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These savvy setups let you give your house to your kids without breaking the bank, protect your interests, and even keep control of your cash.

Sometimes all it takes is one story to be convinced. "I recently heard about parents who put $20,000 each year into a fund for their son," says Richard W. Nenno, a vice president and trust counsel of Wilmington Trust Company in Delaware. "When the son became a teenager, he joined a wrestling team and ended up breaking another kid's jaw during a match. The other kid's parents sued him and won. They took every penny of the $800,000 fund. If the money had been in a trust, they might not have gotten any of it."

According to Nenno, most people still think of assets as being "tied up in a trust," but the reality is that trusts allow more freedom than ever before. "You can set them up the way you want," says Nenno. "There's a lot of flexibility." People often set up trusts because they either want to control family spending or protect assets from creditors. Sometimes the reasons are highly personal. "It may be because you're afraid your child will marry someone who will try to take their money, or perhaps because your child is handicapped," says Elizabeth L. Mathieu, president and CEO of Neuberger Berman Trust Company. "Maybe you're on your second marriage, and you want to ensure that if your spouse dies after you do, that all remaining monies you have given to him or her under the will or during life that he or she did not use go to the children of your first marriage or a charity or elsewhere. It varies from person to person."

There are also, of course, the tax benefits. Irrevocable trusts get assets out of your estate—an advantage when it comes to avoiding gift and estate taxes on the assets' future growth, and possibly minimizing income taxes. "If you have a new business that's worth nothing now, you can put it into an irrevocable trust," Nenno says. "If the business crashes you've lost nothing by doing so. If it does well, you've gotten the growth out of your estate and you pay gift tax on a much smaller amount. The sooner you set up a trust, the better." The good news is that setting up trusts can be easy. "Some trusts have annual documents that need to be filed but many do not,"comments William D. Zabel, senior partner at Schulte Roth & Zabel LLP and author of The Rich Die Richer and You Can Too (John Wiley & Sons, 1996). "Regardless, they are well worth creating."

The type of trust you set up depends on a variety of factors, including: the quantity and type of assets you want to put into the trust; when and to whom you want to give those assets; what degree of control you want to maintain over the assets once they're out of your hands; and whether you, too, want to receive payments from the trust.

In this article we focus primarily on general issues related to trusts. We also examine some specific trusts in detail. Two of the most popular, the generation-skipping transfer (GST) tax trusts and marital trusts, or qualified terminable interest property (QTIP) trusts, were discussed in this column in May/June 2000.


Avoiding Gift Tax: The Basics

Annual $10,000 Gift
You are allowed to give away up to $10,000 per year to as many people as you like without incurring gift tax on it. (Gift tax is 37 to 60 percent.) Married couples can "gift split," or jointly give $20,000 per year to each person in the form of one check.

$675,000 Gift
In addition to the $10,000 annual gift, you can give away up to $675,000—or the "applicable exclusion amount," previously called the "unified credit equivalent"—in your lifetime or after your death without paying any federal gift or estate tax on it. (That number is scheduled to increase to $1 million per individual by 2006.) Therefore, if you're not married and your estate is worth more than that, or if you are married and you and your spouse's estate is worth more than twice that amount, setting up a trust is a wise move. "The challenge is what can you do with the assets above $1,350,000," says Nenno.

Tuition And Medical Expenses
This exemption permits you to pay an unlimited amount of money directly to service providers (such as hospitals or universities) on someone else's behalf. It does not come out of your available annual exclusion or your unified credit amounts.

Generation-Skipping Transfer Tax
The GST tax-exemption allows you to create a $1,030,000 dynasty trust in your lifetime or at death to a grandchild. Above the $1,030,000, you pay a fixed GST tax rate of 55 percent on any such gifts—that's in addition to gift or estate taxes you may have to pay. In order to maximize this advantage, many people create a trust with just that amount in it.

We asked numerous trust experts to share their tips. Here is their advice:


A Revocable Living Trust Lets You Retain Control of Your Assets

Pro: You can get your money back.
Most trusts are irrevocable, meaning that once you give your assets away, you can rarely get them back. "Irrevocable trusts are often created to use the GST exemptions, or to make gifts to spouses, children or charity," Nenno explains. With a revocable living trust, on the other hand, a trustee will manage your assets—but you can alter or revoke the trust whenever you want. Revocable living trusts may simplify probate and are especially useful if you become disabled at some point. For instance, you can state how you should be taken care of in case of disability, or whether you want to be placed in a nursing home or to be kept in your own home as long as possible. The key with a living trust, as with any trust, is to change all of your assets, such as the title to your house, to that trust.

