration will change the law governing the administration of the trust

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For states that have not enacted the UPC or UTC (e.g., Maryland), and if the trust document is silent regarding administrative situs, the Restatement (Second) of Conflict of Laws generally applies (in addition to common law/case law)◦ Movables

Testamentary trust – by the law of the testator’s domicile at death unless the trust is to be administered in another state, in which case that other state’s law governs

Inter vivos trust – by the law of the state to which administration is most substantially related

◦ Land – law of the state where the land is located Based on the above, a change in the place of administration will

change the law governing the administration of the trust, provided that such change is authorized by the terms of the trust (either express or implied)◦ e.g., power to appoint a new trustee (in another state)

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Delaware has not enacted the UPC or UTC – administrative situs is based on common law and case law◦ Most important factor is the location of the trustee and the

trustee’s principal place of administration The Supreme Court of Delaware (affirmed by the US Supreme

Court) has held that the principal place of administration for a directed trust is where the trustee (and not the trust director) is located [Lewis v. Hanson, 128 A.2d 819 (Del. 1957), aff’d Hanson v. Denkla, 357 US 235 (1958)]

Delaware statute provides that if the administrative situs of a trust is transferred to Delaware, then Delaware governs the administration of the trust, unless the trust provides otherwise [12 Del. C. § 3332(b)]

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Scope of the VA UTC is limited for testamentary trusts ◦ Trustee of VA testamentary trust is still required to:

Qualify before the clerk or court in VA Furnish bond with surety, unless surety is waived

Surety is not required of banks and trust companies File annual accountings with the Commissioner of Accounts, unless

such requirement is waived by the instrument and certain other conditions are satisfied

Obtain a court order to transfer the principal place of administration VA UTC also provides that a corporate trustee that maintains a

place of business in VA at which a trust officer is available for consultation with beneficiaries is not deemed to have transferred the principal place of administration outside of VA, even under circumstances in which all or significant portions of administration are performed outside of VA

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Most state self-settled asset protection statutes (e.g., Alaska, Delaware, Virginia) require the following in order for the designated state to accept jurisdiction/administrative situs, regardless of the administrative situs designated under the terms of the trust document:◦ Some or all of the trust’s assets must be deposited in the

designated state◦ At least one of the trustees must be a “qualified trustee” in the

designated state◦ The trustee must maintain records and arrange for the

preparation of the trust’s income tax returns within the designated state, and

◦ At least part of the trust’s administration must occur in the designated state

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Most states tax a (non-grantor) “resident trust” on its worldwide income and tax a “non-resident trust” only on income derived from or sources within the state

Seven states have no fiduciary income tax◦ Alaska, Florida, Nevada, South Dakota, Texas,

Washington, and Wyoming Delaware allows resident trusts to deduct taxable

income set aside for future distributions to nonresident beneficiaries◦ As a result, few DE resident trusts created by

nonresidents pay DE state income tax

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Definition of “resident trust” can vary depending on the state, based on one or more of the following criteria:◦ If the trust was created by the Will of a testator who was

domiciled in the state at his or her death◦ If the grantor of an inter vivos trust was domiciled in the

state when the trust was created◦ If the trust is administered in the state◦ If one ore more of the trustees live or do business in the

state, or◦ If one or more of the beneficiaries live in the state

A trust can be a “resident trust” of more than one state

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Constitutional arguments against state income taxation of a trust not having sufficient nexus to impose tax◦ Safe Deposit and Trust Company v. Virginia [280 US 83 (1929)] –

VA property tax on the value of stocks and bonds held by an inter vivos trust created by a VA domiciliary and having VA beneficiaries - but a MD trustee - violated the Due Process Clause

◦ Quill Corporation v. North Dakota [504 US 298 (1992)] – in order for state to tax impose tax, there must be: A minimal connection between the taxing state and the

person, property or transaction it seeks to tax A rational relationship between the income attributed to the

state and the values connected with the taxing state Two state courts – DC and CT – have held that the due

process requirements are met solely by the fact that the testator was domiciled in the state at his death

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DC, MD and VA each consider a trust to be a resident trust solely because the grantor was domiciled in the state when the trust was created ◦ See District of Columbia v. Chase Manhattan Bank, 689 A.2d

