Kaestner and Fielding: SCOTUS Implications Create Opportunities

Kaestner wins, Fielding Denied: What we can learn when analyzed together. 

On June 21, 2019, in North Carolina v. Kimberley Rice Kaestner 1992 Family Trust, Docket No. 18–457, the United States Supreme Court (SCOTUS) ruled that the residency of a beneficiary in a U.S. state alone was not sufficient nexus (connection) for a state to tax the undistributed net income of a trust. 

Many commentators have written about the case and its implications. However,  SCOTUS declining the writ of certiorari to Minnesota’s Fielding case right after deciding on Kaestner should not be overlooked.

Declining to Hear Fielding

By refusing to grant a writ of certiorari in Fielding, et al. v. Commissioner of Revenue, 916 N.W.2d 323 (Minn. 2018), the Minnesota Supreme Court’s decision in favor of Fielding remains. It is still unconstitutional to tax a trust solely based on grantor residency at the time the trust became irrevocable.

As applied to the Fielding trusts, the nexus between the state and the trust is not substantial enough to warrant state taxation. 

Two States Impact Our Entire Country

While some analysts believe the Kaestner decision was relatively narrow, the implications of both cases combined are broad, likely resulting in trust taxation changes in North Carolina and Minnesota. However, the implications extend to many other states limiting a state’s ability to tax undistributed income held within trusts.

It’s unlikely that SCOTUS will entertain another trust taxation case anytime soon. It’s now up to the state courts to interpret Kaestner and make the appropriate amendments to their laws.

North Carolina and Minnesota and states with similar tax laws have many estate planning opportunities even before states’ legislatures act.

But where will the lines be drawn? 

Comparing Kaestner and Fielding

First, let’s take a look at the facts in the two cases. Kaestner and Fielding have distinctly different fact patterns, as shown below.

  Kaestner Fielding
Residence of the Grantor New York Minnesota
Trustee Not a North Carolina resident Not Minnesota residents
Trust law New York Minnesota
Trustee physical presence None in North Carolina None in Minnesota
Beneficiaries North Carolina Three of the four beneficiaries lived outside of Minnesota
Trust Documents and records New York Colorado
Trust Established in New York Minnesota
Asset Custody Massachusetts Outside of Minnesota
Direct in-state investments None in North Carolina Included an MN S Corp
Physical Property None in North Carolina None in Minnesota
Pre-case Taxation: Only while a beneficiary was an N.C. resident If established as a resident trust, the trust would have been taxed in Minnesota for its entire existence

 

Broad or Narrow Implications? You Decide.

In Kaestner, the only connection to North Carolina is the beneficiary’s residence in the state. SCOTUS ruled that having a beneficiary in the state was not sufficient to tax the trust.

In the Fielding case, the Minnesota Supreme Court ruled that despite additional connections there was not sufficient nexus to permit Minnesota to tax the undistributed net income of a trust.

The United States Supreme Court’s decision in Kaestner was decided somewhat narrowly.

The Court relied on three key facts concerning the beneficiary in North Carolina:

“First, the beneficiaries did not receive any income from the Trust during the years in question. Second, they had no right to demand Trust income or otherwise control, possess, or enjoy the Trust assets in the tax years at issue. Third, they also could not count on necessarily receiving any specific amount of income from the Trust in the future.”

It is not entirely clear how SCOTUS might decide a case where the beneficiary received some distributions from a trust. It’s also unclear what a case decision would be if it had trust terms that permitted more control over the trust. It’s unknown whether the beneficiary would receive some or all of the corpus from the trust in the future.

The Kaestner decision does not address whether a beneficiary’s ability to assign a potential interest in the income from a trust would afford that beneficiary sufficient control or possession over the trust. It also does not address whether the beneficiaries were guarenteed to receive funds (or enjoyment of the property) in the future to justify North Carolina’s taxation based solely on the beneficiary’s in-state residence. 

Finally, SCOTUS did not consider the trust’s broader argument that the trustee’s contacts alone determine the state’s power over the trust.

In contrast, declining the Fielding writ and allowing the Minnesota Supreme Court decision to stand suggests that the location of the trustee (not the location of the grantor) is most relevant in determining the domicile of a trust.

Will Minnesota follow Michigan?

Bill Lunka, the founder of SALT Partners, a state and local tax consulting firm in Minneapolis, said:

 “Now that the U.S. Supreme Court has denied review of the Fielding case, it is a good time for trustees and their advisors to consider filing claims for refund for those trusts that had Minnesota residents at the time the trust became irrevocable. 

There may also be opportunities to file claims for refunds in North Carolina and other states provided that the beneficiaries are similarly situated to the beneficiaries in the Kaestner case. The combination of the Kaestner and Fielding decisions suggest that the location of the trustee will be most relevant in determining where a trust is domiciled.”

Mr. Lunka further noted, “It is possible that Minnesota will follow, at least for now, Michigan’s lead on using administrative, rather than legislative, tools to change trust taxation. Given the current environment in the Minnesota Legislature where the Democrats control the House of Representatives (and the governor’s office), and the Republicans control the Senate, it may not be easy for the Minnesota Department of Revenue to get legislation passed to change the definition of a resident trust. 

Because Fielding found that the Minnesota definition of resident trust was unconstitutional only as applied to the Fielding trusts, the definition currently in Minnesota law still stands because the Minnesota Supreme Court did rule that the definition facially violated the Due Process Clause. 

Therefore, the Minnesota Department of Revenue can continue to apply the definition of a resident trust in Minnesota for other taxpayers. Of course, the Department is likely to continue to receive claims for refund for those trust that irrevocable while the grantor was a Minnesota resident, and they will review those on a case-by-case basis until legislation can be passed, or then issue guidance.”

The Current Trust Climate According to Michael Redden of Redden Law

Trusts are becoming more like corporations and the implications of that, such as taxes, must be considered. Michael Redden of Redden Law provides the following insight:

“Trusts are going to be treated more like corporations now. Corporations, though fictional, are treated like people and have their own rights. The trust and estates in our country have not been discussed in this context much until recently. For corporations, there are many wide implications. The most obvious implication for trusts is for taxation. 

Here, the U.S. Supreme Court has recognized that trusts have the same rights as individuals. A state must be able to get personal jurisdiction over an individual to tax that person or exercise any power over them. The same is now true for a trust. I predict that we will continue to explore how the personhood of trusts affect other policies in the future. This is especially true since dynastic trust planning is becoming more and more common.

The U.S. Supreme Court, in Kaestner, alluded to the Fielding case when it limited its opinion. The Court likely sees that there are many more circumstances that might need review. By limiting the opinion, the Court likely expects to hear more about these situations. The Minnesota law is different than North Carolina’s. 

By focusing so much on the grantor, it creates many more factual situations that are not as clear cut at Kaestner. In short, it is prone to more grey areas. I agree that the Court should have declined to hear the case. The Minnesota Supreme Court used the same line of analysis when it decided Fielding. The result is one that the Court would likely have upheld.

For now, all taxpayers and their advisors and lawyers should consider how a trust that is sitused in Nevada, South Dakota, or another taxpayer-friendly jurisdiction might help. The worst case scenario is that you will pay taxes at the same rate that you pay now. The best case is that you might end up with a much lower tax burden in the future. It is also very attractive since these same jurisdictions also have special trusts for asset protection.”

 

Estate Planning Strategies Practitioners Should Consider

Those filing refunds for applicable trusts with Minnesota grantors or North Carolina beneficiaries should consult their advisors. It’s important to discuss whether a case could be due refunds for relevant tax years.

It will be interesting to see if taxpayers in other states will use these precedents to challenge their statutes.

Decanting Trusts

For existing trusts, practitioners should look for decanting opportunities to states like Nevada, that have no income tax. Note that Nevada trust laws may provide additional benefits for asset protection and dynasty provisions as well.

Create Your Own Facts

Residents in states outside of Minnesota and North Carolina will benefit from careful planning by structuring around the rulings in Kaestner and Fielding.

Rulings in both cases focus on two key factors: the importance of the trustee’s domicile and not having physical property in the trust.

Develop Flexibility

You can build flexibility, including trust protectors, into a trust structure, even if the facts or laws will change in the future. However, practitioners should be careful. It’s possible to give too much power to an in-state trust protector and create a nexus to state taxation.

Carefully Select Trustees

Pick your trustee carefully! A trustee’s connections to your state can tip the scales in the eyes of the revenue authorities.

Practitioners should consider out-of-state trust companies as part of their process. It’s crucial to be mindful of out-of-state companies that have a significant presence in your state too.

Connections to the state may be scrutinized by state taxation authorities to meet “minimum connection” standards and tax the trust.

