Location Matters
- Dustin Sventy
- Jun 15, 2020
- 4 min read
Updated: Jun 14, 2023
situs | noun | si·tus | \ ˈsī-təs \
: the place to which, for purposes of legal jurisdiction or taxation, a property belongs.
Estate planners and their clients largely choose a state for situs to utilize the state’s trust laws and framework. There is a common-sense argument to be made for having the trust assets in the same state as well.
For nearly a century, U.S. courts have used location criteria to determine legal and tax jurisdiction; the locations of trustees, beneficiaries and settlors have all played critical roles in the courts’ decisions. The location of assets has as well.
Following the Civil War, Congress adopted the 14th amendment to the constitution to limit the actions of all state and local officials. The first section of the amendment, including the “Due Process” clause, has been one of the most heavily litigated sections of the U.S. Constitution to this day. For trust and estate planning, the Due Process clause has come up frequently due to the nature of the industry being regulated and taxed at the state level.
One (1) of the original landmark cases, SAFE DEPOSIT AND TRUST COMPANY OF BALTIMORE v. COMMONWEALTH OF VIRGINIA (Nov. 25, 1929), has several unambiguous opinions by U.S. Supreme Court Justice McReynolds that are relevant to this day. In 1920, Lucius J. Kellam, residing in Virginia, established a trust in Maryland with Safe Deposit and Trust; he transferred $50,000 worth of stocks and bonds into custody with the firm for the future benefit of his two sons. Upon Mr. Kellam’s death, the Commonwealth of Virginia attempted to levy taxes on the estate, claiming that Mr. Kellam had been residing in Virginia in addition to his two sons.
Justice McReynolds:
“Here, where the possessor of the legal title holds the securities in Maryland, thus giving them a permanent situs for lawful taxation there, and no person in Virginia has present right to their enjoyment or power to remove them, the fiction must be disregarded”
“A statute of a State which undertakes to tax things wholly beyond her jurisdiction or control conflicts with the Fourteenth Amendment.”
Speaking of the securities, “They have acquired a situs separate from that of the beneficial owners … Their actual situs is in Maryland and can not be changed by the [beneficiaries of the trust].”
For the purposes of trust situs, several factors are considered by estate planning attorneys and the state and federal court system.
1) Domicile of the settlor –residency of the settlor at the time trust is established
2) Location of the trust assets – custody, physical location, legal jurisdiction
3) Location of trust administration – overlaps with trustee residence, occasionally differs
4) Provisions of the trust instrument – specific language in the trust documents regarding jurisdiction
5) Residence of the trustee(s) – whether corporate trustee or individual
6) Residence of the beneficiary – occasional difference on interpretation depending on contingent beneficiaries
Location of trust administration was the most frequent interpretation for situs historically, but more recently that interpretation has evolved to consider residency of the settlor when executing the trust instrument. Several states, including Alabama and Missouri, have elected a “multi-factor” approach, effectively needing multiple situs interpretations to claim jurisdiction, e.g. residency of the settlor and trustee(s). This is likely because many cases have been lost by tax authorities relying on the settlor’s residency with little, to no, additional connections to the state. Physical property and sourced income are straightforward, clearly falling into a state jurisdiction, however intangible property and marketable securities have been wrought with differing interpretations. The burden of proof falls on the settlor and there are solutions available to remove doubt.
Custodians are the ultimate safekeepers of investments and serve a critical role in the financial services ecosystem. Services provided by a custodian are typically the settlement, safekeeping, and reporting of customers’ marketable securities and cash. Often, custodians have the authority to trade securities and move funds on behalf of clients and always have the responsibility to issue monthly or quarterly statements.
In 2003, the SEC issued their final rule, under the Investment Advisers Act of 1940, defining the custody of funds or securities. This rule adopted the use of Qualified Custodians and clarified what type of entities could serve in this role. The amended rule defined a custody bank as “national banks, members of the Federal Reserve System, and other banks and trust companies having similar authority to national banks and supervised by state or federal banking agencies.”
There are many aspects that should be considered when choosing a custodian. Safety and soundness, good standing with regulators, quality of service, breadth of capabilities and governing law. And, as evidence of nexus falls under greater scrutiny, location of a custodian becomes increasingly important.
Two Ocean Trust is uniquely qualified to provide true Wyoming situs for clients' trusts and related assets. We provide qualified custody of assets under the Wyoming Division of Banking and all decision making, account administration, as well as offices, employees, board members and owners are based in Wyoming.
Two Ocean Trust provides a full range of trust and investment capabilities to private clients and advisers including the first comprehensive wealth management platform to seamlessly bridge traditional and digital assets.
Based in Jackson Hole and regulated by the Wyoming Division of Banking, Two Ocean Trust is uniquely positioned to provide access to Wyoming's low tax rates, favorable trust laws and unparalleled privacy and legal protections.
(1) There are myriad cases in which states have argued for the collection of taxes on non-resident trusts and the courts have voted in favor of the trust settlor and beneficiaries, most often siting the Due Process clause in the 14th Amendment.