539 (DC App 1997) (re: testamentary trust)◦ But see VA Tax Commissioner Rulings P.D. 93-189 and P.D. 99-

110 – as long as the only connection between the Commonwealth and the trust is that Virginia is the domicile of the grantor when the trust was created, there is not sufficient nexus for Virginia to impose a tax

Consider moving tax situs of DC, MD or VA trust after the grantor’s death – easier to argue no other sufficient nexus other than domicile of the grantor

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Confidentiality and Disclosure to Beneficiaries

Favorable Legislative Environment: Pre-Mortem Validation

Bifurcation of Fiduciary Responsibilities

Favorable Judicial Environment

Savings on State Fiduciary Income Taxes

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Confidentiality in judicial proceedings No statute delineating what notice is

required and when 12 Del. C. §3303(a) permits trust instrument

to prohibit information about trust to beneficiaries “for a period of time”

Case study – asset protection trust moves to Delaware

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12 Del. C. §3546 permits a trustee to give any person notice of a trust’s existence, which starts a 120-day time period within which to contest the validity of the trust

Minimal notice required by statute Effect of notice is to force a challenge while

the grantor is alive Case Study – trust moves from California to

Delaware

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Traditional fiduciary has responsibility for investment and distribution decisions and administrative functions

12 Del. C. 3313 permits the bifurcation of fiduciary responsibilities

Case study – trust moves from Pennsylvania to Delaware

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ValuesMissionGoals

Discretionary Administration

Custody,Trust Accounting

&Communications

Asset

Managers

Investment

Consultant

SpecialAsset

ManagementTax Planning& Compliance

Trust ModificationFiduciary Removal

InvestmentAdviser

Tax Adviser

DistributionCommittee

SpecialHoldingsAdviser

DirectedTrustee

TrustProtector

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Certainty and predictability of court system Competent and swift resolution of fiduciary

matters Dedicated to equitable matters Longstanding relationship between bench

and bar

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Review the terms of the governing instrument

Review the applicable law of the original jurisdiction and the new jurisdiction

Consider the Court Petition process

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Specific Change of Situs Provision Modification of Administrative Provisions Change of Trustee Provision Powers of Appointment Decanting (or Merger) Power Express Contrary Intent

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Uniform Trust Code (108, 111 and 411) Petition Decanting/Merger

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New Delaware Chancery Court Rules (100, 101, 102 and 103)

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Delaware Trusts 2012, Richard W. Nenno, Esq. Let my Trustees Go! Planning to Minimize or Avoid State Income Taxes on Trusts,

Richard W. Nenno, Esq., University of Miami School of Law Heckerling Institute (2012). The Nuts and Bolts of Changing the Situs of a Trust, 40 U. Miami Inst. (January 12,

2006). The Trust from Hell: Can it be Moved to a Celestial Jurisdiction?, Richard W. Nenno, Esq.,

22 Prob. & Prop. 60 (May/June 2008). How, Why, and When to Transfer the Situs of a Trust, by Philip J. Michaels, Esq. and

Laura M. Twomey, Esq., 31 Estate Planning 28 (January 2004). Here Today, Gone Tomorrow: Trust Law Situs and Jurisdiction Considerations, W. Donald

Sparks, II, Esq., ACTEC 2006 Fall Meeting. It May Not Be Broken, But It May Need Fixing: Techniques, Tools and Pitfalls In Changing

The Trust, Kathleen R. Sherby, Esq., ACTEC 2009 Fall Meeting. Trust Adventures in Wonderland – From the Meadow and Through the Looking Glass;

Situs and Governing Law, Peter S. Gordon, Esq., ACTEC 2012 Summer Meeting. Down the Rabbit Hole and Through the Looking Glass: The Wonderland of Trust Situs

and Governing Law, Margaret E.W. Sager, Esq., and Bradley D. Terebelo, Esq., ACTEC 2012 Summer Meeting.

Survey of State Statutory Transfer of Situs and Governing Law Provisions, Gordon, Fournaris & Mammarella, P.A., Memorandum dated October 3, 2011.

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Questions?