Tennessee is one of the top US states for wealthy families looking to protect - and maintain control over - their private assets, Sam Graham and Rob Lineberger of Diversified Trust tell Family Wealth Report.

Tennessee is one of the top US states for wealthy families looking to protect - and maintain control over - their private assets, Sam Graham and Rob Lineberger of Diversified Trust tell Family Wealth Report.

Diversified Trust is based in the Southeast and serves individuals, multi-generational families, family offices, foundations, endowments and retirement plans, with offices in Atlanta, GA, Greensboro, NC, Memphis, TN, and Nashville, TN.

Tennessee has for a while been regarded as a friendly state in terms of trust law, in view of ongoing legislative renovation of its trust and banking laws dating back to 1987. Namely, it adopted the Prudent Investor Act in 2002, the Uniform Trust Code in 2004, the Tennessee Investment Services Act in 2007 and then the Tennessee Community Property Trust Act in 2010.

Lineberger, a partner at Diversified Trust, said the jurisdiction has gone from having “good” trust laws to “excellent” trust laws.

July 1, 2013, saw even bigger amendments which, according to Robert Malin of the law firm Wyatt, Tarrant & Combs, many industry practitioners are still trying to get their heads around.

The 50-page amendment can, however, be broken down into three main themes: creditor protection for trust beneficiaries, protection for trustees and directed trusts, he said in a blog. 

In summary, trusts now better protect assets from the beneficiary’s creditors, divorce and lawsuits, while giving trustees more discretion - yet less exposure - to potential liability. Meanwhile, directed trusts allow a third party to advise and direct the trustee on specific issues.

Momentum

“We believe this is going to be a growth area for Tennessee trust companies,” said Graham, chief executive at Diversified Trust.

“I think that you will see the state begin to tout our new laws and advertise more about how trust-friendly this jurisdiction has become. While people might have cited South Dakota or Nevada previously, you’re going to start seeing Tennessee thrown into that mix,” Lineberger added.

For example, a family can now protect a private business and instruct an institutional trustee to perform certain functions that are of a fiduciary nature while, crucially, maintaining control over the business operations.

“Before it used to be an all-or-nothing proposition,” Graham said, noting that you don’t have to live in Tennessee, or indeed the US, to take advantage of these laws.

“We are receiving calls from very large families…you can be anywhere you need to be in terms of living and where the assets are, so long as you’re using a Tennessee trust with a Tennessee trustee.”

Lineberger highlighted how Tennessee differs from, say, Florida, which places a big emphasis on satisfying alimony claims in divorce proceedings.

“There was a decision about a year ago in Florida where an individual was not working and had fallen behind on his alimony, but was receiving money from a trust. The court in Florida required the trustee who had been paying his living expenses to pay those to the ex-wife,” he said.

“If that same case was held in Tennessee, that would not be the result. That is a creditor protection. You will find four or five jurisdictions in the country that have statutes like that and we are one of them.”

Lineberger also noted that there are no capital gains taxes on individuals in the state and no state income tax on out-of-state trust beneficiaries. “Therefore it does allow, at the state level, the trust to accumulate income.”

Graham noted that wealthy families are likely to already have a financial plan in place, including trust vehicles, which isn’t something that is changed very quickly but is, however, reviewed periodically.

“I would imagine that there will be some snowball effect occurring in the next year or two when families in other states start hearing about the advantageous laws in Tennessee, but it’s not something that happens very quickly, typically,” he said.

Dynasty trusts

According to Nevada attorney Steve Oshins’ latest list of dynasty trust state rankings, Tennessee is now in the top four, since the 2013 bill signing (behind Nevada and Alaska – in joint second place – and South Dakota.)

“While the common law rule against perpetuities no longer exists in some jurisdictions, it has not been abolished in Tennessee, which instead has a 360 year trust perpetuities period. This has given rise to the use of dynasty trusts that Tennessee is becoming increasingly well known for,” said Lineberger.

Notably, dynasty trusts “last potentially forever,” Dan Lindley, president of The Northern Trust Company in Delaware, previously told this publication.

They avoid all future gift, estate and generation-skipping taxes, which has “a tremendous impact on wealth accumulation,” he said.