How to Choose The Best State to Set Up Your Trust

When you’re considering setting up a trust, it’s imperative to make sure your legacy is being cared for in a trust-friendly state. Laws, rules, and regulations vary from state-to-state, so there is plenty to consider before you make your decision. The good news is that you are not limited to establishing your trust in the jurisdiction in which you reside.

There are 7 states that are generally considered the best in which to establish your trust: Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming. Here, we will compare each state and explain the differences, nuances, and best states for certain considerations.

Best States For Trust Privacy

Privacy is a major consideration for many looking to establish a new trust, and the legalities to ensure discretion and confidentiality vary from state to state. While states like Nevada, New Hampshire, and Wyoming leave the sealing of crucial trust documents to the discretion of the assigned judge, Delaware ensures that trusts are sealed for at least three years before an appeal to a judge must be made. During that period, the information regarding the trust is fully confidential.This differs from other states, like Alaska, where records are made immediately available to the public.

This is accomplished partly through Delaware’s advanced Discretionary Trust laws, which mitigates concerns like the potential negative impact of revealing significant wealth to beneficiaries, diminishing their motivation or values. Delaware, as well as the other seven states listed in the intro, also permit “quiet trusts” or “silent trust,” which delay informing beneficiaries about the trust, allowing them to discover it at a potentially more beneficial time in their lives. 

Best States For Asset Protection Trusts

Alaska, Nevada, and Delaware stand out as prime choices for establishing trusts with a specific eye towards asset protection, but each comes with its unique legal nuances. 

In Alaska and Delaware, there’s a stringent 4-year scrutiny period for examining potential fraudulent transfers into the trust, contrasted by Nevada’s shorter 2-year timeframe. Uniquely, Alaska mandates marital consent for trust formation, and strictly disallows any exceptions for certain creditors. Nevada follows suit with no exceptions, coupled with the ability to nullify transfers based on constructive fraud. Delaware differentiates itself by permitting specific exemptions for the grantor’s current spouse and children, adding an additional layer of complexity to its trust structure. Delaware law also offers the option of spousal waiver, wherein an existing spouse has the option to officially waive future claims against the trust via a statutory process.

Asset protection in trusts is crucial as it ensures the safeguarding of assets from creditors, legal judgments, and other financial risks, providing long-term security and financial stability for beneficiaries. The above juxtaposition underscores the importance of state-specific nuances in asset protection: Alaska’s marital consent requirement and strict creditor rules, Nevada’s short scrutiny period and robust fraud prevention measures, and Delaware’s unique exemptions and waiver option all exemplify how regional legal differences can greatly influence the effectiveness and complexity of asset protection. 

Best States For Trust Tax

Each of the seven states offer their own unique benefits for taxes in regards to revocable and irrevocable trusts. While states like Alaska, South Dakota, and Tennessee do not impose state income taxes, Delaware exempts trusts with non-resident beneficiaries. This setup allows for transferring income-generating assets into trusts in these states to potentially avoid local or state taxes based on the grantor’s residence. The IRS has recognized certain trusts in these states as incomplete non-grantor trusts, which are not subject to gift taxes on funding and can avoid state income taxation, such as capital gains tax on the sale of trust assets. These are commonly known as ING trusts.

Alaska’s tax environment is particularly favorable, with no state income, capital gains, estate, or gift taxes, and many ING trusts have been established under Alaska law. Nevada shares similar tax advantages and has the highest number of private letter rulings for ING trusts. Delaware, despite its state income tax, offers attractive tax exemptions for trusts with non-resident beneficiaries, making it a popular choice for establishing ING trusts.

In short, while all of the states listed above have various benefits when it comes to taxes, Alaska, Nevada, and Delaware are the best choices for their flexibility and cost effectiveness.

Best States For Trust Decanting

Different states have different rules and flexibilities when it comes to trust decanting. Delaware, known for its solid legal foundation, offers a specific and reliable option for trust decanting. Its unique charm lies in its exemption from state income tax for trusts with non-resident beneficiaries, making it an attractive choice despite certain limitations in modifying trusts. This balance of tradition and modern trust law gives Delaware a distinct edge, along with its long history.