SCOTUS may take on another case in the future, which would clarify what connections with a state are necessary before a state can tax a trust. Until then, it’s best to be careful.

Employ Discretionary Trusts

The Kaestner decision was very explicit in favoring discretionary trusts. Practitioners should include a spendthrift clause, which prevents a beneficiary from assigning their interest, in their trust documents.

Conclusion

While Minnesota and North Carolina will need to redo trust taxation codes to comply with the two rulings, there are implications and opportunities in most states. We anticipate a lively dialogue in Minnesota and North Carolina governments to create respective new trust taxation structures.

Will other state tax codes be challenged by new precedents set in Kaestner and Fielding? Our guess is yes. It’s also likely that many states will experience a large volume of refund claims filed in light of the Kaestner decision.

While those challenges and discussions are occurring, we would encourage practitioners to evaluate their existing trust structures carefully. The imminent advantages (beyond the current benefits) of utilizing out-of-state trust structures are likely ideal for many clients. 

Kaestner v. North Carolina: the Most Significant Trust Case In Nearly a Century

SCOTUS Sides with Family Trust Over the State of North Carolina

The United States Supreme Court ruled on June 21st, 2019 that the taxation of The Kimberley Rice Kaestner 1992 Family Trust by the North Carolina Department of Revenue is unconstitutional.

The much-anticipated ruling stated that the presence of in-state beneficiaries alone does not empower a state to tax trust income. Beneficiaries experience more protection before a trust distribution and when the beneficiaries have no right to demand, nor are they sure to receive the income.

Click here to download SCOTUS Opinion on the North Carolina Dep’t of Rev. v. Kimberley Rice Kaestner 1992 Family Trust.

New Precedent. New Opportunities.

This ruling creates many planning opportunities for both states with high-income tax laws and states with no income tax.

For those with estate plans in high-income tax states, reviewing your estate and how it is structured is exceptionally prudent. Prudent because it may be advantageous to move assets to a trust jurisdiction with no income tax. And, prudent because many estates could be entitled to refunds.

For states like Nevada with no income and corporate taxes, there is an obvious opportunity to acquire new business from higher income tax states. The key is to structure the trusts properly so that they fall outside of “substantial” nexus — more on this below.

We encourage anyone potentially affected to consult with their advisors to discuss their particular situation.

The Facts

See pages 3 and 7 of the SCOTUS opinion for further details.

  • The Kaestner Trust was established in New York and subjected to New York Tax Law.
  • The Grantor of the Trust was a New York resident.
  • No Trustee lived in North Carolina.
  • The Trustee domiciled the Trust Documents and records in New York.
  • The Trust Asset Custodians resided in Massachusetts.
  • The Trust also carried no physical presence in North Carolina.
  • The Trust made no direct investments in the state of North Carolina.
  • The Trust held no property in the state of North Carolina.

The only connection between the State of North Carolina and the Kimberly Rice Kaestner 1992 Family Trust is that the beneficiary lives in the state of North Carolina – but this is not enough of a reason to tax the Trust.

Nexus Between a Trust and A State: “Minimum” v. “Substantial”

As anticipated by some SCOTUS followers, and hinted at during the oral arguments, the Court did not place any weight on the Wayfair case from 2018.

Last year (2018), SCOTUS analyzed the differences between the “minimum contacts” nexus (Due Process Clause) and the “substantial” nexus (Commerce Clause) in Quill Corp. v. North Dakota (91-0194), 504 U.S. 298 (1992) and South Dakota v. Wayfair, Inc., 585 U. S. ___ (2018). 

The Wayfair case overruled Quill regarding sales tax collections and physical presence giving states more authority in out-of-state taxation.

However, the Court relied on the original Quill, Brooke and Safe Deposit precedent for state taxation. The Court opines that the relevance of in-state contacts depends on “the extent of the in-state beneficiary’s right to control, possess, enjoy, or receive trust assets.”

More on Wayfair and Quill (Forbes) here

How the SCOTUS Decision Impacts Self-Settled Asset Protection Trusts

In a Self-Settled Asset Protection Trust, the Grantor and Beneficiary are the same person. State taxing authorities could argue that the Grantor/Beneficiary retains control over assets which could amount to a source of wealth for the Grantor/Beneficiary.

The Court Argued:

“Although the Court’s resident-beneficiary cases are most relevant here, a similar analysis also appears in the context of taxes premised on the in-state residency of settlors and trustees. In Curry, for instance, the Court upheld a Tennessee trust tax because the settlor was a Tennessee resident who retained “power to dispose of” the property, which amounted to “a potential source of wealth which was property in her hands.” 307 U. S., at 370. That practical control over the trust assets obliged the settlor “to contribute to the support of the government whose protection she enjoyed.” Id., at 371; see also Graves v. Elliott, 307 U. S. 383, 387.”

More SCOTUS Decision Highlights With Insights

Justice Sotomayor-

“The Due Process Clause provides that “[n]o state shall . . . deprive any person of life, liberty, or property, without due process of law.” Amdt. 14, §1. The Clause “centrally concerns the fundamental fairness of governmental activity.” Quill Corp. v. North Dakota, 504 U. S. 298, 312 (1992), overruled on other grounds, South Dakota v. Wayfair, Inc., 585 U. S. ___, ___ (2018) (slip op., at 10). In the context of state taxation, the Due Process Clause limits States to imposing only taxes that “bea[r] fiscal relation to protection, opportunities, and benefits given by the state.” Wisconsin v. J. C. Penney Co., 311 U. S. 435, 444 (1940). The power to tax is, of course, “essential to the very existence of government,” McCulloch v. Maryland, 4 Wheat. 316, 428 (1819), but the legitimacy of that power requires drawing a line between taxation and mere unjustified “confiscation.” Miller Brothers Co. v. Maryland, 347 U. S. 340, 342 (1954). That boundary turns on the “[t]he simple but controlling question . . . whether the state has given anything for which it can ask return.” Wisconsin, 311 U. S., at 444.”

According to Justice Alito

Justice Alito filed agreed with Justice Sotomayor, in which Chief Justice Roberts and Justice Gorsuch also joined, to clarify that existing precedents still stand. He concluded his opinion with:

“The Due Process Clause requires a sufficient connection between an asset and a State before the state can tax the asset. For intangible assets held in Trust, our precedents dictate that a resident beneficiary’s control, possession, and ability to use or enjoy the asset are the core of the inquiry. The opinion of the Court rightly concludes that the assets in this Trust and the Trust’s undistributed income cannot be taxed by North Carolina because the resident beneficiary lacks control, possession, or enjoyment of the trust assets. The Court’s discussion of the peculiarities of this Trust does not change the governing standard, nor does it alter the reasoning applied in our earlier cases. On that basis, I concur.”

Implications of SCOTUS Opinion on Universal Tax Law

SCOTUS did not universally rule that all beneficiaries no longer need to pay state income taxes. Instead, states should analyze the totality of connections.

Justice Sotomayor Stated:

“We hold that the presence of in-state beneficiaries alone does not empower a State to tax trust income that has not been distributed to the beneficiaries where the beneficiaries have no right to demand that income and are uncertain ever to receive it. In limiting our holding to the specific facts presented, we do not imply approval or disapproval of trust taxes that are premised on the residence of beneficiaries whose relationship to trust assets differs from that of the beneficiaries here.”

The Court declined to address discretion on distributions:

“We have no occasion to address, and thus reserve for another day, whether a different result would follow if the beneficiaries were certain to receive funds in the future.” It sounds like the Court is preparing to address this issue in the future, but it could be a long time until the Supreme Court accepts another trust taxation case.”

In footnote 11 on page 13 of the SCOTUS Opinion, the Court opines that the location of the Trustee does not universally create the nexus to tax the Trust which would have changed many of the state laws.

The Court says:

“Because the reasoning above resolves this case in the Trust’s favor, it is unnecessary to reach the Trust’s broader argument that the trustee’s contacts alone determine the State’s power over the Trust.”

In Footnotes 8 & 11, the Court Leaves the Door Open for States to Create Their Own Laws:

“Even if beneficiary contacts—such as residence—could be sufficient in some circumstances to support North Carolina’s power to impose this tax, the residence alone of the Kaestner Trust beneficiaries cannot do so for the reasons given above.” In footnote 8, the Court states: “As explained below, we hold that the Kaestner Trust beneficiaries do not have the requisite relationship with the Trust property to justify the state’s tax. We do not decide what degree of possession, control, or enjoyment would be sufficient to support taxation.”

