By Todd M. Beutler and Todd D. Mayo
Family Wealth Report from Wealth Briefing, September 8, 2015
Across the globe, there are a number of attractive jurisdictions for trusts. Among them are a handful of U.S. jurisdictions. More and more, wealthy families are including U.S.-situs trusts in their wealth planning structures. Several factors—including investment opportunities, wealth preservation, tax planning, and good laws—are motivating non-U.S. families to use U.S.-situs trusts.
Investing in the U.S.
Many families are looking to invest in the U.S. Right now, much of the investment activity involves U.S. real estate. The Wall Street Journal, International Business Times, CNN, and other media outlets have recently spotlighted investment by Chinese families, who currently are the largest group of foreign real estate buyers in the U.S. As the Wall Street Journal reported, “signs are emerging that Chinese property investments abroad will maintain their torrid pace despite the market turmoil, as wealthy individuals and well-heeled companies seek to shelter their money in more stable havens abroad.” While recent media reports have focused on Chinese investment in the U.S., Chinese families are not alone. Wealthy families from elsewhere in Asia, as well as from Europe, the Middle East, and South America, are investing in the U.S.
For families investing in the U.S., a U.S.-situs trust often is the optimal top-tier vehicle for holding those investments. If a family already has a non-U.S. situs trust or foundation, a U.S.-situs trust can readily complement the family’s existing arrangement for managing its wealth. If properly designed, a U.S.-situs trust is a tax-efficient way through which to hold U.S. real estate or other U.S. assets, and it can minimize the family’s exposure to U.S. income, gift, and estate taxes.
Preservation of Family Wealth
For some families, the U.S. is a place in which to safeguard their wealth. In their home countries, they face political, social, and economic uncertainties. Those uncertainties may even include the risk of expropriation. For those families, investment opportunities may be secondary to simply preserving the wealth that they already have accumulated. They look to the U.S. as a safe haven for their wealth, because it offers political stability, a well-established rule of law, and access to the markets. They create U.S.-situs trusts or move existing trusts to the U.S., because they want to have peace of mind that their wealth is protected.
Individuals and families considering immigrating into the U.S. often use U.S.-situs trusts as a part of their pre-immigration tax planning. For someone considering a temporary or permanent move to the U.S., a U.S.-situs trust potentially can play a significant role sheltering income from U.S. income taxes and sheltering assets from U.S. estate taxes.
Becoming a U.S. citizen or U.S. resident carries a tax burden. For income tax purposes, the U.S. taxes a nonresident, non-citizen only on U.S.-source income. In contrast, the U.S. taxes a U.S. citizen or a U.S. resident on his or her worldwide income. For estate tax purposes, the U.S. taxes a nonresident, non-citizen only on U.S.-situs property. In contrast, the U.S. taxes a U.S. citizen or a U.S. resident on worldwide assets. Pre-immigration tax planning can minimize that tax burden.
While there are many facets to pre-immigration tax planning, trusts often play an integral part of a comprehensive plan. A drop-off trust, for example, is a common strategy for minimizing exposure to U.S. estate taxes. Under the terms of the trust, the individual must not retain any impermissible rights or control, such as the power to direct distributions. The individual, however, generally can retain the power to manage the trust property.
If the trust is created in a U.S. jurisdiction that, like New Hampshire, recognizes self-settled spendthrift trusts, then the individual can be a discretionary beneficiary. Care in the design and implementation, however, is required if the individual is a beneficiary. Given the trust’s tax deferral benefits, it is advantageous to create the trust in a U.S. jurisdiction that, like New Hampshire, allows perpetual private trusts.
Other Tax Considerations
U.S. income tax law often motivates multi-national families to move existing trusts to the U.S. If a non-U.S. trust has a U.S. beneficiary, there can be unwelcome tax consequences. The U.S. beneficiary potentially faces significant, enhanced taxes upon receipt of a distribution from the trust. In addition, the U.S. beneficiary may be taxed upon receipt of a loan from the trust or upon the use of trust property, such as trust-owned real estate or artwork. Those unfavorable tax consequences most frequently arise after the settlor’s death, and they disappear if the trust becomes a U.S. trust for U.S. tax purposes. Consequently, families and trustees generally will seek to “domesticate” or “on-shore” a non-U.S. situs trust soon after the settlor’s death.