Pro: You can set up an easy out in case Congress abolishes estate tax.
Be sure to structure your revocable trust with enough flexibility to accommodate any new tax laws. As Mathieu explains: "Put in language stating that the trustee has the right to distribute all assets to the beneficiaries if the trustee deems that it is in their best interests—or even to terminate the trust if any tax that the trust was set up to minimize is abolished, provided of course that abolishing it is in the beneficiaries' best interest."

Pro: The records stay private.
One of the greatest advantages of a living trust is that, unlike a will, it can keep your estate confidential since trust documents don't always have to be filed in the public record. (Exception: When you put real estate into a trust, you have to file a deed, which is entered in the public record. In addition, certain states, such as New York, require revocable trusts to be public.) "When Jackie Onassis died, the terms of her will were all over the press," remarks Nenno. "That probably wouldn't have happened if she had put them in a trust in a state such as Delaware."

Con: There's no tax advantage.
Revocable trusts offer no federal, state, gift, or estate tax savings. Irrevocable trusts, on the other hand, while lacking the flexibility of revocable trusts, are popular because they provide significant tax savings. Typically, gifts made through them remove the assets from your estate, which means that the assets appreciate in the beneficiaries' hands. Depending on the type of trust and the assets used to fund it, you may be able to discount the value of the gift, too, which in turn can reduce the amount of gift tax you must pay.

Con: Because it doesn't cover future purchases, you'll need to update it.
"Generally the living trust is seen as an alternative to a will," says Zabel. "It's not. You still need a simple will for those things that you didn't transfer into the trust." Whereas a will covers anything that you will own in the future, a living trust won't do that unless you revise it constantly. In addition, Mathieu notes, "A living trust cannot capture assets that you own jointly with another, unless they are also a settlor of the trust. It will not designate guardians for children or who should be executor of your estate. It cannot deal with what should happen to insurance proceeds payable at your death if the person you name in the policy dies before you."


A Perpetual Dynasty Trust Can Make the Family Fortune Last Forever

Pro: If you set up the trust in the right state, your money can stretch further.
"Ninety-eight percent of our clients say that if a trust can last eighty to one hundred and twenty years, that's long enough," says Al King, director of estate planning for Citigroup. "Then, when they hear about the advantages and flexibilities of perpetual trusts, a lot of them convert."

The trick, however, is setting up the trust in the proper state. Under the Common-law Rule Against Perpetuities, which still exists in most states, a trust can last for only 21 years after the death of a living person who is identified in the trust document. (For example, many Americans define that individual as the last descendant of Joseph Kennedy, on the assumption that his clan is now so large that there will always be a living member of it somewhere.) After the named person's death, the trust must immediately distribute its assets to the beneficiaries—even if they do not need the assets or do not want them in their estate (which means they are subject to estate tax).

However, some states, such as South Dakota, Delaware, and Alaska (see section No Limitation on Duration), have abolished this rule, thus allowing the possibility of perpetual trusts, which have no restriction on when a future interest can vest. "Why should you require a trust to end at your child's death if you don't have to?" says Nenno. "Once the assets are out of a trust, you cannot get them back into the same trust, and they can be reached by creditors."

"Many people don't like the idea of setting up a trust today that could control the financial destiny of very remote generations," adds Mathieu. "To resolve this issue, trusts can be written to ensure that the trustee can distribute all the assets upon a request by a beneficiary or upon the happening of an event, such as the abolition of the federal estate tax."

Con: If you want your heirs to control the money, they'll need to pay taxes.
The key to the dynasty trust's success is the type of power of appointment that is given to heirs. With a general power of appointment, the heir can direct the trust to go to any person or charity that he or she pleases. This freedom is convenient, but has a significant downside: The IRS then considers the trust's assets part of the heir's estate and therefore taxable. If you specify a limited power of appointment, on the other hand—meaning you limit the class of eligible appointees, typically to your children, spouse, or favorite charity—the IRS deems the trust outside of the heir's estate. "It's long been the law that if the person creating the trust didn't give you the full enjoyment and control of it, then you don't have to pay tax on it," says Zabel.


Professional Trustees Are Accountable For Their Errors—Your Kids Aren't

Pro: If you choose wisely, pros can provide security and crucial guidance.
Appointing a corporate or professional trustee in addition to family members is probably a wise move. "Often nonprofessionals do not know how to run a trust," states Nenno. "They have to hire lawyers, accountants, and investment advisors."