The Impact of SCOTUS Opinion on Various State Law

What the Court Says:

“The state directs the Court’s attention to 10 other state trust taxation statutes that also look to trust beneficiaries’ in-state residency, see Brief for Petitioner 6, and n. 1, but five are unlike North Carolina’s because they consider beneficiary residence only in combination with other factors, see Ala. Code §40–18–1(33) (2011); Conn. Gen. Stat. §12– 701(a)(4) (2019 Cum. Supp.); Mo. Rev. Stat. §§143.331(2), (3) (2016); Ohio Rev. Code Ann. §5747.01(I)(3) (Lexis Supp. 2019); R. I. Gen. Laws §44–30–5(c) (2010). Of the remaining five statutes, it is not clear that the flexible tests employed in Montana and North Dakota permit reliance on beneficiary residence alone. See Mont. Admin. Rule 42.30.101(16) (2016); N. D. Admin. Code §81–03–02.1–04(2) (2018). Similarly, Georgia’s imposition of a tax on the sole basis of beneficiary residency is disputed. See Ga. Code Ann. §48–7–22(a)(1)(C) (2017); Brief for Respondent 52, n. 20. Tennessee will be phasing out its income tax entirely by 2021. H. B. 534, 110th Gen. Assem., Reg. Sess. (2017) (enacted); see Tenn. Code Ann. §67–2–110(a) (2013). That leaves California, which (unlike North Carolina) applies its tax on the basis of beneficiary residency only where the beneficiary is not contingent. Cal. Rev. & Tax. Code Ann. §17742(a); see also n. 10, supra. 13The Trust also raises no challenge to the practice known as throwback taxation, by which a State taxes accumulated income at the time it is actually distributed. See, e.g., Cal. Rev. & Tax. Code Ann. §17745(b).

Location of the Trustee Does Create “Substantial” Nexus

The Court holds that since trustees get the benefit of home state protections, states can tax based on the location of the trustee. Beneficiaries (or settlors) base taxation on the fact pattern of each trust or the totality of the connections.

  • The Trustee is “the owner of [a] legal interest in” the trust property, and in that capacity, he can incur obligations, become personally liable for contracts of the trust, or have specific performance ordered against him.”
  • At the same time, the trustee can turn to his home state for “benefit and protection through its law,” id., at 496, for instance, by resorting to the state’s courts to resolve issues related to trust administration or to enforce trust claims, id., at 495. A state, therefore, may tax a resident trustee on his interest in a share of trust assets. Id., at 498.

“In sum, when assessing a state tax premised on the in-state residency of a constituent of a trust—whether beneficiary, settlor, or Trustee—the Due Process Clause demands attention to the particular relationship between the resident and the trust assets that the state seeks to tax. Because each individual fulfills different functions in the creation and continuation of the Trust, the specific features of that relationship sufficient to sustain a tax may vary depending on whether the resident is a settlor, beneficiary, or Trustee. When a tax hinges on the in-state residence of a beneficiary, the Constitution requires that the resident have some degree of possession, control, or enjoyment of the trust property or a right to receive that property before the state can tax the asset. Cf. Safe Deposit, 280 U. S., at 91–92.8 “

“Property in Their Hands” is a Vital Component to Taxability

Distributed income is subject to tax. The key to the Court’s opinion is whether something seems like a source of wealth or property in their hands. For example, the certainty of receiving income or control of investments can trigger even undistributed net income to be taxed by a state.

“First, the beneficiaries did not receive any income from the Trust during the years in question. If they had, such income would have been taxable. See Maguire, 253 U. S., at 17; Guaranty Trust Co., 305 U. S., at 23.”

“Second, the beneficiaries had no right to demand trust income or otherwise control, possess, or enjoy the trust assets in the tax years at issue. The decision of when, whether, and to whom the Trustee would distribute the Trust’s assets falls to the Trustee’s “absolute discretion.” Art. I, §1.2(a), App. 46–47. The Trust agreement explicitly authorized the Trustee to distribute funds to one beneficiary to “the exclusion of other[s],” with the effect of cutting one or more beneficiaries out of the Trust. Art. I, §1.4, id., at 50. The agreement also authorized the Trustee, not the beneficiaries, to make investment decisions regarding Trust property. Art. V, §5.2, id., at 55–60. The Trust agreement prohibited the beneficiaries from assigning to another person any right they might have to the Trust property, Art. XII, id., at 70–71, thus making the beneficiaries’ interest less like “a potential source of wealth [that] was property in [their] hands.” Curry”

Trustee Discretion ≠ Beneficiary Distributions

The Court implied that the analysis on whether the “property will be in their hands” is the trustee’s discretion. Having a stated schedule of distribution could tip the taxation scale to the wrong side, but the Court thought that having some discretion in the trust document, even if written as “generous,” creates enough uncertainty and that the state cannot tax the trust.

“To be sure, the Kaestner Trust agreement also instructed the trustee to view the trust “as a family asset and to be liberal in the exercise of the discretion conferred,” suggesting that the Trustee was to make distributions generously with the goal of “meet[ing] the needs of the Beneficiaries” in various respects.

By reserving sole discretion to the Trustee, the Trust agreement still deprives Kaestner and her children of any entitlement to demand distributions or to direct the use of the Trust assets in their favor in the years in question.

Not only were Kaestner and her children unable to demand distributions in the tax years at issue, but they also could not count on necessarily receiving any specific amount of income from the Trust in the future.”

Update on the Fielding Case

The U.S. Supreme Court has not decided whether it will hear Minnesota’s Fielding case. The Court pushed the decision on the state taxation of trusts to the October 2019 term.

However, with a sweeping decision with Kaestner, another SCOTUS trust case seems less likely.

We will continue to closely monitor the implications of the Kaestner case and the developments of the Fielding case. More to come!

Why You Need to Establish a Trust Versus a Will: Protect Both Your Assets and Your Privacy

Have a will, but don’t think you need a trust? You may want to think again.

It’s a misconception that trusts are only for the ultra-wealthy. For many people, a trust should be an essential part of a sound and smart financial strategy. If you don’t think you need a trust, here are a few examples of why you might:

  • You want your money and assets equally distributed to your heirs.
  • You want your estate to go to your biological children and not your step-children.
  • Ensure higher education paid for before asset distribution.
  • Mitigate estate taxes for your family.
  • Protect your assets from your creditors or the creditors of your heirs.
  • More privacy surrounding your money and assets.

These are just a few examples. The list could go on and on.

Bottom line: if you have assets such as investments, a home, or other property such as a boat or vacation home and you want to avoid additional taxes and specify who inherits your assets, when they inherit, and how, you need a trust.

The Benefits of a Trust

Aside from detailing the fate of your assets, trusts have many specific benefits to both you and your beneficiaries.

Save Time and Money by Avoiding Probate

If you have a will but not a trust, your assets will go through the public process of probate. Upon your death, all of your assets will go into probate, and the court proves that your will is valid.

Typical Probate Process

  • The court inventories your property and assets;
  • The court then pays outstanding taxes and debts;
  • The court assesses your probate tax;
  • The court distributes the assets to the wishes of your will or by state law if you do not have a will in place or you did not correctly draft your will. Your estate plan should be reviewed regularly as estate laws evolve. Alliance can refer you to attorneys that will assist you.

The probate process can take up to a year, and in the meantime, your family will be without their inheritances. Sometimes the court allows some of your estate to be distributed during probate, but often your family is left waiting.

YOU Control Distribution

A trust allows you to detail exactly how, when, and to whom you’d like your assets distributed. You can choose to have your assets distributed over time or in one sum and even how you want the assets utilized. For example, you can specify that the money is only for the use of living expenses such as food and housing.

Controlling distribution can be highly effective in situations where you are unsure about how your beneficiaries will handle receiving a large sum of money. Often, grantors want to be certain bad decisions don’t squander their wealth.

A Trust is Difficult to Contest

While a will is easy to challenge, a trust is not. If you fear that someone will be unhappy with your decisions and wish to challenge the distribution of assets, a trust is a much safer option.

There are two ways to challenge a trust, both requiring significant proof:

  1. The grantor was not in the right mental state when setting up the trust.
  2. The grantor was under “undue influence” when drafting the trust and did so under someone else’s influence.

Even with these potential challenges, a trust is much more likely to withstand contest than a will.

Cover Educational Costs

Many grantors want to be sure that educational costs for their beneficiaries are covered first before the distribution of assets. You can specify whether each child should get the same amount after education costs, or whether distribution should be contingent on education costs.

An educational trust fund provides a lot of flexibility and control for a beneficiary to ensure their educational goals for their children are met even after their death.

Specify the Division of Property

Some assets are more difficult to divide than others, such as real estate or other personal property like boats or cars. A trust helps make these things easier to divide by allowing the grantor to specify precisely how to transfer the property upon their death.

A grantor can choose who gets what property, whether they can sell the property and if so, how they should sell the property and divide the proceeds. The trust can provide equal access to the property for each beneficiary or even allow them to buy each other out if they wish.

