Newswise — A handful of opportunistic states are luring banking business to their economies with relaxed trust fund rules more favorable and flexible for wealthy customers seeking to safeguard their assets for future generations.

“Trusts have been used for hundreds of years to try to control wealth from beyond the grave,” says Jeffrey A. Schoenblum, Centennial Professor of Law at Vanderbilt Law School and a renowned expert on trusts.

“It’s known as ‘The Dead Hand.”

TAX LOOPHOLES SAVE MILLIONS

States including Tennessee, Delaware, Nevada, Wyoming, South Dakota and Alaska have relaxed or eliminated requirements limiting how long trusts can last, who can control them, who can access the money and even how much information beneficiaries of a trust can have. They also have opened up tax loopholes that can save some millions of dollars.

“Some people have expressed deep concerns that it permits the concentration and expansion of wealth for those who already have it,” Schoenblum says. “But there is another attitude which is people should be able to accumulate and control the wealth they have earned, and limiting the amount of taxes that individual families have to pay is a fine, noble effort.”

UNIFORM TRUST CODE

Ironically, this trend began in the late 1990s and early 2000s, the same time many other states were adopting The Uniform Trust Code, a set of trust laws formulated by the Uniform Law Commission that offer the framework for the more traditional approach (Tennessee actually adopted The Uniform Trust Code, only to pass so many exceptions that the character of the code is dramatically altered.)

RENEGADE STATES

The renegade states, as Schoenblum calls them, went in a dramatically different direction.

“These states are happy because they have trust business now,” Schoenblum says. “They have trust companies that are employing people. The trust managers are being paid a commission annually by people who don’t even live in the state. “The way the states see it - it’s good, clean money and real opportunity for their residents. It’s money made by people wearing suits and ties.”

FLUXUATIONS OF THE LAW

Some aspects of the trust law have been in flux in the renegade states:

Dynasty TrustsThe rule against perpetuities limits most trusts to 90 to 100 years, which guards against the establishment of Dynasty Trusts. Some states have abolished that law altogether, while others have extended the limit anywhere from 365 years (in Tennessee) to 1,000 years. Dynasty Trusts can be designed so that no estate taxes are paid when the trust fund moves from one generation to the next.

Weak TrusteeThe role of the trustee in the operation of a trust can be defanged to the point of making him or her more of an administrator than a trustee. Instead, families in some states can set up a Directed Trust, in which the family designates an adviser or advisory committee to make decisions on the trust based on rules set forth by the founders.

Disbursement RightsSome states no longer require the beneficiaries of a trust have any rights regarding disbursements or management of the trust funds. A founder of this variety of trust can stipulate under what conditions disbursements are made, how the fund is managed and by whom, all without the beneficiaries having any rights or oversight at all except to receive the money when dispersed.

Spendthrift TrustsSpendthrift Trusts designed to frustrate creditors of children, including their ex-spouses seeking child support and alimony, from getting access to family trust funds. Previously, states did not allow protection from spousal and child support claims. States that allow these Spendthrift Trusts protect the money until it is dispersed to the beneficiary.

Taking Spendthrift Trusts one step farther, a person can establish such a trust to protect a substantial portion of assets from his or her own creditors, including spousal and child support claims, while still retaining access to the funds. Traditionally, trust law has allowed creditors to reach such funds.

Income Tax PaymentsThose looking to lower their state income tax payments can set up a trust fund for themselves in certain of the renegade states that impose no state income tax, and if done properly, that money will not be subject to their home state’s income tax.