While domestication often is advisable, it is not always optimal. When a settlor of a non-U.S. trust dies, a family should not robotically domesticate the trust, even though that is the standard advice of many advisors. A thoughtful, holistic evaluation of the family’s wealth planning, circumstances, and long-term plans may suggest a better approach.
With the rise of information sharing among countries concerning their citizens’ and residents’ assets and income—precipitated by the U.S.’s FATCA requirements—the U.S. ironically has become a more attractive jurisdiction for trusts. Compliance with reporting obligations can be simpler when a U.S. financial institution is serving as a trustee of a trust. Moreover, contrary to popular belief, the U.S. recognizes a U.S.-situs trust that, for U.S. tax purposes, is a non-U.S. trust. The U.S. treats that “non-U.S. trust” in the same manner as, for example, it would a Jersey-situs trust or a Cayman-situs trust.
Individuals who create wealth often have specific ideas concerning how that wealth should be managed and expended through succeeding generations. For those individuals, creating a trust in a jurisdiction that respects settlor intent is important. The leading U.S. trust jurisdictions offer best protection of settlor intent.
For example, New Hampshire, which is one of the best U.S. trust jurisdictions, has a strong tradition of protecting settlor intent. New Hampshire’s highest court has described settlor intent as “paramount,” and it has declared that, probably more than any other state in the U.S., it upholds settlor intent over any arbitrary rule of law. New Hampshire has codified this tradition, expressly incorporating those principles into its statutes.
For many individuals creating trusts, that commitment to preserving settlor intent is important, because it enables them to have confidence that their wishes will be fulfilled. In contrast, many non-U.S. jurisdictions apply the Saunders rule, which generally allows the beneficiaries to terminate a trust by agreement.
In similar vein, some families wish to avoid the forced inheritance laws of their home countries, and a U.S.-situs trust potentially can help them achieve that goal.
Within the U.S., there are a handful of attractive trusts jurisdictions. One hallmark of those jurisdictions is comprehensive statutory laws governing trusts. In contrast, many non-U.S. jurisdictions rely more heavily on common law—i.e., judge-made law. The robust statutory laws of the leading U.S. trust jurisdictions often provides a higher degree of certainty concerning how a trust can be designed and how it will be administered.
In some non-U.S. jurisdictions, there can be more “unwritten rules,” because the statutes provide only a limited, general framework. By its nature, that approach leaves more to a judge’s discretion. For some families, that leaves too much to fate.
By affording greater certainty, the comprehensive statutory laws of the leading U.S. jurisdictions typically facilitate better trust design and more efficient trust administration. The laws are clearer and more specific. Everyone—settlors, beneficiaries, trustees, trust protectors, creditor, and advisors—therefore is in a position to have a good understanding of how the law will apply in a particular situation.
Selecting a U.S. Jurisdiction
Within the U.S., there are a handful of attractive trusts jurisdictions. Among those states, New Hampshire, South Dakota, and Delaware are leading trust jurisdictions. While each family will weigh them differently, some of the key factors that families consider when selecting a U.S. jurisdiction are:
Divided trusteeship (directed trusts). The ability to divide trust powers among trustees, trust advisors, and trust protectors permits the design of a trust governance structure tailored to a specific family’s needs and better facilitates the efficient management of the family’s wealth. New Hampshire, South Dakota, and Delaware have some of the best developed divided trusteeship laws in world. Each of those states allows the division of trust powers and ring-fences the liabilities for a breach of duties, so that a trustee, trust advisor, or trust protector is only liable for duties that the trust deed assigns to that trustee, trust advisor, or trust protector. In New Hampshire and South Dakota, the trustee and beneficiaries generally can superimpose a divided trust structure on an existing trust. While Delaware generally is an attractive jurisdiction for creating new trusts with divided trusteeship, it potentially is less attractive for existing trusts. A Delaware court recently stymied a family’s effort to modify an existing trust to superimpose a divided trust structure, in which an investment director—not the trustee—would have the power to manage the trust’s investments.