Avoid (or at Least Reduce) Estate Taxes

Assets placed into a trust are not subject to estate taxes. A trust gives grantors the ability to give tax-free gifts from the estate to their children up to the annual exclusion. The annual exclusion states that grantors can give gifts up to a certain dollar amount annually without incurring taxes.

Estate taxes only apply to estates worth $1 million or more, so they don’t apply to most. You do, however, need to be sure you understand the full value of your estate. Remember to factor in the value of your home and any other assets, not just your liquid assets and investments.

Enjoy More Privacy

As we mentioned earlier, if your estate is in a will and goes into probate, it is a public process. With a trust, your assets remain private. While a public record is sometimes necessary, it is not common. In many cases, you can find ways to work around disclosing records publically.

Keep Family Harmony Intact

After the death of a family member, there is grief and many emotions involved. A trust is an easy and straightforward way to ensure that emotional factors don’t play a part in the distribution of assets.

It can be easy for family feuds to arise during the division of an estate. A trust can be customized to precisely specify what each heir will inherit, leaving nothing to be argued over. A trust can even ensure that only the beneficiary has access to their inheritance and exclude spouses, step-children, or anyone else a grantor desires.

Who controls the trust? You do! Or a trusted family member, friend, or independent corporate trustee whom you appoint. Unlike a will, you control every aspect of a trust before and after your death to ensure your family is immediately protected.

Nevada carries the most advantageous privacy and asset protection laws in the U.S. You do not have to live in Nevada to take advantage of Nevada’s trust jurisdiction. Alliance Trust Company of Nevada has vast experience with both domestic and international complex estate planning and taxation strategies. Moreover, Alliance had a significant network of Nevada attorneys, advisors, and CPAs that we can refer you to. Do not hesitate to reach out to learn more about what Nevada can do for you!

The Appropriate Time For An International Family To Establish a U.S. Trust May Be Now

Your Family Could Benefit From the Flexibility, Control, and Tax Benefits of a U.S. Trust

The changing global economy is causing international families to have to look at their trust structures and re-evaluate. Many international families have assets in multiple countries (including the U.S.). Or, they have children who have moved stateside. Both are factors significantly impacting the way assets are taxed and how they are distributed.

The United States is experiencing an increasing influx of non-resident alien (NRA) children. Families outside of the U.S. are looking for a way to avoid the whopping 40% tax rate that assets over $60,000 would endure upon their distribution to a family member in the U.S.

You do not have to live in the U.S. to establish a trust in the U.S. However, you will need to work with professionals to ensure your trust is designed appropriately and that you choose the most beneficial state in the U.S. in which to establish your trust.

In addition to establishing a trust in the United States, non-U.S. families should consider the state of Nevada as the ideal situs for their trust. Nevada has especially favorable trust and tax laws and no state, nor corporate, income taxes as well as superior privacy and protection laws.

When Should You Consider a U.S. Trust?

1. If You or Your Family Own Assets in the U.S.

The estate tax exemption in the U.S. for non-resident aliens is $60,000. After that, you are subject to that 40% tax we mentioned earlier. An irrevocable trust fund that’s funded by non-U.S. assets or a foreign blocker corporation often eliminates these taxes.

A properly structured trust could include a foreign grantor trust, which contains both a U.S. and non-U.S. entity. A foreign grantor trust serves to protect the non-U.S. assets from high estate taxes and to protect the U.S. assets from capital gains and income tax making it a very desirable option for NRA’s.

Even U.S. families with U.S. assets spread over several states require complex structuring to ensure their trust is serving them well. When it comes to families spread across several countries, the need for legal and trust professionals is even more significant to ensure your assets are protected and distributed according to your wishes and with the least amount of taxable income possible.

2. If an Immediate Beneficiary is Planning to Move to the U.S.

If you know your beneficiary will move to the U.S., and you want to receive the maximum estate tax and income tax benefits on your assets, a U.S. trust is a powerful tool. Inheritances of non-U.S. assets by U.S. persons can be tax-free when adequately structured.

Properly structuring your trust in the U.S. requires appointing an offshore trustee in a U.S. trust jurisdiction such as Nevada. This trustee then declares a new trust and foreign assets may be poured over into the trust.

3. If a Future Beneficiary is Getting Married to a U.S. Citizen (or Not)

Nevada trust law tested against divorce settlements in court and held up when it came to the divorcing spouse’s access to the trust. Divorcing obligations such as child support and alimony will still be settled. However, the assets in trust remain protected. For families who wish to keep assets and family businesses within the family tree, Nevada trust law can keep wealth within a family for generations with a Nevada Dynasty Trust.

There are several trusts that could prove advantageous in this scenario, but those marrying a U.S. citizen often use qualified domestic trusts to achieve their desired objectives.

4. A Future Beneficiary is Applying for a “Green Card” (a permanent U.S. resident)

It’s imperative to establish a U.S. trust before a “green card” is obtained because once a green card is in hand, the trust options are much more limited.

Families need to take into consideration all tax and trust options before a future beneficiary makes a permanent move and get assets settled before they become a resident. Otherwise, assets may be subject to IRS reporting and taxation.

5. The Grantor is Interested in U.S. Tax-Free Legal Protections

If you desire tax-free legal protections in the U.S., you need to evaluate the state of Nevada. Nevada does not allow for claims of alter ego or sham trusts. In Nevada, the only recourse for a creditor is a claim of fraudulent conveyance, which is void after assets migrate into the Nevada trust (Nevada carries a two-year statute of limitations seasoning period).

Nevada has exceptional industry-leading legal protections, arguably the very best in the United States. The rule of law in Nevada surrounding trusts is well established and well respected. Nevada has no state or corporate income taxes.

Moreover, several trusts have been tested in Nevada courts. No other state has stronger asset protection precedents than Nevada. Click here to read about a recent asset protection Nevada Supreme Court case.

Weighing the Benefits v. the Risk of a U.S. Trust

While the list above is by no means exhaustive, it should give you a good idea of why a U.S. trust may be beneficial to you.

Weighing the benefits and risks should really be a simple part of your decision. Many families seek to establish their trust in the U.S. for economic stability and the benefit of establishing their assets in a non-blacklisted country. If your family has a beneficiary who is seeking residence in the United States, a U.S. trust should be established well in advance of their departure.

A U.S. trust, properly structured and established at the right time can save families big on taxes and even eliminate some taxes. Like any complex estate planning strategy, it’s necessary to employ the right professionals to help you take advantage of your unique situation.

Alliance Trust Company of Nevada has many years of experience both with complex domestic trusts and very complex trusts established by non-resident families. We would be happy to help you navigate establishing your trust in the state of Nevada to optimize your tax benefits, privacy, and protection.

SCOTUS Highlights and Insights From the Kaestner Oral Arguments

The United States Supreme Court Hears Oral Arguments for North Carolina v. Kaestner

On April 17, 2019, the United States Supreme Court heard the oral arguments in perhaps the most significant trust case in 100 years: North Carolina Department Of Revenue, Petitioner, V. The Kimberley Rice Kaestner 1992 Family Trust, Respondent. 

The crux of the Kaestner case is whether the state of North Carolina should be able to constitutionally tax trusts where the only connection to the state is that the beneficiary is a resident.

In the state of North Carolina, the taxpayer won throughout the entire court system, but North Carolina appealed successfully to the U.S. Supreme Court.

Matthew W. Sawchak, North Carolina Solicitor General, argued on behalf of the Petitioner and David A. O’Neil, Esq., of Debevoise & Plimpton LLP  on behalf of the Respondent.

In the hour-long arguments, the Justices actively participated, frequently interrupting the counsels. Overall, based on our initial analysis of the transcript, the line of questioning from the majority of the Justices seemed to be slightly more sympathetic to the Respondent. However, there were several times the Justices were challenging the Respondent’s arguments.

As always with the Supreme Court, it is difficult to tell the outcome until the decision is published.

Hypothetical Outcomes

More Context By Including the Fielding Case?

The central argument seems to focus on what is the connection of a trust to a location – trustee, place of administration or the beneficiary. Interestingly, there was no discussion over the location of the grantor – which is the central argument in the Fielding case from Minnesota.

We are closely watching to see if SCOTUS will hear Fielding as well providing more context to taxing resident trusts.

In this case, there are many ways the court could decide whether to grant for the respondent, rule for the petitioner, or the send the case back to North Carolina for further analysis.

Michael Redden, Redden Law, PLLC, Provides Insight

We reached out to an estate planning attorney in Minnesota with whom we have been closely monitoring the Fielding case which carries similar trust taxation issues as the Kaestner case.

Click here to see our summary of both cases.

