Trust Situs

Trust situs is the location a trust is treated as belonging to. In ordinary use it is a single word for three separate legal questions that are answered by different rules and can come out differently: which state's law determines the meaning and effect of the trust's terms, which state's law governs how the trust is administered, and which state has enough of a connection to tax the trust's income. Statutes do not use the word. The Uniform Trust Code, as enacted by the states that have adopted it, names only the administration component, calling it the principal place of administration.

The two statutes are adjacent, and they are not the same test. Florida's enactment of the Uniform Trust Code separates them by one section number. Section 736.0107, headed "Governing law," provides that the meaning and effect of a trust's terms are determined by "the law of the jurisdiction designated in the terms of the trust, provided there is a sufficient nexus to the designated jurisdiction at the time of the creation of the trust or during the trust administration, including, but not limited to, the location of real property held by the trust or the residence or location of an office of the settlor, trustee, or any beneficiary." Absent a designation, it is the law of the jurisdiction where the settlor resided when the trust was first created. And a designation is not controlling "as to any matter for which the designation would be contrary to a strong public policy of this state."

Section 736.0108 then addresses administration. A designation of the principal place of administration is "valid only if there is a sufficient connection with the designated jurisdiction," and the statute supplies a safe harbor: the designation is valid and controlling if a trustee's principal place of business is in the designated jurisdiction or a trustee resides there, or if all or part of the administration occurs there. Where the instrument designates nothing, the default is the trustee's usual place of business where the trust records are kept, or the trustee's residence if there is no place of business, with tie-breakers for cotrustees that put a corporate trustee first.

Two things follow that people find counterintuitive. A trust drafted to be governed by one state's law can be administered in another, because the two sections test different facts. And neither section decides the tax question, which is federal constitutional law layered on top of fifty state statutes.

Neither connection test can be drafted around. Florida's section 736.0105 lists the provisions the terms of a trust cannot override, and paragraph (2)(f) puts both of them on that list: the requirements under 736.0108(1) for designating a principal place of administration, and the requirements under 736.0107 for designating the governing law. A settlor may pick a state. A settlor may not pick a state the trust has no connection to.

The trustee has a duty to be in the right place, and a power to move. Section 736.0108(4) imposes a continuing duty "to administer the trust at a place appropriate to its purposes and its administration." Subsection (5) then gives the trustee the power to transfer the principal place of administration to another state or outside the United States, without court approval, in furtherance of that duty. The protection for beneficiaries is procedural rather than substantive: subsection (6) requires notice to the qualified beneficiaries not less than 60 days before the transfer is initiated, and the notice must state the destination jurisdiction, the new contact address and telephone number, the reasons for the transfer, the anticipated date, and the date by which a qualified beneficiary must object. Subsection (7) suspends the trustee's authority to act without court approval if a qualified beneficiary files a lawsuit objecting on or before that date.

What the Supreme Court actually decided about taxing a trust, and what it expressly did not. In North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, decided June 21, 2019, the Court wrote: "We hold that the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it. In limiting our holding to the specific facts presented, we do not imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here."

Read the second sentence twice. The case is not authority that a trust can be moved to a state without an income tax and thereby escape tax elsewhere. In the same part of the opinion the Court listed the connections it has already accepted: "The Court has already held that a tax on trust income distributed to an in-state resident passes muster under the Due Process Clause. ... So does a tax based on a trustee's in-state residence. ... The Court's cases also suggest that a tax based on the site of trust administration is constitutional." Every one of those theories survives Kaestner, states use different combinations of them, and more than one state can have a claim on the same trust at the same time. Which state may tax a particular trust is a question about that state's nexus statute, and the amount of the tax is a separate subject belonging to the pages on trust income taxation.

Situs is established and changed in a sequence, and each step answers a different one of the three questions.

1. The document names a governing law. Under Florida's section 736.0107 the designation controls the meaning and effect of the terms if there is a sufficient nexus to that jurisdiction, measured either when the trust was created or during administration. Real property held by the trust, or an office or residence of the settlor, trustee or any beneficiary, are named in the statute as examples of a nexus.

2. The document names a principal place of administration, or does not. A designation is valid only where there is a sufficient connection under section 736.0108(1), and a trustee resident or with a principal place of business there, or administration actually occurring there, satisfies it. With no designation the default is wherever the trustee keeps the records.

3. The trustee keeps testing the second answer. The duty to administer at an appropriate place is continuing, so a trustee who moves, resigns or is replaced can change the answer without anyone amending the document.

4. A move requires notice, not permission. At least 60 days before initiating a transfer, the trustee notifies the qualified beneficiaries with the five items the statute lists. If a qualified beneficiary sues by the stated date, the trustee's authority to proceed without a court is suspended until the suit is dismissed or withdrawn.

5. The tax question is answered separately, by every state with a nexus theory that reaches the trust. Moving the administration changes one input into that analysis. It does not answer it, and it does not undo a claim based on the settlor's residence when the trust was created or on distributions to a resident beneficiary.

A hypothetical: a trust is drafted in Illinois, names Illinois law, and is administered by an Illinois trustee. The trustee resigns and a corporate trustee in another state accepts. Under the default rule the principal place of administration follows the records to the new trustee's office. The governing law named in the document does not move with it, because that is section 736.0107's question and not section 736.0108's. The trust now has one state's law for meaning and another state's for administration, which is a normal outcome rather than a drafting error.

What choosing situs deliberately can do

• Fix which state's law will be applied to the document's terms, subject to a nexus requirement and to the forum's public policy.
• Put administration where the trustee actually is, which is the answer the statute reaches by default anyway.
• Give a long-lived trust a route to follow better law later, because the trustee's power to transfer administration does not need a court.
• Reach a state whose trust statutes offer something the settlor wants, such as a longer permitted duration, which the dynasty trust entry covers.

What it does not do, and what it costs

• It does not settle state taxation. Multiple states can assert nexus on different theories, and Kaestner struck down one theory rather than endorsing relocation.
• The two tests can diverge, so a trust can be governed by one state's law and administered under another's, which raises the cost of every question.
• A designation of governing law gives way where applying it would be contrary to a strong public policy of the state actually deciding the case.
• Moving administration usually means changing trustees, and an out-of-state corporate trustee charges for the service and has no relationship with the family.
• The 60-day notice is a real check. A qualified beneficiary who objects and sues suspends the transfer, so a move made over family objection is slow and public.