Wyoming Trusts and Trust Alternatives

Despite its small population, Wyoming has earned an international reputation as one of the most favorable jurisdictions in which to establish or move a trust to hold family wealth. With the enactment of stringent federal and offshore reporting rules increasing worldwide interest in U.S. trusts, Wyoming’s appeal has only increased. In this paper, Amy Staehr and Christopher Reimer of Long Reimer Winegar LLP discuss the reasons for Wyoming’s reputation as a desirable trust situs: (1) tax advantages, (2) modern and flexible trust laws, (3) privacy, and (4) asset protection — including the recent innovations of Discretionary Asset Protection Trusts and statutory foundations.

1. Tax Advantage

Wyoming does not impose a state income tax of any kind, much less on trust income. Despite declining mineral severance tax revenues, the Wyoming Legislature has shown little interest in adopting a state income tax. Even if legislative will existed, the Wyoming Constitution requires that any income tax be accompanied by a full credit against such liability for sales, use, and ad valorem taxes paid by a given taxpayer to any Wyoming taxing authority during the year. The probability of this provision being amended or Wyoming’s favorable tax situation changing is therefore remote.

 2. Modern Trust Laws

In 2003, Wyoming adopted the Uniform Trust Code (UTC), Wyo. Stat. Ann. §§ 4-10-101 et seq. The Legislature has heavily modified Wyoming’s version of the UTC, resulting in a flexible and settlor-friendly statute. The following laws put Wyoming at the forefront of jurisdictions to consider when migrating, domesticating, or settling a trust:

• Primary of Settlor’s Intent. Wyoming courts have long recognized that the foremost consideration in trust matters is to carry out the settlor’s intention. In addition, most UTC rules are default rules only and, with narrow exceptions, can be overridden by the terms of a trust instrument. Wyo. Stat. Ann. § 4-10-104(b). Wyoming law provides settlors with other tools for protecting the validity of their trusts, including the ability to force beneficiaries to commence pre-mortem trust contests, see id. § 4-10-604(a)(ii), and broadly enforceable no-contest clauses (with no common law probable cause safe harbor), see Briggs v. Wyo. Nat’l Bank of Casper, 836 P.2d 263, 266 (Wyo. 1992).

• Dynasty Trusts. Wyoming has enacted a 1,000-year limit on dynasty trusts, with the result that a valid trust in Wyoming must vest within 1,000 years. Wyo. Stat. Ann. § 34-1-139. A trust created after July 1, 2003 holding personal property may continue for 1,000 years after the trust’s creation if (1) the trust is governed by Wyoming law; (2) the trustee maintains a place of business, administers the trust in, or is a resident of Wyoming; and (3) the trust terms require that powers of appointment over the trust’s personal property terminate and all such interests vest or terminate no later than 1,000 years after the trust’s creation (or an earlier date specified in the trust instrument). An interest in real property may be effectively converted to personal property by holding it in a limited liability company.

• Non-charitable Purpose Trusts. Wyoming permits the creation of non-charitable purpose trusts, which are created for a specific purpose, but have no ascertainable beneficiary. Wyo. Stat. Ann. § 4-10-410. Such trusts are not subject to any common law limitation on their duration, but, like any other post-July 1, 2003 Wyoming trust, may last for up to 1,000 years.

• Modification, Migration, and Decanting Rules. The Wyoming UTC provides flexible methods of reforming, modifying, terminating, migrating, and changing the governing law of a trust. Wyo. Stat. Ann. §§ 4-10-412 et seq. In addition, a trustee with a mandatory or discretionary power to distribute trust income or principal may do so by appointing it to a new trust (i.e. “decanting”). Id. § 4-10-816(a)(xxviii).

Finally, while courts may grant petitions for instructions regarding each of these options, the UTC also permits interested persons to resolve any matter involving a trust, without the expense and publicity of court intervention, through nonjudicial settlement agreements. Id. § 4-10-111.

• Directed Trusts and Trust Advisors. Wyoming’s directed trust statute allows a trust instrument to appoint a person or entity, often called a trust advisor, to manage trust assets, thereby relieving the trustee from management decision liability and allowing hand-selected advisors (not necessarily located in Wyoming) to make sensitive decisions regarding trust assets. See Wyo. Stat. Ann. § 4-10-718. By relieving a trustee from liability by vesting discretionary duties in a third party, the statute allows trust assets to be invested and managed in increasingly creative and asset-appropriate directions.