Michael Redden shared his insights with the oral arguments with us:

“The Court took note that the state was essentially asking the Court to overturn 100 years of tax precedent to reach the conclusion that the beneficiaries residence alone should determine. It is essentially a personal jurisdiction question. Who owns the trust assets? When do they own the trust assets? Traditionally, it has always been the trustee and not the beneficiaries.

“This is analogous to the legal fiction that a corporation is a person. A corporation is a separate person from the shareholders. The shareholders ultimately benefit from the economic activity, but the corporation is separately taxed and has separate legal character. The same principle applies here but is even more powerful.

“Why?

“Because there is an actual person there: the trustee. The beneficiaries may ultimately benefit, but the ownership is held in the personhood of the trustee.

“Discretionary trusts further embody this. The court seemed to look to this ownership question: When does the beneficiary own the property?

“It’s when they control the property. Just like when stock options and incentives vest. The Court focused on this question.

“Interestingly enough, the Court also spent time considering the ability of a beneficiary to change tax residency and how that might affect the state of taxation. This topic will be central to any consideration of the Fielding case should the Court decide to hear it. One way or another, either 100 years of tax precedent will be adjusted or the tax regimes of 33 states will.”

Expectations and Speculations

Based on the arguments, we were pleased that the Court seems to be settling in that this is a Due Process case (and not a Commerce Clause case) and seems to be set on deciding either way based on the arguments.

Our expectation, given the arguments, is that we don’t think the Court will give practitioners broad constitutional direction on all state trust taxation laws, but narrower guidance on the taxation of beneficiaries.

It is possible that the Court could solely rule regarding the taxation of discretionary trusts as the arguments centered around them.

Much Chatter Regarding Throw-Back Taxes

It would not be unreasonable for the court to opine that current state income taxation of undistributed trust income would be unconstitutional, but throw-back taxes would be permissible.

A combination of a narrow ruling on Kaestner and the Court not granting a writ of certiorari on Fielding could lead to an interesting situation for practitioners.

Furthermore, given the discussion surrounding adjudication v. taxation, it will be interesting to see whether the Court’s opinion will impact out-of-state asset protection trusts, specifically states’ arguments over jurisdiction of trusts.

Highlights from the Oral Arguments

Below, we highlight some of the exchanges and questions from the discussion yesterday. For those who are interested in the full transcript, it is 69 pages.

You may check the transcript out here.

All text within quotations is taken from the SCOTUS transcript linked above.

Initial Questions from Justices Ginsburg and Sotomayor

Right away, Justice Ginsburg asked Mr. Sawchak: “But you couldn’t – you couldn’t tax the beneficiaries on that accumulated income when they haven’t received it?”

Justice Sotomayor chimed in a bit later to the Petitioner: “But it still begs the question. What makes it your right under any circumstance to tax all of the trust income where there’s no guarantee that she is going to receive all of it at any point?”

Justice Breyer weighs in

Justice Breyer had one of the most extended remarks from Mr. Sawchak: “Look, the trustee lives in New York, okay? The settlor is in New York. All the administration is in New York. There is one thing that’s going to happen in North Carolina. The thing that’s going to happen in North Carolina is if she is there when it’s distributed, she’ll get some money. Okay? Which you’re totally free to tax. But that isn’t what want to tax. You want to tax all these things which are everyone except her is in New York, and moreover, we don’t even know if she’ll ever get the money.

“Now there’s something wrong with that. I don’t know, it doesn’t say specifically about trusts in the Constitution, but, thus, I mean, lots of trusts say there are 10 beneficiaries, each one lives in a different state, and I, the trustee, have total discretion as to who give this money to and maybe I’ll give it to none of them.

“So here’s a woman who might get none of it, and you want to tax that. Is that right? Do I have the facts right?”

Justice Breyer later looked to simplify his line of questioning: “Let me make it simpler. There are five beneficiaries. One lives in North Carolina. As it turns out, that one in North Carolina gets $3. The others get $999,997. But North Carolina does not tax $3. What it taxes is 20 percent or $200,000. Do I have my facts right?”

Justice Sotomayor: is unequally taxing beneficiaries leading to changing grantor’s intent

Justice Sotomayor’s line of questioning is asking whether unequal state taxation could be interpreted as potentially changing the settlor’s intent and if the trustee needs to take that into account in distribution decisions.

Justice Sotomayor asks: “But you’re changing the trust instrument because you as a state are saying the trust must give them 20 percent each, because, regardless of what the terms of the trust are, I’m going to tax you on that 20 percent even though you might get none, even though you might get more. You’re still a trust, you’re being charged for 20 percent because you should have given her 20 percent. That’s really what you’re saying, isn’t it?”

Mr. Sawchak: “That –you’re right, Your Honor, to say there is a –assuming nothing’s in the trust instrument, there would be a full –”

Justice Sotomayor: “No, there is something in the trust instrument here. The trust instrument says that the trustee has absolute discretion to give her something or nothing, to give three people–I think there’s two or three children; I don’t know how many there are here, but let’s assume there’s four of them, her and three children, for using even numbers.

“The trustee could choose to –if she had a disabled child, to give it all to the disabled child or to divide it among the three because she’s very rich and they’re not. The trustee has a lot of discretion. But you, the state, are changing the terms of the trust instrument in saying each of them must still pay 25 percent.”

Mr. Sawchak: “That is correct, that nothing else appearing, we make the pro rata. And here’s why that’s fair. First of all, throughout the period in question, those people had true ownership of the accumulating assets. Secondly, also essentially on a pro rata basis, North Carolina is protecting each of them.”

Back-and-Forth Between Justice Gorsuch and Mr. Sawchak regarding overruling SCOTUS precedents

Justice Gorsuch: “And, counsel, along those lines, if I’m –if I’m understanding your position correctly, because you think that rule is inequitable, you’d have us overrule Safe Deposit and Brooke, two decisions of this Court that suggest that that’s the correct rule, is that right?”

Mr. Sawchak: “Not overrule them, Your Honor. They could be –”

Justice Gorsuch: “Well, what would you have us do with them if it’s not overruling them?”

Mr. Sawchak: “Two things, Your Honor. First of all, they can be distinguished in terms of being property tax cases versus income tax cases, because this Court –”

Justice Gorsuch: “Let’s say I don’t find that distinction particularly significant. It’s slicing the baloney a little too thinly. Then what?”

Mr. Sawchak: “Then we would be really within the proposition of the due process part of Quill, where these are decisions that have been superseded by the movement –”

Justice Gorsuch: “Right. You’re -you’re asking us to overrule them. I mean, it’s a polite way of saying overrule, isn’t it?”

Mr. Sawchak: “They’ve probably, frankly, already been laid aside by other –by the due process decisions, as this Court’s noted in -”

Justice Gorsuch: “But that’s a -that’s a really nice way of saying overrule them.”

(Laughter.)

Justice Gorsuch: “Right?”

Mr. Sawchak: “They’ve probably already been -”

Justice Gorsuch: “I’ve already been overruled; we just haven’t said so.”

Mr. Sawchak: “That’s probably right, Your Honor, and let me say why that’s –”

Justice Gorsuch: “Okay. All right. And –and you’d have us overrule them in the name of fundamental fairness, is that right?”

Mr. Sawchak: “In the name of fundamental fairness because –”

Justice Gorsuch: “And –and Justice Breyer’s problems notwithstanding, that–that fundamental fairness problem, we shouldn’t take into account?”

Mr. Sawchak: “No, there are criteria, a variety of criteria out there, and every one of them –”

Justice Gorsuch: “That’s more fundamentally fair than the existing rule of this Court that’s almost 100 years old?”

Mr. Sawchak: “So query whether that really is the existing rule, first of all. Those are –”

Justice Gorsuch: “Well, right, except for the fact that we haven’t overruled it, but we really have. Okay. But assuming we thought those were still precedents of the United States Supreme Court –let’s just spot me that for the moment.”

(Laughter)

Justice Gorsuch: “–you think it’s more fair to overrule them and proceed down the track we’ve just illuminated with Justice Breyer than to maintain them?”

And later Justice Sotomayor asks: “Hanson, you would be asking us to overrule because I don’t know how you can tax somebody you have no jurisdiction over, especially if they haven’t done anything like pay any money over or have no contacts with the person in your state. All the meetings were in New York. So add a third case you want to overrule.”

Justice Sotomayor’s exchange on trust location

Justice Sotomayor: “So how is the trust in your state?”

Mr. Sawchak: “Pardon me, Your Honor?”

Justice Sotomayor: “I thought the trust is represented by the trustee. And the trustee is not in your state.”

Mr. Sawchak: “The –the trust has its presence –”

Justice Sotomayor: “It’s not being administered in your state.”

