Many people would rank Nevada as the leading jurisdiction for trusts. The opportunities found under Nevada law have prompted numerous estate planners and financial planners to situs their clients’ trusts in Nevada to take advantage of the advantages that Nevada offers that are not available in most other states. This article will highlight many of these opportunities. It is no longer sufficient to simply use the client’s home state as the trust situs.
Nevada Domestic Asset Protection Trusts[i]
The Domestic Asset Protection Trust (“DAPT”) has become one of the most popular asset protection tools in the planner’s toolbox. A DAPT is an irrevocable trust into which the settlor (the trust creator) transfers assets in order to protect those assets from the settlor’s creditors.
Only a minority of states have DAPT statutes. Nevada is generally considered the leading DAPT jurisdiction for three primary reasons: First, it is one of only two states that have no statutory exception creditors who can access the trust assets. Exception creditors in other states generally include divorcing spouses, alimony creditors, child support creditors and pre-existing tort creditors. Second, it has a short two-year statute of limitations period which is the waiting period before a future creditor is no longer allowed to sue the trust. Third, it is one of the states that do not force the trust settlor to prepare a new affidavit of solvency each and every time he or she makes a new transfer to the trust. Thus, it is very user-friendly since it is easy to comply with the statutory requirements.
At the time of the writing of this article, no non-bankruptcy creditor has challenged a DAPT all the way through the court system and been able to access any DAPT assets. Most likely this is because such a large majority of people believe that, if tested, the DAPT will work to protect its assets from the creditors of the settlor. However, despite the very high likelihood of protection, if there is a way to increase the odds of success even more, then such a strategy should be utilized whenever possible. That takes us to the Hybrid DAPT, especially when created under Nevada law.
Nevada Hybrid Domestic Asset Protection Trust[ii]
The Hybrid Domestic Asset Protection Trust (“Hybrid DAPT”) is a strategy that should increase the probability that the trust assets will be protected. And it is very simple. The Hybrid DAPT is just like a regular DAPT except that the trust settlor isn’t an initial discretionary beneficiary of the trust, but can be added later. Thus, the trust is initially set up for the benefit of the settlor’s spouse and descendants, for example, but not for the settlor. By not including the settlor as a beneficiary of the trust, the Hybrid DAPT is by definition a third-party trust and therefore substantially increases the protection from creditors in comparison to the regular DAPT. But if the settlor ever needs to be added in as a beneficiary, it is important that the trust be sitused in Nevada in order to take advantage of the Nevada protections described above.
Especially where the settlor is married and has a strong, trusting relationship with his or her spouse, there is no good reason for the settlor to have his or her name in the trust agreement as a beneficiary. It is very simple to indirectly access the trust assets through the spouse. And the trust agreement should define the “spouse” using a “floating spouse provision” that says that the spouse is the person the settlor is married to from time to time. This gives the settlor the ability to access the trust assets through a subsequent spouse in the event of a divorce or the death of the settlor’s current spouse.
In case the settlor needs to be a discretionary beneficiary of the Hybrid DAPT sometime in the future (i.e., if the settlor has no spouse or child that will “share” a distribution with the settlor and the settlor now needs a distribution), the trust agreement provides that a trust protector can add additional beneficiaries, including the settlor.
Nevada Dynasty Trusts[iii]
Most attorneys draft trusts that make mandatory distributions to the beneficiaries upon reaching certain ages. For example, many trusts pay out one-third upon reaching age 25, one-half of the balance upon reaching age 30 and the balance upon reaching age 35. This is commonly known as a Staggered Distribution Trust since the distributions are staggered over different time periods. The philosophy used in this type of trust design is that the beneficiaries have multiple opportunities to learn from their mistakes. However, Staggered Distribution Trusts fail to take into account most clients’ goals to leverage the estate tax savings and creditor protection benefits that a trust can provide.
Those who recommend Staggered Distribution Trusts fail to properly consider the estate tax and creditor, divorcing spouse and bankruptcy exposure that exist with mandatory distributions. This short-sighted view is often based on a misunderstanding of the amount of control that can be given to a beneficiary as a trustee of the trust. When a client says, “I want my child to have the assets at age 25,” the client usually means that he wants the child to have control, rather than ownership, at that age since ownership is what causes estate tax, creditor, divorcing spouse and bankruptcy exposure.
An irrevocable trust that is set up to continue for as long as the applicable state perpetuities laws allow is commonly known as a Dynasty Trust. Approximately half of the states will allow the trust to continue for approximately 90 to 120 years, while the other states will allow a much longer term of years.
Nevada modified its laws in 2005 to allow a Dynasty Trust to continue for 365 years. In addition to this long trust duration, Nevada has no state income tax, and doesn’t have any exception creditor statutes or case law allowing any classes of creditors to pierce through the trusts. Thus, Nevada is a popular Dynasty Trust situs.
Decanting an Irrevocable Trust Using Nevada’s Flexible Decanting Statute[iv]
For many years, practitioners have struggled to find ways to change the terms of an irrevocable trust. However, through common law and through the decanting statutes that have been enacted in many jurisdictions, it is now possible to modify an irrevocable trust. The rationale for allowing such a modification is that a trustee who has the power to distribute the trust property to or for the benefit of one or more beneficiaries should be able to make the distribution to them in trust and dictate the terms of that trust.
