Estate planning seems simple on the surface. You sign a series of documents naming a responsible party to manage your assets in the event of your incapacity and directing how your assets should be distributed upon your death. However, once you start to really think carefully about all the issues that are involved in the transfer and stewardship of your hard-earned assets, you begin to realize that an estate plan should be comprehensive and should address a multitude of detailed considerations. One important but often overlooked consideration is which state governs your trust?
With the exception of federal tax considerations, estate planning is mostly governed by state law. Each state has its own unique rules regarding the administration and interpretation of trust provisions. Typically the state in which your trust was drafted and where you reside will govern the terms of your trust. However, there are occasions when it might be prudent to allow for a change in the governing law. A provision allowing the change of the governing law of your trust is often referred to as a “flight clause.” Below are a few examples of how including a “flight clause” in your trust can be beneficial to your overall estate plan.
1. Roaming Beneficiaries
In today’s society, it is rare for people to spend their entire lives in the same hometown. People often move to different states for schooling, career opportunities, and adventure. It is likely that you might move to a different state after establishing your trust or that your beneficiaries might move to a different state after your death. Although your trust will be recognized in all 50 states, it might be practical or more convenient to have the governing law of your trust match the state in which the beneficiaries reside.
2. Keeping the Trust Current
Your basic living trust remains revocable during your lifetime. However, upon your death, your trust becomes irrevocable. A good comprehensive estate plan will often continue the trust for the lives of your beneficiaries in order to provide them with a degree of creditor protection and divorce protection. However, circumstances can change and it might be beneficial or necessary to modify the terms of the trust even after it has technically become irrevocable. Some states, such as California, require court involvement in limited circumstances in order to modify an otherwise irrevocable trust after the Trust-maker is deceased. Other states allow for the beneficiaries to agree to a modification without court involvement. If an irrevocable trust needs to be modified, a “flight clause” allowing the governing law of the trust to be moved to a state that allows for modification of the trust without court involvement could be very helpful.
3. Extending the Life of the Trust
Most states have a “Rule Against Perpetuities,” or a “RAP,” which limits the period of time in which a trust can last. Other states have greatly extended their RAP or have entirely eliminated their RAP. Sometimes you might want your trust to last for generations, such as to provide funding for the education of your grandchildren, great-grandchildren, and great-great-grandchildren. A “flight clause” could allow a trust governed under a state with a short RAP to be moved to a state with a longer RAP in order to allow the trust to continue for a much longer period of time.
4. Better Creditor Protection
State laws vary greatly on whether or not a trust can provide the beneficiaries with creditor protection. The most favorable states are typically Nevada, Delaware, Wyoming, and Alaska among others. If a trust is formed and governed under the laws of a less favorable jurisdiction, a “flight clause” might allow the trust to be moved to a more favorable state to provide the beneficiary with better creditor protection.
Although all of these planning opportunities involve their own nuances and are often dependent upon the particular facts and circumstances of the situation, the presence of a “flight clause” can provide flexibility in a variety of circumstances. The traditional method of setting the governing law of a trust in stone has its limitations and can often frustrate the purpose or limit the benefits of the trust.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before acting on any of the information provided in this article, it is important that you consult a competent attorney who is licensed to practice law in your community.