The Tennessee Trust Advantage: Why Advisors and Families Site Trusts Here

A trust does not always have to be governed by the law of the state where the family lives.

With the appropriate connection to another jurisdiction, often through the appointment of a trustee located there, families may be able to choose a state whose trust laws are better aligned with their planning goals.

That choice is known as trust situs, and it can affect much more than where the trust is administered. State law can influence taxation, asset protection, how long a trust can continue, how fiduciary responsibilities are divided, and how easily an irrevocable trust can adapt when circumstances change.

Tennessee has spent years modernizing its trust statutes and is now regularly considered alongside other leading trust jurisdictions.

For advisors and families evaluating where a trust should be established or administered, here are several reasons Tennessee may deserve consideration.

Tennessee does not impose a state income tax on trust income

One of Tennessee’s clearest advantages is its lack of a state income tax on trust income.

Federal tax rules still apply, and the tax treatment of a particular trust can depend on the grantor, beneficiaries, source of income, and other factors. But for a properly structured trust, Tennessee does not add its own state income tax layer.

That can be especially relevant for families who live in states with high income or capital gains taxes and are planning around significant taxable events, such as:

• The sale of a closely held business
• The sale of a large concentrated investment position
• The realization of substantial long-term capital gains
• Long-duration trusts that may accumulate income over many years

The potential benefit is highly fact-specific, particularly for nonresident grantors and beneficiaries, so state tax counsel should be involved in the analysis.

Tennessee allows trusts to last for generations

Tennessee permits a trust to continue for up to 360 years under its rule against perpetuities.

For families using dynasty or multigenerational trusts, that provides a very long planning horizon. A trust can potentially benefit children, grandchildren, great-grandchildren, and later generations without being forced to terminate after a relatively short period.

Tennessee is not the only state with favorable perpetuity laws, and some jurisdictions allow trusts to continue indefinitely. For most families, however, a 360-year period provides more than enough duration for a multigenerational plan.

Tennessee offers self-settled asset protection through TISTs

The Tennessee Investment Services Act allows for a type of self-settled asset protection trust commonly called a Tennessee Investment Services Trust, or TIST.

Unlike a traditional third-party trust, a properly structured TIST is designed to allow the person establishing and funding the trust to remain a beneficiary while still receiving a measure of protection from certain future creditors.

Tennessee has shortened its creditor challenge period over time, making the TIST an important planning tool for individuals and, in some cases, business entities.

There are important limitations. A TIST is not a way to avoid an existing obligation or known claim, and federal bankruptcy rules may impose a longer look-back period. Certain obligations, including alimony and child support, also remain enforceable.

TISTs are available to Tennessee residents and nonresidents (when statutory requirements are satisfied), including the use of a qualified Tennessee trustee.

TINGs may offer planning opportunities for residents of higher-tax states

A Tennessee Incomplete-Gift Non-Grantor Trust, commonly called a TING, may be used by residents of states that impose individual income or capital gains taxes.

When properly structured, a TING is designed to be treated as a non-grantor trust for federal income tax purposes while being administered in Tennessee. In some circumstances, that may reduce or eliminate the home state’s tax on certain trust income.

This area of planning is complex and continues to receive attention from state tax authorities. Several states have enacted rules intended to limit the effectiveness of incomplete-gift non-grantor trusts for their residents.

For that reason, a TING should be considered with experienced tax and estate planning counsel and reviewed as laws change.

Tennessee offers planning tools for married couples

Tennessee also provides several trust structures that may be useful for married couples, including community property trusts and tenancy by the entireties trusts.

A Tennessee community property trust allows qualifying married couples, including certain nonresidents, to elect community property treatment for assets transferred to the trust.

One potential advantage may involve basis adjustment. Community property may receive a full adjustment in basis at the death of the first spouse, rather than an adjustment only to the deceased spouse’s share. For couples who own highly appreciated assets, that can materially affect future capital gains exposure.

Tennessee’s tenancy by the entireties trusts are designed to also allow qualifying married couples to preserve certain creditor protections associated with tenancy by the entireties while holding assets in trust.

Directed trust statutes help preserve existing advisor relationships

Tennessee also provides for directed trusts, which separate trust administration from investment management.

In a directed structure, the corporate trustee can support the fiduciary administration while an outside wealth advisor continues managing the trust’s investments.

That may be valuable for families who already have an investment advisor relationship and do not want a change in trustee to force a change in investment management of trust assets.

The trust document can also assign responsibilities to other parties, such as an investment advisor, distribution advisor, or trust protector, depending on the family’s objectives and the attorney’s planning approach.

This flexibility is one reason Tennessee can be especially attractive to families and advisors looking for a trust jurisdiction that supports an open-architecture approach.

Tennessee provides ways to adapt an irrevocable trust

The word “irrevocable” can make a trust sound completely fixed. In practice, circumstances change.

Families evolve. Tax laws change. Beneficiaries move. A trustee that made sense twenty years ago may no longer be the best fit.

Tennessee law provides several tools that may allow an irrevocable trust to be updated or adjusted, including:

• Decanting
• Nonjudicial settlement agreements
• Judicial or nonjudicial modification in appropriate circumstances
• Trust protector provisions
• Changes in trustee or situs

Which options are available depends on the trust document, the governing law, and the facts involved. But the broader point is important: Tennessee gives families and their advisors meaningful flexibility to address change without necessarily starting over.

How to establish Tennessee situs

Access to Tennessee’s trust laws requires a genuine connection to the state.

For many trusts, that connection is established by appointing a qualified Tennessee trustee and administering the trust in Tennessee. The exact requirements depend on the structure and the planning objective.

Magnolia Trust Company is a Tennessee-chartered corporate fiduciary focused on trust administration. We do not manage investments, allowing us to work alongside a family’s existing wealth advisor, attorney, CPA, and other professionals.

We administer a broad range of trust structures, including:

• Revocable and irrevocable trusts
• Marital and credit shelter trusts
• Dynasty and generation-skipping trusts
• TISTs and TINGs
• Tennessee community property trusts
• GRATs, IDGTs, SLATs, BDITs, and ILITs
• Charitable trusts
• Special needs trusts

We work with traditional marketable securities as well as private businesses, real estate, and other non-traditional or illiquid assets.

Is Tennessee the right trust jurisdiction?

The right answer depends on what the family is trying to accomplish.

For many families, Tennessee offers a compelling combination: modern statutes, no state income tax on trust income, long-duration planning, asset protection options, support for directed trusts, and flexibility to adapt when circumstances change.

For families and advisors across the Southeast, geography can also matter. Having access to a sophisticated trust jurisdiction without sending the relationship across the country can make communication and coordination easier.

If you are evaluating situs for a new trust or considering whether an existing trust should move to Tennessee, we would welcome the opportunity to work alongside you and your other advisors.

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Content on this site is for informational purposes only and is not legal, tax, or investment advice. Please consult your own professional advisors regarding the appropriateness of any trust or planning solution for your specific circumstances.