Mr. Sawchak: “True, but its true owner, its central figure, is in North Carolina. Let me offer”

Justice Sotomayor: “So why didn’t we say that in Hanson?”

Mr. Sawchak: “So Hanson, first of all, is a situation where the burden of adjudication, by the way, not taxing, fell on the person of the trustee. This Court in Walden described –”

Justice Sotomayor: “The same thing here. You’re making the trustee liable for paying the tax. You’re doing exactly what happened in Hanson.”

A discussion on discretionary v. non-discretionary trusts with Mr. O’Neil, the counsel for Respondent

Justice Kagan: “Would your position be different if she were–if–if the–if the trustee did not have this discretion as to shares? Suppose that the –the trust instrument simply said, here are the five beneficiaries. The trust will be distributed pro rata. You know, if one dies, then it will be distributed pro rata as to the other four. But –but –but the beneficiaries all know that they’re going to get a fifth of this money. Would your answer be different?”

Mr. O’Neil: “If the trust instrument gave her a vested, current right to the income, then we wouldn’t –”

Justice Kagan: “Not a current right. She’s going to have to wait until she’s whatever years old, 30, 40, whatever. She can’t pull the money now. But she’s going to get the money one day.”

Mr. O’Neil: “No, that –that case would not be different because it would still be based on this speculative possibility that she will ultimately receive the money.”

Justice Kavanaugh brings up whether they can leave some points open

Justice Kavanaugh: “If –I thought we didn’t need to answer the question raised by Justice Kagan’s previous hypothetical, and just raised by you, which is, if we did know, in other words, if it were guaranteed or certain, that might or might not be a different case.

“But this case is one where we don’t know based on the nature of the trust contingent or discretionary beneficiary, and for that case, the answer, I thought you were arguing, should be that the state where the beneficiary resides cannot tax, but we could leave open the question raised by Justice Kagan’s hypothetical.”

Later, Justice Sotomayor added: “So the thing that Justice Kavanaugh and Justice Alito were reserving, and I assume Justice Kagan, was on the question of what happens if she is a guaranteed distributor–distributee, meaning she can’t call it today, but at age 40 or at the end of the trust life, at some point, she’s going to be the 100 percent owner or going to be a fixed 10 percent owner, whatever it might be, they’re saying we should reserve on that question?”

Justice Alito sympathetic to Respondent

Justice Alito: “But I thought this case was simpler than your argument seems to be making it. I thought this was a case about a state imposing a tax on someone for money that that person may never get. And if –and if the person ever gets some money, we’d have no idea how much that money would be. Isn’t that what this case is about?”

Could states impose throw-back taxes as the Federal Government does with offshore trusts?

Mr. O’Neil: “Can the trust? No, at that point, it won’t be trust property. At that point, it will be the beneficiary’s property. And this –you know, the federal government has the same issue. U.S. citizens can have trusts that are located abroad, and what the federal government does is impose a throw-back tax so that when the beneficiary actually receives the money, the beneficiary can be taxed not only on that distribution but also on –on income that had accumulated in previous years and that the trustee did not pay taxes on.”

Justice Kavanaugh: “And throw-back taxes are –are permissible, constitutional? You’re not challenging those in any way?”

Mr. O’Neil: “We are not. [ …] ”

Mr. O’Neil later said: “I’d like to just focus, if I could, on the –on the point of the throw-back tax because I do think –I do think it is an answer to why –to the state’s concern about all of the potential loss of revenue that it may –may –may lose out on here.

“If and when this money is actually distributed to the beneficiary, if she is a North Carolina resident at that time, the state can get all of this income tax back by taxing the beneficiary.”

Alliance Trust Company of Nevada will continue to monitor this case very closely.

The Impact of New Federal Tax Laws on Existing Trusts and Estates

It’s Time to Revisit Old Trusts – New Federal Exemptions Could Give Wealthy Families a False Sense of Security

The end of 2017 saw significant changes in federal tax law when President Donald Trump signed the “Tax Cuts and Jobs Act.” The impact of the Act on estate planning could affect those with existing estates and those who might be considering drafting a trust in the future. While many changes will work to benefit estates, there are several things to be aware of and consider.

Changes to Exemption

Before the Tax Cuts and Jobs Act, federal exemptions for wealthy families were capped at 5 million dollars but has now been increased to $11.4 million per person (including inflation). This means that before 2018, married couples could have exemptions up to $23.36 million. Any gifts under these new exemptions can be made tax-free during your life and also upon your death as an inheritance.

Something to consider about the Tax Cuts and Jobs Act is its expiration date. The new regulations will expire at the end of 2025. They are then expected to revert to the previous amount of 5 million per person barring any changes from Congress. While past amounts will be adjusted for inflation, the new model for calculating inflation is expected to change and will yield a lower rate of inflation year-over-year.

However, estates valued at less than $5 million are less impacted by the new regulations.

How Federal Tax Reform Affects State Tax

Estate tax on the state level has remained unchanged. If your state assesses estate taxes, you will still be required to pay those taxes. The state of Nevada has some of the most favorable tax laws in the country and many people establish Nevada trusts to take advantage of them.

If you currently live in a state which assesses high taxes on estates or income produced by your estate, you may want to consider moving your trust to a state with no income tax, no estate tax, and favorable tax laws such as Nevada.

Some great news about exemption limits is the ability to gift more freely until 2025 when the limits expire. It will be easier to gift estate assets without incurring federal gift and estate taxes until that time. The state of Nevada has no gift tax, so staying under the federal cap is your only concern for assets established in Nevada.

Nevada does not have an inheritance tax either, but keep in mind that even if your state does not have an inheritance tax, if you gift assets to someone in a state which does, it’s possible for the beneficiary to get taxed on those assets.

What to Watch Out For

Higher exemptions have caused one big problem that could go undetected: accidental disinheritance. If you have an older trust that was written for a smaller tax exemption and your trust stipulates that the exempt amount of your estate should pass to your children and the rest to your spouse – you may accidentally leave up to $11.4 million to your children and nothing to your spouse depending on the size of your estate.

Learn more about Trust Decanting.

Regardless of estate size, it’s important to review your old trusts to make sure that the terms of that trust still make sense for your current life situation.

Does a Trust Still Make Sense in Light of New Federal Exemptions?

Some people may be compelled to review their old trusts and choose to allow their assets to pass into a “credit shelter” trust. This tactic does pass your income along to your spouse and children. However, families who use such trusts miss out on a huge tax break from stock and real estate assets.

Trusts also help shield assets from federal estate tax even with higher exemptions and allow more control over assets. Another thing to keep in mind as you choose whether or not to create a trust is that the higher exemptions put into place by President Trump will only last until 2025. It may be better to think of them as being artificially high.

Learn More About the Tax-Favored State of Nevada

You don’t have to live in Nevada to take advantage of its favorable tax and trust laws. By establishing your assets in the state and using a Nevada resident trustee, like Alliance Trust Company of Nevada.

There are more benefits than favorable tax law in the state of Nevada. Those who establish trusts in the state can also experience benefits like short seasoning periods, iron-clad asset protection laws, and the ability to develop dynasty trusts that last hundreds of years and more.

Contact Alliance Trust Company of Nevada to learn more about how you can make the most of higher federal exemptions and benefit from fewer state taxes.

Potential Upcoming High-Profile IPOs In Bay Area Make NINGs An Attractive Solution

Softening the Blow of California Income Taxes with a NING Trust

The New York Times recently published an article about how the California Bay Area is about to experience a huge financial shakeup. Several high-profile companies are about to go public including Uber, Lyft, Airbnb, and Pinterest. With what the NYT refers to as “IPO-palooza,” companies worth upwards of $200 billion will create millionaires overnight.

While this is great news for the newly minted millionaires, it could cause a strain on San Francisco’s economy, displacing many people from their homes and making the already expensive city even less affordable. Moreover, with the new State and Local Income Tax (SALT) deduction capping at $10,000, even the new wealthy Californians will be scrambling looking for ways to protect their assets from massive capital gains and income taxes.

With new money (and lots of it) in their bank accounts, this new generation of millionaires will be looking to buy homes, cars, boats, and more. But, hopefully, they will also be interested in investing and protecting their wealth. We’ve had a favorable economy for a while now, and a correction will inevitably come.

While a luxury or two is certainly well-deserved, ensuring that this hard earned financial windfall lasts for generations is also important. In order to grow and compound wealth, the new Bay Area wealthy might consider working around the state’s high-income tax rate by establishing an ING trust.

Should New Millionaires Establish California Trusts?

California has notoriously high taxes all around, but its state income tax can be a real burden, up to 13.3%. Often, wealthy California residents will establish trusts outside of the state of California to avoid these high taxes with some even physically moving their residences outside the state of California.

