Not Your Grandmother's Trust: Women with Assets #4
AZ: One of the issues that come up, because I deal with clients all over the country even though I’m out of North Carolina, whether it’s California or New York, is taxes.
DW: Certainly. The idea of situs is nothing more than just jurisdiction, just legal jurisdiction. And, as most people know, each state has its own laws relative to trust laws. South Dakota Trust themselves, are not taxed. So, to your specific question, that makes the issue of trust jurisdiction or trust situs so compelling because this is one of the most measurable areas we have to see what happens if you don’t choose the right jurisdiction. In this case, what we’re talking about is something called a “Resident Trust.” So, it’s a properly established trust in a jurisdiction like South Dakota that does not have state taxation.
AZ: Can you do this if you don’t live in South Dakota? Because, I have a lot of people like, “How on earth could I have a South Dakota trust if I don’t live in South Dakota? I live in North Carolina.”
DW: Absolutely. That’s an excellent question. You can establish a trust anywhere you like, even out of the country if you want to. The key is, it becomes the trust company’s responsibility to make sure that it really is, first of all, a valid trust and properly administered in South Dakota to make sure that the laws of South Dakota apply. And, that’s the magic. You have to make sure the laws of South Dakota apply. So, anybody can settle a trust, set up a trust in South Dakota, and can be the beneficiary of a trust in South Dakota. The key is, though, that it’s a South Dakota trust which means then that South Dakota’s laws apply, and since there’s no income tax, we avoid taxation on undistributed income. So, if you think of a large trust that’s in place for multiple generations, often there isn’t a lot coming out of those trusts. So, residents of California have a lot to save here. Residents of North Carolina have a lot to save. The reason why I specifically mention North Carolina, your home state, is because it is one of the leading jurisdictions right now to acknowledge this principle that if a trust is properly established in a jurisdiction that does not have income tax, then it becomes unconstitutional for the state of North Carolina to try to tax the undistributed income because, why, it’s not subject to the laws of North Carolina. And there’s a great appellate court case right on point within the last 18 months that has acknowledged just that. There’s also a case out of Pennsylvania and New Jersey, and it’s an excellent case and it lays the groundwork for excellent planning. I know, Ann, you do a lot of planning for your clients. A lot of it is payroll taxation, but how much are you seeing now state taxation planning coming to the forefront?
AZ: I think we really want to make it clear that we are all in favor of paying taxes. If you made income, you owe taxes. So, that’s really the basic. But, if you live in New York City, and you’re being taxed on the income that you work there, but yet there’s a trust that you’re the beneficiary of but you may not be getting even paid out any money, why should you be paying your city, state taxes? So, it’s really just, I think, protecting what you have and having it grow, not trying to shelter or hide anything.
DW: This is not tax evasion at all. This is tax planning, smart tax planning, that takes advantage of laws that are already on the books. Nobody is suggesting that anybody hides money from the government or shirks their responsibility to pay taxes. But, a smart planner needs to understand the options. And just because somebody exercises their option to take advantage of this opportunity doesn’t make them bad. It just makes them smart planners.
AZ: The other thing that I think is so exciting about these trusts is that you would have a distribution committee, and if the person moved to a different state, or if they need the income and they want to pay taxes to whatever state they’re living, they can do that. It’s not permanent. It’s flexible. It’s amendable. And, so, as people’s lives change… I mean, I really didn’t think I’d be living back in North Carolina. I lived in New Orleans, New York, California. I even lived in South Dakota. So, you don’t really know where you’re going to end up and really don’t want to have the taxes be part of your decision.
So, thank you, Guys, for joining us. Or, “Y’all.” And, I’m Ann Zuraw with Zuraw Financial Advisors, and…
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