Planning for the Risk of Trust Litigation with Trust Situs or Governing Law Selection By: Timothy M. Ferges When including trust situs and governing law provisions, estate planners often focus on tax and asset protection issues. This article describes how these provisions affect trust litigation in ways that are rarely considered at the planning stage. When litigation arises relating to administration of a trust, the procedural law of the forum state can have a profound effect on the proceeding. Likewise, the substantive law that would govern a trust’s administration may vary significantly from state to state. As our society becomes more mobile, we are no longer so committed to one particular jurisdiction when creating a trust. But in determining where a trust will be administered or in the selection of a trust’s situs or governing law, estate planners tend to limit their focus on issues other than the potential for litigation -- such as the creditor protection available in a particular jurisdiction, the taxes that SPRING 2022
a particular state would impose on the trust’s income, or other matters. In some cases, it could serve the grantor well to also consider the possibility of litigation and how a dispute might play out before the courts of one jurisdiction versus another. This can be particularly true where a grantor has specific concerns regarding a litigious beneficiary or family member. As a general matter, the administration of a trust “is supervised by the courts of that state only in which the administration of the trust is located.” Restatement (First) of Conflict of Laws § 299. In the case of a testamentary trust, that is presumed to be the state of the testator’s domicile upon her death. Id at § 298, comment a; N.J.S.A. 3B:31-8(a). In re Johnston, 127 NJ Eq. 576 (Prerog. 1940), affirmed 129 N.J.Eq. 104 (E. & A. 1941). A grantor of an inter vivos trust may specifically designate in the trust instrument the principal place of the trust’s administration. Such designation will be respected by the court of designated jurisdiction so long as: “(1) a trustee maintains a place of business located in or a trustee is a resident of the designated jurisdiction; or (2) all or part of the administration occurs in the designated jurisdiction.” N.J.S.A. 3B:31-8(a). On the other hand, if the trust instrument does not designate the site of administration, it is presumed to be New Jersey if the trust is governed by the law of New Jersey. Id. Setting aside those jurisdictional issues, the substantive law governing a trust’s administration can vary from state to state. 3
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