• Trust Protectors. A trust protector is a disinterested third party appointed by the terms of the trust and given powers which may include the ability to modify some trust terms as the needs of future generations, tax status, or governing law change. Wyoming law permits a trust instrument to specify the duties, powers, and fiduciary standard of a trust protector. Wyo. Stat. Ann. §§ 4-10-710, -713.

3. Privacy

Wyoming law provides a variety of tools for lawfully protecting the privacy of trust assets:

• Trust Privacy. There is no requirement in Wyoming for a noncharitable trust to be registered with a local court or submitted to a registry of any kind. The Wyoming UTC also uses a highly modified definition of “qualified beneficiary” to reasonably limit a trustee’s default notification duties. Wyo. Stat. Ann. § 4-10-103(a)(xv). In addition, settlors are free to create so-called “silent” or “quiet” trusts by reducing or completely eliminating a beneficiary’s rights to notices or accountings.

• Court Records. Upon the filing of any petition related to a trust in a Wyoming court, “the trust instrument, inventory, statement filed by any fiduciary, annual verified report of a fiduciary, final report of a fiduciary and any petition relevant to trust administration and any court order thereon” will automatically be sealed and not made a part of the public record of the proceeding. Wyo. Stat. Ann. § 4-10-205. Upon a showing of need and a subsequent order of the court, the sealed trust records will be made available, but only to “the court, the settlor, any fiduciary, any qualified beneficiary, their attorneys, and any other interested person” as determined by the court.

• Private Family Trust Companies. The Wyoming Banking Commissioner has long recognized unregulated private family trust companies, which provide trust and other fiduciary services to members of a single family. This approach has now been codified by statute. Wyo. Stat. Ann. §§ 13-5-701 et seq. Family trust companies have the option of being completely unregulated or subjecting themselves to light regulation (typically in lieu of more stringent federal regulation as an investment advisor by the Securities and Exchange Commission). See Wyo. Stat. Ann. §§ 13-5-301(a)(ii), -603 and -606.

• Limited Liability Companies (LLCs). Trust settlors often make use of LLCs for additional layers of privacy or asset protection or as a method of holding real property in trust for beyond the common law rule against perpetuities. Wyoming adopted the first laws recognizing LLCs in the 1970s and continues to provide flexible and protective laws. Wyoming’s LLC act requires only the entity’s registered agent to appear publicly on the Secretary of State’s website. Wyo. Stat. Ann. § 17-29-201.

4. Asset Protection

Wyoming law offers a number of tools for protecting trust and non-trust wealth from creditor attack.

Wyoming Qualified Spendthrift Trusts (WQSTs)

Wyoming is one of a growing minority of states that authorize self-settled domestic asset protection trusts, which protect assets from attachment by restricting the settlor’s right of voluntary and involuntary alienation. Wyo. Stat. Ann. §§ 4-10-510 et seq. A WQST must be irrevocable, have a Wyoming qualified trustee, and be funded by a qualified transfer (including an affidavit providing, among other things, that the settlor has personal liability insurance of at least $1 million). Wyoming’s UTC allows settlors to retain significant interests and powers without interfering with the irrevocability or asset protection of a WQST. Id. §§ 4-10-506(b), -510.

Wyoming law provides a heightened clear and convincing evidence standard of proof for challenging a fraudulent transfer to a WQST. Id. §§ 4-10-517, -521. If a fraudulent transfer is found, the qualified transfer to the WQST would be avoided only to the extent necessary to satisfy the debt, plus costs. Id. § 4-10-521. Such a claim must be brought within four years after the transfer or, for transfers with actual fraudulent intent discovered after four years, within one year after the claimant could have reasonably discovered the transfer. Id. § 34-14-210(a).

Wyoming law provides two other exceptions to the spendthrift protection of a WQST. First, property in a WQST will not be protected in the event of an agreement or court order requiring the settlor to pay child support, if the settlor is in default by thirty or more days. Second, financial institutions may be able to reach trust property where the financial institution has relied on the property in extending credit to the settlor other than for the benefit of the WQST. Id. § 4-10-520. This exception applies only in relation to the specific institution from which the credit was sought. The Wyoming UTC does not provide an exception for tort claims, a divorcing spouse, or a spouse owed alimony.

Note that many unanswered questions exist regarding the protection offered by domestic asset protection trusts, including conflict of law issues and application of the Full Faith and Credit Clause of the U.S. Constitution, which this paper does not address.

