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RIAs Should Reexamine Their Trust Arrangements

November 21, 2013

Successful advisors create client relationships that last generations, and few strategies are as effective in achieving that goal as partnering with a trust company to make sure clients’ estate plans are as effective as possible. That’s one reason wealth managers often choose to work with trust companies in Delaware, where tax laws governing trusts are favorable and structures like dynasty trusts are not only permissible but facilitated. But a recent landmark ruling by the Delaware Supreme Court makes it more costly and time-consuming to move assets from trusts created in another state to Delaware’s jurisdiction.

The Peierls Family Testamentary Trusts case involved a trustee who asked the Delaware high court to accept jurisdiction from another state, amend the trust language and allow the home-state trustee to continue serving. In a surprise decision, the court on October 4 ruled that the other state court must first “release” jurisdiction and consent for the trust to be moved to Delaware. Furthermore, the court found, unless an investor already has a Delaware trustee, the home-state trustee does not have jurisdiction to administer the trust.

For example, if a client’s trust was created under Arizona law and her advisor’s trust company is under Delaware jurisdiction, the client must go before an Arizona judge to change the trust document’s language so it can be governed under Delaware law. Before the ruling, a trust could be moved to Delaware without a home-state judge’s approval.

The ruling has the following implications for RIAs:

  • It increases trust administration costs. The client’s legal costs to change the language in the trust could be between $3,000 and $10,000.
  • It adds time to the process. Petitioning a state judge can take anywhere from six weeks to six months, depending on the judge’s docket. A client who just received an inheritance and needs or wants the money quickly will have to wait until the assets are released to Delaware jurisdiction.
  • It disrupts relationships. A client who has set up a trust in her home state is also likely to have a home-state lawyer. But if her advisor’s trust company is in Delaware, she will need a new lawyer (unless her current attorney practices there too). Such a situation could potentially end more than one important relationship, as the advisor may wind up alienating the home-state lawyer — who might have been a preferred professional partner and a source of referrals.

Despite the advantages of Delaware law, many clients and their attorneys will find it easiest to continue administering trusts in the state where they were originally drafted. So advisors with trust-company partners in Delaware run the risk of subjecting such clients to new hassles. In the worst case, some clients might even switch advisors rather than have to deal with a trust company that doesn’t operate in their home jurisdiction.

To avoid the potential pitfalls, advisors should do the following:

  • Understand each client’s financial- and estate-planning goals, and assess each client attorney’s trust capabilities. Depending on how many clients face a potential change of trust jurisdiction, an advisor may want to partner with a trust company that can operate in every state.
  • Determine the benefits, in each case, of having a trust administered in Delaware. If the tax savings and other advantages are self-evident, it may be worth the additional costs to ask a state court for permission to move the trust.

Now more than ever, prudent advisors need a strategy for coordinating trust administration on behalf of their current and future clients.