However, even moving out of California right before an income event may not even insulate a wealthy California resident from taxes. The state’s aggressive Franchise Tax Board has found ways to tax people regardless of their move. A newer approach is to create a Nevada Incomplete Non-Grantor Trust or NING. Moving a portion of assets as incomplete gifts to a no income tax state, like Nevada, will protect those assets from hefty taxes created by the new SALT cap.

NINGs Could be the Answer to California State Tax

New and established millionaires alike could benefit from establishing a NING trust in which the donor makes an incomplete gift to the trust and assigns an independent trustee. Alliance Trust Company of Nevada provides independent trustee services for many families establishing NING trusts.

By establishing an independent trustee the grantor is still involved, but not considered the owner. A NING trust allows any income or gains by the trust not to be taxed until it’s distributed, at which point the trustee may have moved out of California and can avoid income tax on these gains.

Deferring taxes over years creates a compounding effect that can yield high returns even when just working around state income tax. Utilizing a corporate trustee, such as Alliance Trust Company of Nevada, to administer an incomplete non-grantor trust (ING) in a state with no income tax is becoming a popular solution for wealthy entities in high-tax states.

Why Nevada?

The state of Nevada is one of a few states with no state income tax, but more than that, Nevada’s trust protection is considered to be the best in the country. With several cases which have set precedents in favor of protecting trusts, Nevada has proven to be more in favor of trust protection than any other state including protection from creditors and divorcing spouses.

You never have to live in Nevada as long as you maintain a Nevada trustee. Other benefits include a short seasoning period on trusts and no corporate income tax. You can see a full list of Nevada’s advantages over other states here.

Does the Benefit Outweigh the Risk?

There are quite a few hoops to jump through when establishing a NING, however, with an experienced trust attorney, this should not be a barrier. After establishing a NING, it may be that you will have to pay some California tax.

Alliance works with many attorneys specializing in NINGs. Architecting a NING that focuses on your individual situation and the specific assets being placed in the trust is crucial to meeting your objectives with a NING. We would be happy to refer you to an appropriate attorney.

ING trusts are still being tested in the courts of every state but New York, so there’s not certainty about how California will react yet. It does seem that the state will react with audits before their legislature.

So if you’re about to hit a financial windfall, the calculated risk of establishing a NING could pay off exponentially when it comes to income tax. In which case, the benefit would certainly outweigh the risk.

If you want to learn more about establishing a NING trust contact our experienced team for more information.

Asset Protection in Minnesota, a Breakfast Event

Why Are Asset Protection Trusts Popular in California but not Minnesota?

Alliance Trust Company of Nevada is partnering with BlackRock and Redden Law to host a Breakfast Event for a discussion on Asset Protection in Minnesota: From market to legal risks; Who is at risk and for how much?; Is it true that a creditor can seize my car for $4,600?; My IRA for $69,000?

Our expert panel will lead a lively discussion.

Learn more about Asset Protection Trusts in Nevada

Details:

Speakers

Brian Wevergergh – Market Leader, BlackRock

Michael Redden – Attorney, Redden Law

Greg Crawford – President, Alliance Trust Company of Nevada

Agenda

  • Market outlook and investment implications of balancing risk and reward – What can I do to protect myself?
  • What other risks are impacting my wealth – Is it true that a creditor can seize my brand-new Suburban for $4,600? What about my IRA or my house?
  • What can I do to protect myself and my family?
    • Protecting Wealth: Different strategies to manage risk – from LLCs to Asset Protection Trusts
    • Asset Protection Trust basics: Why, What, Who, and How
    • Case study
    • Why are Asset Protection Trusts popular in California but not Minnesota?

Who Should Attend:

  • Attorneys
  • Financial Advisors
  • Wealth Managers
  • Small Business Owners / Doctors / Dentists

Speaker Bios

Brian Weverbergh

Brian Weverbergh, CIMA® is a Market Leader with BlackRock. He serves financial advisors in the states of Minnesota, North Dakota and South Dakota. Prior to joining the firm in 2016, he was a Regional Vice President for Allianz Global Investors based in Minneapolis, MN.

Mr. Weverbergh earned the Certified Investment Management Analyst (CIMA®) designation through the Investment Management Consultants Association in conjunction with the Yale School of Management. He earned a B.S. in Business Administration with a concentration in Finance from Ithaca College.

Michael Redden

Michael Redden is a veteran of the United States Air Force.  He served as an Intelligence Analyst with the 31 FW in Aviano, Italy.  After the Air Force, Michael returned to Minnesota where he attended law school at Hamline University School of Law.  Michael lives in New Hope with his wife and four sons while coaching youth wrestling. In the past, Michael worked at Prudential Insurance Company of America where he helped clients of the company protect their assets.  While at Prudential, Michael was a registered representative of Pruco Securities and held his Series 6 and Series 63 securities designations.

Michael has a passion for helping licensed professionals preserve their wealth for the next generation. Since tort reform is unlikely, it is more important than ever to have a plan to protect your wealth from lawsuits. He has also served as an independent Trustee/fiduciary in the past.  Michael’s practice has a special focus on Integrated Estate Planning. He combines effective Asset Protection techniques with other Estate Planning strategies in order to protect the assets of individuals and businesses from lawsuits.

Greg Crawford

As president of Alliance Trust Company of Nevada, Gregory E. Crawford develops strategy, drives growth, and oversees operations. For two decades, Greg has designed and implemented asset management and asset protection plans for multi-generational families in the United States and abroad for some of the largest institutions in the world. This work involves comprehensive financial planning, portfolio design, business entity structure strategy, and sophisticated estate planning techniques.

Greg is a regular speaker on the benefits and advantages of Nevada trust situs at law school conferences around the country. A native of Menlo Park, California, Greg holds a Bachelor of Arts from the University of California, Davis, and a Master of Health Administration from the University of Minnesota. Greg is certified in financial planning by Boston University and is a Registered Trust and Estate Practitioner and a Certified Financial Planner.

Mr. Crawford has regularly been quoted in publications such as The Wall Street Journal, The New York Times, The Financial Times of London, and has appeared as an on-air expert on CNBC, Bloomberg and ABC World News Tonight.

Greg has lived in Reno since 2000 and is married with two children. He is a member of Our Lady of the Snows Catholic Church, the Reno Angels Investor Group, the Entrepreneur’s Organization, Reno Sunrise Rotary, and the Reno Tahoe Winter Games Coalition.

Save the Date:

  • March 12, 2019 at 7:30-9:00am
  • Location – Seven Steakhouse, 700 Hennepin Ave, Minneapolis, MN 55403
  • Schedule: 7:30-8:00am registration and coffee, 8-9am program
  • Cost: Free

Can Incomplete Non-Grantor Trusts (INGs) Really Save Wealthy Californians Money on SALT?

A Proactive Approach to Wealth Management May provide Families Significant Savings on State and Local Income Tax (SALT)

Taxpayers could be scrambling after the Federal Tax Reform passed at the end of 2018 capping state and local income tax (SALT) deductions at $10,000. For many wealthy families in high-tax states, this deduction will only cover property tax and won’t touch capital gain income or other investment income.

While California is attempting to pass the Protect California Taxpayers Act which allows taxpayers to deduct some taxes as “charitable contributions,” for many the bill feels like a workaround or even tax evasion, and it’s unclear whether the IRS will allow such a bill to pass.

Rather than waiting for legislation to pass that is more protective of taxpayers, many residents from states like California are considering leaving the state or taking other measures to protect their wealth.

Moving out-of-state is not a feasible option for many. However, moving assets out of a high-tax state may be an ideal solution.

What are My Options?

Traditionally, grantors gift away income-generating investments to beneficiaries who live in tax-favored states. However, these gifts often incur federal gift tax or utilize some of the grantor’s exclusion for a gift and estate tax.

A newer option is the NING trust or Nevada Incomplete Gift Non-Grantor Trust. There are several tax-sheltered states in the U.S., but only a few allow Incomplete Gift Non-Grantor Trusts and the most tax-favored state for such a trust is Nevada. The NING allows a trust to avoid taxation by the grantor’s home state until assets are distributed, or, rather, the gift is complete.

Why Choose a NING?

By transferring assets into a NING, the assets become a separate taxpayer receiving the tax benefits of Nevada. Because transfers are not completed gifts, there is no federal gift tax exclusion.

For those who live in high-income tax states, such as California, establishing a NING to transfer some of the tax burdens to Nevada allows them to take advantage of Nevada’s no income tax benefit.

Additionally, Nevada has the most robust creditor protection and protection as its considered a “spendthrift trust” in Nevada. Nevada also has tested protection from divorcing spouses which has held up in Nevada Supreme Court with Klabacka v. Nelson.

