19th ANNUAL SPRING SYMPOSIA ABA SECTION OF REAL PROPERTY, TRUST & ESTATE LAW PERPETUAL DYNASTY TRUSTS: TAX PLANNING AND JURISDICTION SELECTION Richard W. Nenno, Esquire Managing Director and Trust Counsel Wilmington Trust Company Wilmington, DE May 1, 2008 2008 Wilmington Trust Corp. Affiliates in California, Connecticut, Delaware, Florida, Georgia, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Pennsylvania, South Carolina, Vermont, Cayman Islands, Channel Islands, Dublin, Frankfurt, London, and Luxembourg. All rights reserved. This presentation is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional adviser should be sought. 1
PERPETUAL DYNASTY TRUSTS 2
SCOPE Why Create a Perpetual Trust? Federal Tax Implications of Dynasty Trusts Choosing a Jurisdiction Ethical Concerns Moving an Existing Trust Use by NRAs 3
WHY CREATE A PERPETUAL TRUST? Why Create a Trust? Why Create a Perpetual Trust? 4
KINDS OF DYNASTY TRUSTS Exempt Dynasty Trust -- GST Exemption Allocated Grandfathered Dynasty Trust -- Irrevocable on 9/25/85 Nonexempt Dynasty Trust -- Not Exempt or Grandfathered 5
EXEMPT DYNASTY TRUST (GST Exemption Allocated) Perpetual Trust Possible Illustrations 6
GRANDFATHERED DYNASTY TRUST (Irrevocable on 9/25/85) Perpetual Trust Possible But Rare Exercise Limited Power of Appointment to Extend Trust 7
NONEXEMPT DYNASTY TRUST (Not Exempt or Grandfathered) Nontax Reasons to Keep Assets in Trust Tax Reasons to Leave Nonexempt Assets Outright Tax Reasons to Keep Nonexempt Assets in Trust Create Trust to Preserve Options 8
FEDERAL INCOME-TAX IMPLICATIONS Grantor vs. Nongrantor Trust Powers That Make Trust Grantor Trust Recent Rulings 9
CHOOSING THE JURISDICTION FOR A DYNASTY TRUST Definitions Effectiveness of Jurisdiction Designation - Second Restatement of Conflict of Laws - UTC 10
ABILITY OF HOME STATE TO DISREGARD DESIGNATION OF TRUST STATE Existence of Jurisdiction Exercise of Jurisdiction Governing Law Full Faith and Credit 11
FACTORS TO CONSIDER IN CHOOSING A JURISDICTION Clients Do Select Jurisdictions Other Than Their Home States Factors - Is trust climate friendly? - Will client s wishes be carried out? - Are perpetual trusts possible? - Can state fiduciary income tax be avoided? - Is prudent-investor rule available? - May duties be allocated among trustees/advisers/protectors (directed trust)? 12
FACTORS TO CONSIDER IN CHOOSING A JURISDICTION (cont d) - Can creditors reach interest in third-party trust? - Can creditors reach assets/interest in self-settled trust? - Are power to adjust and total-return unitrust statutes available? - Are principal/income allocation rules appropriate? - Is judicial system favorable? - Will trust be subject to surviving spouse s right of election? - Does trust have insurable interest? - Is noncharitable purpose trust effective? - Is decanting power available? 13
ETHICAL CONCERNS Background Ethical Principles Malpractice Concerns My Experience 14
SHOULD EXISTING TRUST BE MOVED? Can Trust Be Moved? Can There Be More Assurance That Client s Objectives Will Be Carried Out? Can Trust Become Perpetual Trust? Can State Fiduciary Income Tax Be Avoided? 15
SHOULD EXISTING TRUST BE MOVED? (cont d) Can Investment Flexibility Be Increased? Can Asset Protection Be Enhanced? Can Administrative Costs Be Reduced? Can Power to Adjust and Total-Return Unitrust- Conversion Statute Be Made Available? Will Adverse Federal Transfer-Tax Consequences Result? 16
PLANNING FOR NONRESIDENT ALIENS Lifetime Transfers May Be Exempt from Gift/GST Tax Transfers at Death Might Be Subject to Estate/GST Tax NRAs Should Consider Creating Trusts in U.S. 17
19th ANNUAL SPRING SYMPOSIA ABA SECTION OF REAL PROPERTY, TRUST & ESTATE LAW PERPETUAL DYNASTY TRUSTS: TAX PLANNING AND JURISDICTION SELECTION Richard W. Nenno, Esquire Managing Director and Trust Counsel Wilmington Trust Company Wilmington, DE May 1, 2008 2008 Wilmington Trust Corp. Affiliates in California, Connecticut, Delaware, Florida, Georgia, Maryland, Massachusetts, Minnesota, Nevada, New Jersey, New York, Pennsylvania, South Carolina, Vermont, Cayman Islands, Channel Islands, Dublin, Frankfurt, London, and Luxembourg. All rights reserved. This presentation is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional adviser should be sought. 18