Personal Trusts / Nevada Trusts

The number and size of lawsuits brought against wealthy individuals increases every year. With this increase in lawsuits comes an increasing need for people to protect their assets. Many people fail to address this need until after the liability occurs. Unfortunately, many asset protection opportunities are no longer available at such time because of fraudulent conveyance laws.

Nevada is one of only a limited number of states that allow a person to create an asset protection trust for oneself. This Nevada law became effective for trusts created on or after October 1, 1999, yet many doctors, business owners, corporate executives and other high net worth individuals still have not taken advantage of this opportunity.

Assets transferred to a Nevada asset protection trusts are generally protected from the transferor’s creditors two years after the transfer to the trust. Nevada law is superior to the laws of the other domestic asset protection jurisdictions in this regard since the required waiting period in most of the other jurisdictions is four years.

Effective October 1, 2005, the Nevada perpetuities law was modified to allow a dynasty trust to continue for up to 365 years with its assets protected from estate taxes, creditors and divorcing spouses during such time.

A dynasty trust is an irrevocable trust that leverages a person’s estate, gift and generation-skipping transfer tax exemptions for as many generations as applicable state law permits. Whereas most attorneys draft trusts to provide for mandatory distributions to the grantor’s children at staggered ages (e.g., one-third at age 25, one-half of the balance at age 30, and the balance at age 35), a dynasty trust is drafted to encourage the trustees of the trust to keep the assets in trust for the benefit of the beneficiaries and to allow the beneficiaries to “use” Nevada trusts properties rather than receive it outright where it will be subject to estate taxes, creditors and divorcing spouses.

Discretionary Trusts – For maximum creditor and divorce protection, an independent trustee is used to make discretionary distributions and other tax sensitive decisions. The primary beneficiary can be given the power to remove and replace the independent trustee with or without cause. Additionally, the primary beneficiary can be the investment trustee of the discretionary dynasty trust thereby being able to make all investment decisions over his trust assets. Thus, the primary beneficiary has the control over and use of the dynasty trust property as though he owned it free of trust. However, by having the dynasty trust as the owner, if drafted correctly, the assets are protected from estate taxes and from the beneficiary’s creditors, including divorcing spouses. This co-trusteeship, although slightly more complex than drafting just one trustee into the dynasty trust, provides the ultimate combination of control, estate tax savings and creditor protection.

​Support Trusts – Alternatively, the primary beneficiary can be the sole trustee of the dynasty trust. With this option, the beneficiary can only distribute assets from the dynasty trust to himself for his health, education, maintenance and support. This is often called a “support trust,” as opposed to a “discretionary trust” which uses an independent trustee for discretionary distributions. Although a support trust is simpler to administer than a discretionary trust, certain creditors of the beneficiaries of a support trust may access the trust assets, so it is less protective than a discretionary trust. One such creditor is a divorcing spouse of a beneficiary which is why the discretionary dynasty trust is the superior option.

If a client has beneficiaries in another state that has a state income tax, a trust can be used to save state income taxes for the otherwise-taxed beneficiary or beneficiaries. For example, if a Nevada resident has children who live in California, the Nevada resident could leave the inheritance for the child who lives in California in a continuing complex trust. To the extent that the child in California does not need the income from the inheritance (but is rather saving it for the future), the income would accumulate within the complex trust and be protected from California state income tax.

In order to be protected from California state income tax, (i) the income earned by the trust cannot be California source income and the fiduciaries (trustees) of the complex trust would have to be non-residents of California. In this example, it would be natural for the Nevada resident to name another Nevada resident or a Nevada bank or trust company as the fiduciary of the complex trust for the California-resident beneficiary. In addition to protecting a beneficiary’s inheritance from potential state income tax, many clients from neighboring states like CaIifornia have been seeking Nevada counsel to help them reduce their lifetime state income tax liabilities. A trust that is often referred to as a NING (standing for Nevada Incomplete gift Non-Grantor trust), may be used to mitigate state income tax for a non-resident of Nevada.

The ideal client for a NING Trust is a resident of a state with an income tax, who has income producing assets, the income of which is not traceable back to the taxing state. The client would need to be willing to divest himself or herself of the asset and the income from the asset by placing the asset into a complex trust that has no fiduciaries in the taxing state. To the extent income is accumulated within the complex trust in Nevada, the income should not be taxed in the client’s residency state. It is important to note that structuring of a NING trust for a client is a complex endeavor that requires analysis of the state income tax laws for the state in which the client resides. Nevada is one of the leading jurisdictions for this type of trust because of Nevada’s favorable self-settled spendthrift trust laws (found in NRS Chapter 166).

The NING may be structured to benefit the client contributing the funds as a beneficiary at some point in the future (assuming state income tax savings are no longer a concern because of a change of desires of the client or a change of residence).

The Inheritor’s Trust is one of the most powerful estate, tax and asset protection strategies available to planning professionals. Essentially, it is a third-party settled trust designed: (1) to give the client (who is both a trustee and the initial primary beneficiary of the trust) control and beneficial enjoyment of trust property such that the client can use and manage the trust assets without compromising the trust’s ability to avoid transfer taxes at the client’s death, and (2) to protect the trust assets from the client’s creditors. After the demise of the client (the primary beneficiary), control of the Nevada trusts pass to subsequent primary beneficiaries, often on a per stripes basis, subject to change through the exercise of a non-general power of appointment by the client. In addition to receiving control of the trust, the subsequent primary beneficiaries also receive the benefits of trust-owned property such as: (1) transfer tax avoidance, (2) creditor protection, including protection from a divorcing or separated spouse, and (3) potential income tax savings, including state income tax, by domiciling the trust in a state with preferable income tax rates.

The critical concept empowering the Inheritor’s Trust is that assets received from a third party and retained in a properly structured trust are protected from unnecessary exposure to the client’s “predators,” including the IRS, judgment creditors, a divorcing spouse, disgruntled family members, and/or business partners. A standard Inheritor’s Trust becomes “beneficiary defective” when it is drafted so that the beneficiary is treated as the owner of the trust for income tax purposes pursuant to the IRC’s grantor trust rules (a “Beneficiary-Defective Inheritor’s Trust” or “BDIT”). This (1) requires the beneficiary to pay the income taxes on the income generated by the trust and (2) also permits the beneficiary to engage in transactions with the trust income-tax-free. Significantly, this also allows trust assets to grow income-tax-free, which compounds the multi-generational accumulation of wealth in the trust.

With respect to the beneficiary, a BDIT combines the benefits of a traditional intentionally-defective grantor trust (IDGT)5 created for others with the enhanced wealth, transfer tax and asset protection advantages of a trust created and funded by a third party for the benefit of the beneficiary.

Because of the enhanced planning benefits available through a BDIT, particularly the control of the trust property and the access to and enjoyment of the trust property, many clients who otherwise are reluctant to do comprehensive planning or make significant wealth transfers now can enjoy the benefits of advanced wealth and asset protection planning with minimal personal, financial and tax risk.