Amateur trustees are also held to a lower standard of performance by courts than professionals. "I heard of a woman who died in 1982, when the unified credit amount was $225,000," says Nenno. "She set up a credit shelter trust with that amount and named her two surviving children as trustees. When her husband died in 1994, it turned out that the trust's assets had been invested in municipal bonds. So it was still worth just $225,000. The court ruled that it was okay, but a professional trustee probably would have been in big trouble, and would have had to pay a surcharge to the trust for the money that wasn't earned due to poor investing."

If a professional trustee goes bankrupt, by law the trust's assets must be segregated from the corporation's own assets, so that the former are not at risk. However, with a family member in a financial crisis, you may not be so lucky. "It isn't required of individual or nonprofessional trustees," Nenno points out.

Pro: Hiring a corporate trustee means you can pick and choose.
Whether it's best to hire an individual professional trustee or a corporate trustee depends partly on the type and value of assets you want to put into the trust, as well as the trust's complexity. "It depends on how long the trust will last, if there will be income and remainder beneficiaries, if you need the trustee to do something complex like run a business for you," notes Mathieu. One advantage to hiring a corporate trustee in particular is that there are often many advisors to choose from within the corporation—if you don't like the one initially assigned to you, you can always request someone else.

Con: Pros can be pricey.
"If you do not have much money in the trust, you may not want to pay a corporate trustee, which could be more expensive," says Mathieu. However, if the individual trustee has to hire accountants and investment managers, the full service fiduciary may be cost-effective.

Con: They may not share your goals.
Professional trustees aren't necessarily capable—and they may not fully comprehend your personal, long-term objectives for the trust. To protect yourself, Nenno recommends asking people you know for referrals and looking at the trustee's track record, both in terms of investments and service. "Your family members probably have a much better understanding of how you want your money to be used," explains Mathieu. By appointing family members as co-trustees, they can have a say over what goes on—and they can fire the professional trustees if they feel that they aren't doing a good enough job.


Signing a Power of Attorney Can Protect You

Pro: Someone with a power of attorney can look after all aspects of your estate; a trustee looks after the trust.
A trustee has a legal obligation to act according to the terms of a trust document, which is a crucial but limited role. A person with a power of attorney, on the other hand, has the right—but not the obligation—to act on your behalf. That means that if you're incapacitated, someone with a power of attorney can look at the big picture and make financial decisions for you, including ones that have nothing to do with the trusts you have set up. Even if all of your money is in trusts, the power of attorney is still useful, says Nenno, adding, "Everyone should do it."

Most people set up a "durable power of attorney," which is effective when you sign the document and remains valid through any eventual incapacity. Others opt for what is called a "springing power of attorney," which only activates if a certain event that you have defined occurs, such as your becoming incapacitated. In that case, a third party (usually a doctor) must be brought in to certify that the power of attorney must be used. "It is generally used only if people are paranoid that their heirs will not necessarily have their well-being at heart,"explains Zabel.

Be advised, however: "You cannot compel someone to exercise a power of attorney," Mathieu comments. "A trust, on the other hand, will provide a person with more security, so that whatever the grantor wants to have done will be done. And if a trustee doesn't act according to the trust document, the beneficiary has the right to legal redress in court."

Con: If you don't fill out the right paperwork, your bank may not accept it.
Although some people may think that drawing up one power of attorney document is enough, it's not. "Power of attorney is very complicated," states Mathieu. "Also, there are practical problems. For example, if you wish to give someone a power of attorney over an account in a bank or an investment management house, more often than not the institution will have its own form, which, if you do not fill it out, results in a power of attorney not being respected by that institution."


Setting up the Trust in the Right State is a Crucial First Step

Contrary to popular belief, you don't have to live in a given state in order to set up a trust there. Sometimes it is even a disadvantage, particularly when creditors become involved. "The state you choose really matters," says Nenno. "In some states even if the trust's beneficiary does something awful, the court protects his or her interest in the trust, and says that the money cannot be used to pay a claim. In other states, that's not the case."

Because the best states for trusts are not necessarily the best states for other estate planning vehicles, King says you should do what he refers to as jurisdiction shopping. "Take Family Limited Partnerships," says King. "Because of the way their statutes read, Georgia, Texas, Nevada, and Delaware are considered some of the best states to set them up in. There's more flexibility on the valuation discount of the partnership units. But except for Delaware, these states may not be considered the best states in which to set up duration or dynasty trusts. So you may want to create a Georgia partnership and place it in a South Dakota trust."