South Dakota, on the other hand, stands out for its exceptional flexibility in trust decanting, allowing for a wide range of modifications. It’s particularly favored for dynasty trusts and domestic asset protection trusts (DAPTs), thanks to its versatile legal provisions.

Nevada closely rivals South Dakota with its comprehensive trust laws. It is especially prominent in the creation of DAPTs and ranks highly for dynasty trusts too. The difference lies in the nuances of their statutes, with Nevada offering slightly different provisions that appeal to various needs.

Tennessee offers more options for modifying trusts than Delaware, but it doesn’t quite match the breadth of South Dakota and Nevada. It allows for changes from trusts with ascertainable standards to other discretionary standards, though it has some limitations, like not removing mandatory income interest.

In essence, while Delaware is appreciated for its balanced approach, South Dakota and Nevada are celebrated for their broad flexibility. Tennessee provides a middle ground, offering a range of decanting options with some specific restrictions. Each state’s statutes are tailored to different preferences and needs, making them uniquely valuable in the realm of trust decanting.

Best States For Equitable Resolutions

Some states funnel fiduciary and commercial matters through Chancery Courts, a specialized branch of the judicial system, which are distinct from traditional courts of law. As a court of equity rather than a court of law, the primary focus of Chancery Courts is to provide just and fair resolutions that legal remedies alone may not offer.

Currently, only three states have their own unique Chancery Courts: Tennessee, Mississippi, and Delaware. Delaware is particularly famous for its knowledge and skill in dealing with laws surrounding trusts. The chancery system in place for amicably resolving disputes in matters of equity in Delaware is robust, and has been in place since the late 1700s, providing legal expertise and process not found anywhere else.  Combined with its deep history of judicial precedent, Delaware stands above other jurisdictions.

Best States For Dynasty or Perpetual Trusts

The laws surrounding dynasty trusts (also known as perpetual trusts) in each of the recommended states are somewhat quirky and interesting. In Alaska, South Dakota, and New Hampshire, these trusts can endure in perpetuity, with no end. However, there are limitations in other jurisdictions. In Nevada and Tennessee, for example, a dynasty trust must expire after 365 and 360 years, respectively. Wyoming gives the trustees a bit more time, ending the dynasty trust after 1,000 years. 

In Delaware, there is no expiration for a dynasty trust involving personal property, but real estate can only be held for 110 years. This limitation does not limit Delaware trust duration; however, because by simply holding the real estate within an entity (such as a limited liability company), the dynasty trust can continue to hold the asset in perpetuity.

Best States for Directed Trusts

A directed trust is a type of trust where the classic trustee duties are divided among separate fiduciaries, with each having a specific role. One party manages the trust assets, while the other party is responsible for the trust administrative decisions. This separation of discretionary authority can provide greater flexibility and expertise in managing the trust. This setup ensures that trustees can rely on expert direction from a co-fiduciary without the risk of legal repercussions, enhancing the trust’s management and efficiency.

Each state listed — Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming — offer directed trusts. Both Alaska and Delaware specifically state that trustees following the advice of an adviser or protector won’t be held liable for following their directions, with these advisers considered fiduciaries unless otherwise specified. Nevada similarly allows for directed trusts, relieving trustees from liability for the actions of advisors with discretionary power under the trust agreement.

Read more about directed trusts, how they work, and their benefits, on our blog.
Regardless of what your intentions are in regards to your trust, there are several benefits that vary from jurisdiction to jurisdiction. Undoubtedly, Delaware serves as the state with some of the greatest advantages, especially if you’re establishing a trust as a non-resident. For more information on the benefits of Delaware compared to other states, reach out to us through our contact page.

Commonwealth Trust Company is pleased to provide this article as a guide. Commonwealth Trust Company is not engaged in the practice of law and is not providing legal advice by the provision of these materials. Commonwealth Trust Company recommends that clients seek the opinion of their attorney regarding the specific legal and tax issues addressed in this article.