Perpetual trusts. A perpetual trust allows the trust to have a life span that follows a natural course of events, winding up only when appropriate given the settlor’s intent and the family’s circumstances rather than when dictated by an arbitrary rule of law. New Hampshire and South Dakota allow perpetual trusts. Delaware allows perpetual trusts for personal property; although it does not allow perpetual trusts for real property, there is a work-around. In the U.S., some states that are frequently touted as leading trust jurisdictions do not allow truly perpetual trusts, and, more significantly, a cloud of certainty hangs over the validity of those states’ laws permitting trusts to last beyond the time allowable under the traditional perpetuities rule.
Predictable, efficient courts. While families and trustees generally wish to avoid having any trust matter to go to court, it sometimes is inevitable. A court’s involvement may be necessary or desirable because the terms of the trust may need to be construed, a trustee’s action may warrant judicial review or approval, or there is a dispute. New Hampshire, Delaware, and South Dakota have good courts. Within the U.S., New Hampshire notably is the only jurisdiction with a dedicated trust court. Moreover, New Hampshire’s courts have a well-established tradition of deferring to the state legislature. If the statute is clear, a New Hampshire court will not create an exceptions. Given the state’s robust trust statutes, that deference foster predictable resolution of trust matters by New Hampshire’s courts.
Private trust companies. New Hampshire and South Dakota allow families to create private trust companies. New Hampshire recently modernized and simplified its private trust company laws and now offers even more flexibility in designing and administering a private trust company. New Hampshire does not require a physical office within the state or a resident director, although it may be advantageous to having one or both. South Dakota, on the other hand, requires a physical presence and a resident office. Delaware does allow not a true private trust company, although a family could form a limited purpose trust company.
For some families, geography plays an important role in selecting a trust jurisdiction. Located in the northeastern U.S., New Hampshire and Delaware are readily accessible for families who wish to visit the offices where their trusts are administered. With its proximity to Boston, New Hampshire is especially convenient to families who have family members attending educational institutions like Harvard or MIT. While ruggedly beautiful, South Dakota is somewhat less accessible for families from Asia, Europe, and elsewhere.
Quality trust company. In many cases, the selection of a U.S. jurisdiction comes down to selecting a trust company with which the family already has an established relationship or with which it can build a solid, long-term relationship. To that end, technical competence, attentiveness, responsiveness, and discretion, of course, are musts.
Other factors will influence some families’ decisions. A solid understanding a family’s values, goals, and wishes, as well as the interpersonal relationships of its members and the nature and source of its financial resources, will inform a thoughtful evaluation and selection of a U.S. trust situs—or, for that matter, any trust situs.
While the U.S. has some of the world’s best trust jurisdictions, it incongruously has some undesirable jurisdictions for trusts. For example, despite being centers of commerce and commonly viewed as gateways to the U.S., New York, Florida, and California are unattractive jurisdictions for trusts. Thankfully, a family need not have its trusts in those states. By using a divided trust structure in a state like New Hampshire, South Dakota, or Delaware, however, a family still can access investment advisors and investment opportunities in places like New York City, Miami, Los Angeles, and San Francisco.
While investment opportunities and tax planning will continue to drive the interest in U.S.-situs trusts, the emergence of U.S. jurisdictions like New Hampshire, South Dakota, and Delaware as top-tier global trust jurisdictions affords wealthy families more options. They have more choices in terms of the laws that may help them better achieve their goals and address their needs. In addition, they have more options in terms of trust institutions with whom to work. With all of that, U.S.-situs trusts will continue to rise in popularity.
Todd M. Beutler is the co-head of DLA Piper’s Global Private Client Group. Mr. Beutler is based in Hong Kong.
Todd D. Mayo is a principal and general counsel of Perspecta Trust LLC. Mr. Mayo is based in Hampton, New Hampshire, USA.
September 2015 – This article is reproduced with the permission of Clearview Financial Media Ltd, publishers of