Trust decanting is the act of distributing assets from one trust to a new trust with different terms. Just as one can decant wine by pouring it from its original bottle into a new bottle, leaving the unwanted sediment in the original bottle, one can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.
Nevada has enhanced its decanting statute each legislative session and is now considered by many estate planners to be the leading decanting jurisdiction in the United States. Estate planners often move trusts to Nevada in order to take advantage of its flexible decanting statute which often allows for changes that can’t be made in most other jurisdictions.
Saving State Income Tax using a Nevada Trust: The Third-Party Trust[v]
Nevada has no state income tax. Therefore, estate and financial planners often move out-of-state trusts to Nevada to save state income tax on undistributed trust income. This works with non-grantor trusts (a.k.a. complex trusts) in which the trust pays income tax. Examples of trusts that fit this definition are Credit Shelter Trusts after the settlor dies and also Irrevocable Life Insurance Trusts after the settlor dies.
In order to take advantage of this opportunity, the planner must make appropriate changes in order to avoid various state long-arm statutes from taxing the trust. This is on a state-by-state basis and can’t always be circumvented. States that tax trusts generally do so based on one or more of the following factors: The residence of the settlor or testator; the residence of the trustees; the residence of the beneficiaries; and where the administration is taking place.
Not only is this state income tax savings valuable to the trust beneficiaries, but it is similarly valuable to the financial advisor who therefore has more assets under management given that the investment portfolio owned by the trust isn’t being reduced by state income taxes. Thus, this analysis should be done by every financial planner who has clients with undistributed income in a non-grantor trust that is subject to a state income tax.
Saving State Income Tax using a Nevada Trust: The NING Trust
There is also an opportunity for a resident of a state with a state income tax to set up a Nevada Incomplete Gift Non-Grantor Trust (“NING Trust”) in order to save state income taxes on the person’s own assets (i.e., not assets in a non-grantor trust). This technique requires the use of one of the Domestic Asset Protection Trust jurisdictions, and specifically one, such as Nevada, which has no state fiduciary income tax.
Just like the third-party trust analysis, the NING Trust must work around any state long-arm states that would otherwise tax the trust. Anybody who lives in a state with a high state income tax and who has significant income that is not sourced to their home state should consider this technique.
Using a Nevada Trust Company for the Above Techniques
There is generally a requirement that there be at least one Nevada trustee or co-trustee in order to properly situs the trust in Nevada to take advantage of the foregoing opportunities. While many trust companies only accept trusts where they must manage the assets and charge a percentage of the assets each year, the more flexible trust companies will offer multiple options: The full trusteeship option where the trust company manages the assets and handles all aspects of the management; or a more limited role on a flat-fee basis where the trust company does enough under Nevada law to substantiate Nevada jurisdiction, but with the financial planner continuing to manage the brokerage assets; or anything in between either of these roles.
[i] For a comparison and further discussion of the different DAPT statutes, see Steve Oshins’ Annual Domestic Asset Protection Trust State Rankings Chart (http://www.oshins.com/images/DAPT_Rankings.pdf) and On Nevada Asset Protection and Trust Planning: A Conversation with Steven J. Oshins, Esq., AEP (Distinguished) – Interview conducted by Neil Schoenblum, J.D., LL.M., Part I (https://www.firstamtrust.com/a-conversation-with-steven-j-oshins).
[ii] For a further discussion of the Nevada Hybrid DAPT, see On Nevada Asset Protection and Trust Planning: A Conversation with Steven J. Oshins, Esq., AEP (Distinguished) – Interview conducted by Neil Schoenblum, J.D., LL.M., Part II (https://www.firstamtrust.com/a-conversation-with-steven-j-oshins-part-ii).
[iii] For a comparison of the different Dynasty Trust statutes, see Steve Oshins’ Annual Dynasty Trust State Rankings Chart (http://www.oshins.com/images/Dynasty_Trust_Rankings.pdf).
[iv] For a comparison of the different decanting statutes, see Steve Oshins’ Annual Trust Decanting State Rankings Chart (http://www.oshins.com/images/Decanting_Rankings.pdf).
[v] For a comparison of under what conditions does a state tax a non-grantor trust, see Steve Oshins’ Annual Non-Grantor Trust State Income Tax Chart (http://www.oshins.com/images/State_Income_Tax_Chart.pdf).
About the Authors:
Neil E. Schoenblum, JD, LLM, TEP, is Senior Vice President, Wealth Management at First American Trust of Nevada, LLC, where he is responsible for the efficient administration of trust accounts for high-net-worth clients. Neil currently serves as President of the Southern Nevada Estate Planning Council and previously as the ABA Young Lawyers Division’s Vice Chair to the Committee on Real Property, Probate and Trust Law. He can be reached at 702-784-7611, at nschoenblum@firstam.com, or at First American Trust’s website, firstamtrust.com.
Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.
Disclaimers:
The information provided above is intended for informational purposes only and should not be considered estate planning advice. Please consult an estate planning professional, financial advisor, and/or tax advisor for additional guidance. First American Trust of Nevada, LLC is a wholly owned subsidiary of First American Trust, FSB, and a member of the First American family of companies.
Steven J. Oshins, Esq., AEP (Distinguished) and the Law Offices of Oshins & Associates, LLC are not affiliated with First American Trust of Nevada, LLC or its affiliates.