When it comes to ranking states for trusts, experts generally agree that Delaware, South Dakota, and Alaska offer the most advantages. "They have very interesting tweaks to their statutes," says King. "Other states just haven't jumped on board in the same way yet." But they are trying. "There's a national movement that is altering the landscape of trust law," says Mathieu. "Now, states are thinking competitively. It is a good idea to ask your lawyer to keep you apprised of any changes." Here are the main advantages to look for when you are shopping for a state:

  • No Limitation On Duration
    As mentioned before, under most common- law states the "rule against perpetuities" still exists today. But it doesn't in Alaska, Arizona, Delaware, Idaho, Illinois, Ohio, Maine, Maryland, New Jersey, Rhode Island, South Dakota, Virginia, and Wisconsin—what are frequently referred to as "designer jurisdictions." Instead, these states all permit trusts to have unlimited duration. New legislation has also been passed in Florida, which allows trusts to last 360 years.

    According to King, whose Citigroup has trust companies in Delaware and South Dakota, some advisors are "uncomfortable with the way Delaware did away with the rule against perpetuities; there may be issues. Illinois, Wisconsin, and South Dakota, for example, have all tied the unlimited duration rule into state drafting. That's not the case in Delaware." Mathieu sees it differently. "Delaware abolished the rule against perpetuities in 1995," she notes. "Lawyers there are familiar with it and courts understand it. There are no issues." In Delaware there is also a limitation on real estate: If you put it into a trust, the assets must be distributed after 110 years. That's why a lot of advisors will tell you to put the real estate into a Delaware Family Limited Partnership or a limited liability company, because that will change the character of the real estate to personal property for tax purposes. "But one should exercise caution," advises King, "because if the partnership ever terminates, the assets could be tainted."

    You also have to be careful if you plan to move a trust from one state to another. "If you move an unlimited duration trust from South Dakota to New York, for example, you will taint the trust," admonishes King. "It will no longer have unlimited duration. Or if you move it to Florida, it will be able to last only 360 years. If you move it between South Dakota and Alaska, this should not be an issue if the trust is drafted for such a transfer." Obstacles also exist if you set up the trust in a state without certain advantages, then try to get them later. "You can't start a trust in a state where the rule against perpetuities still exists, then try to move it to one where it doesn't," Mathieu cautions. "You won't be able to make the trust perpetual since it didn't begin that way."

  • Lower Taxes
    Of the states that have abolished the rule against perpetuities, six do not charge any state income tax: Alaska, Delaware, Illinois, Ohio, South Dakota, and Wisconsin. (In Delaware and Illinois, trusts are not charged fiduciary income tax if the beneficiaries are not residents; however, beneficiaries who receive distributions from the trusts are charged income and capital gains tax by the state in which they live, to the extent that they received income or capital gains in the distribution.) Financially, the lack of a state income tax can make an enormous difference over time. "It has been estimated that if you start a trust with $1 million and apply a one percent income tax on the trust over one hundred and twenty years, the trust will pay $2 billion in tax, assuming a twelve percent rate of return," King explains. This is an even greater issue in New York State, since there is also a New York City income tax there.

  • The Prudent Investor Rule
    This rule is the result of the Prudent Investor Act, which requires that trustees who manage a portfolio in a trust must do so "with the realities of the market in mind." In other words they can't just stick everything in bonds. To date the act has been passed in some 35 states. According to the experts, the longer it has been effective, the better because the courts have had more time to become accustomed to dealing with it.
  • "Directed Trusts"
    These are trusts in which the beneficiary can select people other than the trustee—generally family members—to make investment decisions. Most states that have abolished the rule against perpetuities fall into this category, but directed trusts are especially common in Alaska, Delaware, and South Dakota. "It bifurcates the traditional trustee role," says King. "There is an administrative trustee, which is usually an institution since the trust has to be administered in a certain state. (This prevents the family from having to move to that state.) Then there is an investment committee, which directs the investing (subject to the trustee's approval), and a distribution committee, which determines who gets distributions and when. Often family members are on this one, as well as advisors."

    A directed trust can also mean lower trustee expenses. "For instance, if Wilmington Trust Company is the trustee and the trust designates another financial advisor responsible for managing the investments," Nenno explains, "Wilmington Trust will charge the client less." This works particularly well, he adds, if a family company has been put into a long-term trust and the family wants to be responsible for managing its own investments, or for very wealthy families who use multiple money managers in order to create competition among them. "Other states have the directed trust statute," remarks Nenno, "but it is not as widely accepted. A corporate trustee in another state just might not be too comfortable with it, since traditionally that trustee could not delegate the investment responsibility."

