Tennessee Estate Planning Law : Tennessee Estate Planning Lawyer & Attorney : Bryan Howard : Howard & Mobley Law Firm : Nashville, Chattanooga, Memphis

The attached article recognizes Tennessee as one of four Tier 2 trust states. The four Tier 1 states have only two favorable features that Tennessee does not match.

First, Tennessee imposes an income tax on dividends and interest received by a trust with Tennessee beneficiaries. This is no different than if the beneficiaries owned the assets directly. Therefore, this is not really a trust problem. Nevertheless, there are seven states in the United States that do not impose income taxes on their residents.  Tennessee does not impose income taxes on trusts held for beneficiaries who are not Tennessee residents.

The other slight advantage for some states is the rule against perpetuities. Tennessee trusts must terminate after 360 years due to our state consitution. A few states allow trusts to last into perpetuity. The benefit of perpetual trusts is overrated. I have never had a client complain to me that 360 years is too short.  More than one-half of the other states require trusts to end after approximately 90 years.  The difference between 90 years and 360 years is material to a lot of my clients. 

Our legislature has made a concerted effort to keep our trust laws at the forefront. In addition to our comprehensive Tennessee Uniform Trust Code, our laws permit asset protection trusts, decanting, community property trusts, unitrust conversions, directed trusts, equitable adjustments, and a long perpetuities period.

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The term “dynasty trust” refers to a trust that will last for several generations. Since 2007, Tennesseans have been able to establish dynasty trusts that can last for 360 years. Prior to 2007, trusts had to terminate after approximately 100 years.

In order to qualify for the longer duration, the trust must provide a testamentary limited power of appointment to at least one member of each generation of your descendants who dies more than 90 years after the trust is established. A testamentary limited power of appointment provides the beneficiary with the right, through a provision in his or her Will, to terminate the trust in favor of certain beneficiaries or charities or to keep the property in trust with different provisions. Tennessee’s law is unique in requiring this power of appointment in order to qualify for the longer term.

The required power of appointment will be eliminated for trusts established on or after July 1, 2010. Even though the power of appointment will no longer be required, I still recommend that you provide future generations with the ability to modify the trust.  Imagine that your great great grandparents had established a trust in 1910 which now benefits you. Could they have possibly anticipated all of the changes that have occurred over the past 100 years and determined a sensible trust design for your descendants? It is much more likely that you can design a better trust to accommodate the specific attributes of your children and grandchildren and numerous changes that have occurred in the world over the last century.

If 360 years is not long enough for you, there are several states that allow trusts to last into perpetuity. Even if you live in Tennessee, you can take advantage of the laws in one of these other states. To date, only one of my clients has not been satisfied with 360 years.
 

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