Discretionary Asset Protection Trusts (Discretionary APTs)

Since 2015, the Wyoming UTC has authorized a second type of asset protection trust, called a Discretionary APT, with no exception creditors and a streamlined formation and funding process. Wyo. Stat. Ann. § 4-10-506. The creditor of a settlor of an irrevocable discretionary trust created for the benefit of the settlor, with or without a spendthrift clause, may not attach the trust property or compel the trustee to make a distribution. This is true even if the trustee: (1) has the discretion to make distributions based on a standard, (2) has abused his or her discretion, or (3) elects to make a distribution directly to a third-party for the benefit of the beneficiary. Wyoming law further states that no property interest is created in a beneficiary of a discretionary trust, regardless of whether distributions are made pursuant to a standard of distribution—a provision that is applicable to any discretionary Wyoming trust.

A Discretionary APT requires at least one qualified trustee and a trust instrument governed by Wyoming law that provides for discretionary distributions of income or principal to the settlor. No affidavit or personal liability insurance is required under this statute. Other than fraudulent transfers proven by clear and convincing evidence, a Wyoming Discretionary APT has no exception creditors. While a settlor of a WQST can retain considerable interests in the trust’s principal and income, a Discretionary APT limits a settlor’s retained interest to the ability to receive discretionary distributions. Unlike with a WQST, however, the settlor of a Discretionary APT may not retain the power to veto distributions.

LLCs

An LLC not only provides limited liability to its members, it also protects assets held by an LLC from creditor claims against the LLC’s members. If a creditor has a judgment against an LLC’s member, its sole means of satisfying that judgment against the member’s LLC interest is to obtain a charging order. Wyo. Stat. Ann. § 17-29-503. This gives a creditor a lien against the member’s interest, requiring the LLC to pay any distribution that would otherwise be made to the member to the creditor. The managers of an LLC have discretion to determine when to make distributions, thereby allowing the LLC to withhold distributions until a favorable settlement can be reached. Unlike under many other LLC statutes, sole charging order remedy protection exists even if an LLC has only a single member.

A Wyoming LLC’s corporate veil will be pierced only under certain extraordinary circumstances. Fraud, inadequate capitalization, and the degree to which the business and finances of the company are intermingled with the member are the three most common factors a court will consider before allowing the veil of a Wyoming LLC to be pierced. The only dispositive factor is fraud. Wyo. Stat. Ann. § 17-29-304. Moreover, a court may not consider factors intrinsic to the character and operation of an LLC as grounds for piercing the veil.

The Wyoming Supreme Court’s decision in GreenHunter Energy, Inc. initially caused some concern regarding the asset protection effectiveness of Wyoming LLCs. While that case presented the anomalous situation of a completely uncapitalized LLC, the Wyoming Legislature responded by amending Wyo. Stat. Ann. § 17-29-304(b) to its current form.

Statutory Foundations

In 2019, the Wyoming Legislature enacted the Wyoming Statutory Foundation Act, which allows for the creation of a new form of entity called the statutory foundation. Wyo. Stat. Ann. §§ 17-30-101 et seq. Such entities have traditionally been used for wealth management and succession planning in civil law countries and are currently allowed in only one U.S. jurisdiction other than Wyoming. A statutory foundation operates in many respects like a trust, but with some nuances (e.g., the parties include an organizer, founder, board of directors, beneficiaries, and possibly a protector or contributors). Once formed, a statutory foundation is a separate entity and assets contributed to the statutory foundation thereafter are considered foundation property. Statutory foundation property is protected from claims, including forced heirship and legitimate right claims, against its founder and, as applicable, its contributors.

Forced Heirship Protection

A decedent domiciled in a country adhering to civil or Islamic law may be subject to forced heirship or legitimate claims, which override a decedent’s testamentary intent and require inheritance by a decedent’s heirs. Asset protection provided by WQSTs, Discretionary APTs, and trusts providing for distributions according to a standard expressly applies to such claims. Wyo. Stat. Ann. §§ 4-10-504(b), -505(b), 506(c), 517(b). In addition, if a trust’s meaning and effect are governed by Wyoming law, its validity will not be affected by foreign law that does not recognize the concept of a trust or that voids efforts to avoid forced heirship and legitimate rights and claims. Id. § 4-10-107(c).

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These materials are for informational and educational purposes only and do not constitute legal or tax advice. You should not act or rely on this information without seeking the advice of an attorney.