  • Trust Protectors That Are Legally Recognized
    "It means that a person can make changes to a trust even if he isn't a trustee," says Zabel. Although, as King says, "some clients write it into their trusts regardless of the state's statute," trust protectors are only written into the statutes of Alaska, Delaware, and South Dakota. Usually the trust protector is not a member of the family, but instead the family's lawyer or accountant. "It permits someone to oversee all of the committees in a directed trust," says King. "For example, if the government did away with estate tax, which is highly unlikely, the trust protector could terminate the trust. In South Dakota, whose statute in this matter is better, the trust protector can even reform the trust—for instance, if a child becomes drug dependent, the protector can cut off the child's payments, then restore them if the child rehabilitates."

  • Asset Protection From Creditors
    Until recently, you had to go offshore—to the Cayman Islands, Cook Islands, Gibraltar—to create a self-settled asset protection trust or APT (also known as a credit protection trust, or CPT). That means you set up an irrevocable trust, so that your assets are out of your reach for property law purposes and protected from creditors; however, you retain the indirect right to get back the income and principal. At the present time Alaska, Colorado, Delaware, Nevada, and Rhode Island all have statutes allowing onshore, self-settled APTs, to protect your assets from future creditors.


Self-settled APTs can also offer protection when family matters become strained—for example, protection from spouses during divorce proceedings. "In the past, Delaware law said that if you were married and then divorced, any assets in a self-settled APT were part of the marital estate," notes Mathieu. "Today, if you set up a self-settled APT before you get married, they're not included." Some people create APTs and make themselves and their children the beneficiaries, knowing that if they want to they can probably take the money away from the children at any time. "You can request that the trustee give you the full distribution," says Mathieu, "and it could be denied. But generally if the trustee is friendly to you, he or she will do it."

Some, however, caution that the success of onshore APTs has not yet been proven. "They allegedly allow these protections," says King, "but there hasn't been a case yet—it's still unproven. The real issue is the 'full faith in credit' clause of the U.S. Constitution. It says that one state will honor the judgment of another. So the question is, if you have a self-settled APT in one state and creditors in another state are trying to get your money, will the first state force you to hand over the trust's assets if the second state rules that you owe the money?" (According to King, a less-known but powerful strategy to deal with onshore asset protection called "the beneficiary defective-beneficiary-controlled trust" has recently become quite popular.)

For others the risk is well worth the freedom. "People who grew up in the Depression are often scared to give away money now," Nenno says. "This might help them feel better about doing it. If your assets are offshore so that creditors can't get to them, what's going to happen when you want to?"


Use This Loophole Before It's Too Late!

Qualified Personal Residence Trust

What It Is
The QPRT is an easy and inexpensive way to transfer your house to your kids. "It leverages the gift tax exemption," says Zabel. "It's very popular."

How It Works
Suppose that a widow owns a house that has a market value of $2 million. She puts it in a QPRT, which states that she can live in it for 15 years and names her children as the trust's beneficiaries. At the end of the 15 years, the children will own the house. In the meantime, because there will be retained use of it (i.e., the widow will be living there), the fair market value of the house will be discounted heavily for gift tax purposes.

Pros
If it is valued at less than $675,000, there will be no gift tax on it. If it is valued at more than that, the widow will still have to pay some gift tax, but less than that on $2 million. By the time the trust ends, the house may be worth $4 million—and the widow doesn't have to pay any additional gift tax. When the children sell the house, however, they will have to pay capital gains tax on the difference between the current value of the house and their mother's basis.

Cons
Because you cede control of your own home when the QPRT ends—which may be many years before you die—you have to trust that your children will act in your best interests. Once they own the house, they can charge you rent; even worse, they can legally kick you out, which is one reason some parents resist creating a QPRT.

The only other problem? As a loophole, it may not last long. "President Clinton's budget proposal includes eliminating the QPRT," warns Nenno, "because it works too well."


Your Money or Your Life

Life Insurance Trust

How It Works
Generally either the trustee buys a policy on you or your existing policy is transferred to the trust, which then owns the policy. Each year you make cash gifts to the trust, and the trustee uses them to pay the annual premiums. If the trust is properly drafted, you can also put gifts of $10,000 each year per beneficiary (or $20,000 if you and your spouse agree to gift-split) under the annual exclusion allowance.

