Does Trust Need to Be Moved When Settlor Moves to a New State?
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Question:
If a trustee creates a trust in Wisconsin, and the trust says the laws of Wisconsin will be used for its interpretation and administration, then the settlor (also the first trustee and present-day beneficiary) moves and establishes residence in Massachusetts, does the Trust have to be moved to Massachusetts? I am researching this but have found nothing as yet so was wondering if you might know the answer.
Response:
The answer is no, the trust does not need to be moved to the new state, Massachusetts in your case. But let’s dig a little further and explore what we’re talking about and what it means for a trust to be located anywhere. There are two issues: the law that governs the trust, which you bring up, and where the trust will be taxed.
Governing Law
In terms of the law, the trust will in effect be governed by both Wisconsin and Massachusetts law. Once the trust is in Massachusetts, if push comes to shove and any issues that come up that require going to a Massachusetts court, the court will to some extent apply Massachusetts law despite the terms of the trust. In other words, it will be subject to the jurisdiction of the Massachusetts courts. However, in any matter that involves trust interpretation, courts will look first to the actual language of the trust. That shouldn’t change from state to state. Next, given that it says it’s governed by Wisconsin law, even Massachusetts courts will look to Wisconsin law for any interpretation of what the trust means. However, there are certain provisions of Massachusetts trust law, typically beneficiary protections, that apply to all trusts in the state.
If the trust is revocable, the settlor (grantor) can always change the provision regarding which state’s laws govern in order to simplify matters. Some irrevocable trusts allow the settlor, trustee or a trust protector to change the laws that govern the trust to be changed from one state to another if such a change will achieve better treatment for the trust. This might be for tax or creditor protection purposes.
Trust Taxation
In terms of taxes, the trust is likely to be subject to Massachusetts income taxes. If it is a revocable trust and uses the settlor-trustee’s Social Security number, it will be subject to Massachusetts income taxes since that will be the new residence of the settlor.
Under Massachusetts law, if it’s an irrevocable trust it will also be subject to Massachusetts income taxes if the settlor-trustee moves to Massachusetts. However, that would not be the case if the settlor resigned as trustee and appointed an out-of-state trustee to take their place. In the latter case, only Massachusetts source income would be subject to Massachusetts income taxes — for instance, interest earned on an account at a Massachusetts bank. That said, I don’ know about Wisconsin income taxes and whether their income taxes are higher or lower than those in Massachusetts. And, of course, that’s academic if the income is distributed to the settlor, in which case it will be taxed to them in their place of residence in any case. Irrevocable rusts are only taxed on the income they retain and don’t distribute.
Here’s more information on Massachusetts fiduciary income taxes: https://www.mass.gov/doc/2020-form-2-instructions/download
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