The Components of a NING Trust

An ING trust only works in a state with no state income tax. Otherwise, a tax will apply to the trust. Nevada is the preferred state for an ING trust as it carries many other protections and benefits to grantors and beneficiaries.

ING trusts cannot be grantor trusts under the income tax laws of the grantor’s state of residence. Only states that allow self-settled spendthrift trusts (asset protection trusts) can form non-grantor trusts enabling the settlor to be a beneficiary, such as Nevada.

The incomplete gift portion of the ING trust is critical to ensure that the contributions to the trust are not treated as a gift and subject to federal gift tax. It’s essential for the settlor to have lifetime power of appointment and post-death power – which the ING trust allows.

NING trusts will be subject to federal estate tax when the settlor dies, however, if the estate is not large enough to trigger federal estate tax, this is not an issue.

Who Should Consider Establishing a NING

Although a NING has many benefits, the benefits may not be for every grantor. Here are some of the criteria which would make someone a good candidate for a NING trust.

  • Grantor lives in a high-income state – such as California.
  • Grantor carries intangible assets with substantial tax exposure.
  • Grantors in the highest federal tax bracket who would remain in that bracket after transferring assets to a NING.

Should YOU Establish a NING?

NING trusts can be an excellent option for those looking to preserve wealth and protect it from their state’s high tax rates. Since changes to SALT are recent, there are still some questions about how the IRS will respond to attempts to shield wealth from taxes. However, the NING appears to be the best option to do so.

It’s important to work with a trusted advisory team or trust company that is familiar with Nevada Tax Law and NINGs to ensure it’s the right choice for your family and that you’re gaining the most benefit possible.

At Alliance Trust Company, we’re experts in Nevada Trust Law and have a network of attorneys specializing in NINGs. We are available to walk you through your particular situation regarding NINGs. Contact us to learn more about preserving your wealth in the state of Nevada.

STEP Orange County Conference 2019 Session Highlights

Summarizing STEP Orange County 2019, February 4 – 5

Over 225 attendees and 22 exhibiting companies came together at the Fashion Island Hotel in Newport Beach, CA for the Orange County Chapter of STEP’s 8th Annual Institute On Tax, Estate Planning, and the World Economy on February 4-5, 2019.

After a very disappointing Super Bowl on Sunday, the conference kicked off on Monday morning in rainy Southern California. Discussions covered the changes in tax law, including Opportunity Zone Funds, domestic asset protection, and international issues.

Despite the problems in Washington, D.C., the U.S. is still being viewed as an attractive bastion for foreign families given its stability, attractive investment climate, and other benefits.

STEP OC 2019 Monday Morning Sessions Recap

Trust Law and Tax Differences Between the U.S. and Foreign Countries

After the welcoming remarks, Read Moore of McDermott Will & Emery began with a discussion on taxation of trusts with foreign implications. Moore mentioned the differences between trust laws between the U.S. and foreign countries and the challenges these differences could pose.

In such cases, the legal environment should be carefully analyzed including the tax situation of both countries in order to recommend the right structure for each client.

What’s Changed in Life Insurance and ILIT Trusts

Colleen Barney, a partner at Albrecht & Barney discussed life insurance and ILIT trusts and noted that her practice had gone from 100 ILIT trusts a year before the 2017 tax law change to just 10 a year.

She highlighted that the Crummey notices are actually not required by case law, the only part that is required is the ability of the beneficiary to be able to withdraw the funds within a reasonable time, whether they are actually aware of it or not.

She also discussed items that can be made to make ILITs more flexible, such as trust protector features.

Charitable Planning Under the Tax Cuts and Jobs Act

Lawrence P. Katzenstein, a partner at Thompson Coburn, covered charitable planning under the Tax Cuts and Jobs Act. He discussed strategies, such as the bunching of deductions, to breach the new standard deduction in some years.

Katzenstein also went over the new section 4943(g) (the Paul Newman rule) and how foundations are no longer required to dispose of companies under certain circumstances.

When to Use the Unified Credit

Andrew M. Katzenstein, a partner at Proskauer, highlighted how the unified credit will ultimately come down from the current $11.2m in 2025 or earlier, depending on how the politics will play out in the early 2020s.

Katzenstein recommends that clients start using it now before it is gone. He also discussed Qualified Opportunity Zone Funds and the importance of clients carefully analyzing the underlying investments over the tax benefits, which can be worthless in a bad investment scenario. It’s suggested to carefully analyze the income tax benefit vs. estate taxes.

Strategies to Resolve Conflict Within Families

The Honorable James P. Gray (Ret.), a mediator for ADR Services, talked over lunch about how minimizing surprises and overcommunicating within families can resolve many conflicts before they arise.

Families can use strategies such as family meetings and neutral accountants pre-death to reduce family conflicts at a very difficult time for everyone.

Afternoon STEP OC Sessions Recap

Strategies for High Net-Worth Mexican Families

Enrique Hernandez-Pulido, a partner at Procopio, discussed high net-worth Mexican families and the complexities surrounding their situations with first, second, and third generations being a mix of citizenships between U.S. and Mexico.

Hernandez-Pulido covered the surrounding tax and estate planning strategies, including the fact that Mexico has no inheritance tax for Mexican residents, but 25% tax if a Mexican resident inherits from a U.S. trust. This could put a lot of pressure on advisors to make sure they stay updated on family movements and employ the right strategies.

The new post-election climate, Common Reporting Standards (CRS), privacy needs, and potential new inheritance tax keep wealthy families in Mexico interested in US structures.

A Creditor’s View on Asset Protection Trusts

Jay D. Adkisson, a partner at Riser Adkisson, capped off the first day with a creditor’s view on asset protection trusts and his approach to pursuing them.

Adkisson’s approach can include private investigators, finding debtor’s pressure points, and pursuing fraudulent conveyance as a strategy.

STEP OC 2019 Monday Morning Sessions Recap

Life Insurance as a Portfolio Stabilization Tool

Leigh Harter, Managing Director at NFP Insurance Solutions started Tuesday morning off with a discussion on life insurance as a portfolio stabilization tool.

Harter spoke with Paul S. Lee, Global Fiduciary Strategist at Northern Trust, about Qualified Small Business Stock (QSBS) strategies for business owners.

The History of FACTA and the New OECD Initiative

Joseph A. Field, Senior Counsel at Pillsbury, discussed the history of FATCA and how it gave rise to CRS, and the 3,200 bilateral agreements the 110 nations have put in place.

Field explained that the U.S. is not a signatory and is leading to capital being moved from across the world to the U.S. Additionally, CRS is not balancing privacy vs. transparency but has almost reached Orwellian proportions.

Field also discussed the new OECD initiative that would criminalize advising clients avoiding CRS and its chilling impact on advisors. He highlighted the attractiveness of the U.S., given our stability (despite the political climate in D.C.), the world’s largest investment market, the school system, inexpensive real estate vs. Europe and Asia, a favorable tax system for foreigners, and how to structure around some of the pitfalls.

He ended his chat with a question: If advisors need to police their clients, shouldn’t they have a gun and a badge?

How Families Transfer Both Wealth and Values Through Generations

Justin Miller, National Wealth Strategist at BNY Mellon talked about how successful families (think Rothchilds) vs. unsuccessful (think Vanderbilts) transfer not only wealth but values to next generations.

Most families are adept at transferring financial capital but struggle with non-financial capital (think family values) which leads to significant loss of financial capital by the third generation.

Strategies such as having a team of advisors that work together, good investment advice, smart tax planning, and most importantly a focus on family governance and giving, lead to family harmony and success for future generations.

Selecting the Best Jurisdiction for Domestic Asset Protection Trusts

Steven J. Oshins, a partner at Oshins & Associates, discussed selecting the best jurisdiction for Domestic Asset Protection Trusts, and how they work for the 17 states that have enacted DAPT statutes, but not for the other 33 states.

A hybrid structure with third-party beneficiaries is superior in many cases and Oshins discussed how they can be structured to still provide flexibility for grantors and their families.

Oshins also talked about how after 20+ years of DAPTs, there still isn’t a case that has pierced the trust in a non-fraudulent situation, and how DAPTs are leading to quick settlements, which is preferable to long litigation for most clients.

Wrapping Up STEP OC 2019

The conference wrapped up with Robert Keebler, a partner at Keebler & Associates, discussing the Impact of the IRC Section 199A Deduction on Estate Planning.

Overall, the two-day conference was well-attended, informative, and successful and the content of each presentation was very well received by the attendees.

For additional details from the 2019 STEP OC Conference or to learn more about the benefits of Nevada’s trust structures, contact us today.

Want us to give you a call?

Let our experienced team help you with your trust needs