State lines on USA map

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When you create a trust, you select the state law that will govern it. Often, this is the law of the state where you live. For example, if you live in Florida, Florida law will typically apply to your trust.

However, you can choose the law of another state, provided there is a sufficient connection to that state. Usually, the connection is made by choosing a trustee who is located in that state. For instance, someone living in Florida could choose Delaware law to govern their trust if they name a Delaware trustee. In many cases, the trustee will be a Delaware trust company, unless you happen to have a trustworthy friend or family member who lives in Delaware.

But what happens down the road if your trustee moves to another state, or what if another state’s laws are more favorable? Many states, such as Alaska, Delaware, Nevada, New Hampshire, South Dakota, and Wyoming have adopted favorable trust laws. When a dispute arises, however, beneficiaries and trustees cannot simply choose whichever state’s law they prefer. Determining which state’s law applies is often complex and can lead to litigation over the proper governing law.

Decades ago, a trust’s law was typically tied to the state where the person creating the trust lived and died. Families lived nearby in the same state, wealth was often based on land, and trustees were local banks or family members. These days, people and assets are not tied to just one state. Family members often live in multiple states or outside the U.S., wealth primarily consists of financial accounts instead of land, and national trust companies and banks can serve as trustee. If a dispute arises with your trust, there are now greater options for where to bring a lawsuit, and for which state’s trust law will apply.

If a conflict arises, there are a number of factors that determine what state law will apply to your trust:

• The governing state law identified in the trust
• The state where the settlor (the person who created the trust) lived when the trust was created
• The trustee’s physical location
• The state where the trust is being administered
• The location of the trust assets
• Whether the trust was created at the settlor’s death or when he was alive
• The nature of the trust dispute

Shopping for a New State’s Laws

If the governing law of a trust becomes unfavorable, it may sometimes be possible to move the trust to another state.

One option would be to move the administration of your trust by changing the trustee to one who is located in the more favorable state. Another possibility is decanting, which allows a trustee to distribute the trust assets to a new trust. Some states allow decanting into a new trust governed by their law. While decanting has traditionally been used for tax reasons, it is increasingly being considered as a way to move a trust to a state with more favorable laws.

The more states that a trust touches, the greater the likelihood that a conflict-of-laws dispute may arise—sometimes resulting in litigation in multiple jurisdictions. For example, a trust could be created in Massachusetts, administered by a New Hampshire trustee who later moves to Florida, hold real estate in South Carolina, and have accounts with a national bank.

In such situations, determining which state’s law to apply can be complicated and fact-specific. There are rarely simple answers, which is why it is important to consult your attorney.