Pros
When you die, the policy's proceeds are paid into the trust and distributed to the beneficiaries according to the trust terms. Because you had no interest in the trust, the trust isn't included in your estate—and no estate tax is paid on the proceeds. "It takes the wealth from that policy out of your taxable estate," Zabel explains. "Sometimes there aren't even ongoing, annualexpenses, tax returns, or filing fees."

Con
It costs roughly $1,500 to set it up.


Charitable Trusts Are Smart Ways to Stretch a Dollar

"If you give money directly to charity, it's gone forever and you have no control over it," says Zabel. This may not be as satisfying as creating one of these three popular trusts:


Private Charitable Foundation Structured As A Trust
How It Works
When you make the gift, you can take an immediate income tax deduction. The foundation will distribute a small percentage of the funds to charity over a long period of time.

Pro
"Most people prefer the trust structure for foundations over the corporation structure," says Zabel. "It's more flexible. There's no board of directors, no required meetings, and there can be just one trustee. With a corporation, there's a lot more paperwork."

Con
You and your family won't receive annual payments from the foundation.


Charitable Remainder Trust (CRT)
How It Works
You put assets into the trust while you're alive and receive annual payments from it; when you (or you and your spouse, depending on how you structure it) die, the principal goes to the charity, not to your heirs.

Pro
You can take a charitable deduction on all or much of the amount during the year in which you set up the trust, and you can minimize capital gains tax because charities are tax-exempt. "You can put almost anything into it," says Nenno. "But there are different tax rules based on what you contribute."

Con
You can't watch the charity benefit from your donation because you won't be alive.


Charitable Lead Unitrust (CLUT)
How It Works
A charity receives payments annually; at the end of the trust period the principal returns to the grantor's family. (Thus, it is essentially the opposite of a CRT.)

Pros
Although you cannot personally receive payment from it, if it is set up as a grantor trust you can claim a gift tax deduction during the year in which you make the gift. The CLUT also works quite nicely, Nenno notes, with the GST exemption. "People set up a CLUT with $1,030,000, or the GST exemption amount," he says, "plus the gift tax value of the charitable deduction, perhaps another $1 million. The CLUT then pays five percent to charity for x number of years. If the money in the trust is invested well, what eventually comes back to the family can be worth more than $2 million."

Con
"The CLUT is taxed as a regular, irrevocable trust," Nenno explains. "If it sells stock, it pays capital gains on it. It's not tax-exempt."


Are Your Offspring Trustworthy?

Uniform Transfers To Minors Act (UTMA) And Uniform Gifts To Minors Act (UGMA)
How They Work
UTMAs and UGMAs are a convenient way to give money to minors through the state without setting up a trust. Generally this involves opening a bank account under the child's name, depositing money into it, and then naming someone as custodian of it until the child reaches a certain age, usually 18 to 21, at which time he or she will receive the money.

Pro
Setting up the account is free.

Cons
If you are the grantor and custodian, and you die before the child reaches the specified age, the money is taxed as part of your estate. Also, the account is not protected from creditors, as it would be in a trust. Finally, allowing the child to access all of the money at age 21 may be too soon, especially if the value has appreciated greatly.


Sources

Neuberger Berman Trust Company;
212-476-9100; FAX 212-476-9109;
www.nb.com

Wilmington Trust Company;
800-441-7120;
www.wilmingtontrust.com

Schulte Roth & Zabel LLP;
212-756-2000

Citigroup;
212-559-4296; FAX 212-793-0036.


Jurisdiction-Skipping Allows You to Move Your Trust If There's a Crisis

Pro: You Can Switch Your Trust Anywhere You Want
A jurisdiction-skipping clause allows your trust to move to another state or country at any point in time. "I have a client who was really concerned about the possibility of the U.S. getting bombed last year, so he put his assets with ten different trust companies across the country and added a clause stating that the trusts could move offshore if necessary," says King. "Then one morning he woke up and read that an asteroid might hit the U.S., so he had us put in a clause stating that the trusts could be moved to anywhere in the galaxy. He thought, 'Well, even if the asteroid does not hit, 200 years from now Mars may be the best place to keep a trust so my beneficiaries won't be limited.' Since then other clients have added the same clause to their trust documents."

Con: You May Lose Some Benefits Along The Way
Be careful: Some states don't allow you to move trusts. Even if you can move it, the second state may not offer the same advantages as the first—and you may not be able to get those benefits back unless you start another trust in the first state and transfer the assets back into it.

Travis Neighbor, a frequent contributor to Departures based in Atlanta, wrote about fine-writing accessories for the September issue.