COVID-19 Creates A Stark Reminder That Even A Basic Estate Plan Is Far Better Than No Plan

COVID-19: An Example of Just How Unpredictable Life Can Be. Why a Revocable Trust May Be A Great Starting Point For You

Introduction

If COVID-19 has made you take a closer look at your financial plans, you’re not alone. You may have only recently started to establish an estate plan, or you may be rethinking the plans you had previously put in place. Now is a great time to review your financial strategies and consider establishing a revocable trust as part of your estate plan.

Chances are, you know the fundamental differences between a will and a trust, but have you considered why a trust might be the better decision for you? We review the differences and benefits of each.

What is a Will?

A last will and testament give instructions to the court of your final wishes, including who is in charge of implementing them, how the property is to be distributed, and who will care for any children under the age of 18.

The Probate Process

In order to establish a will, you will need to work within the probate court system. This requires that you file all documents with the court, and the documents then become a matter of public record. Many people choose to establish a trust to avoid the public record, protecting their family’s privacy.

Establishing a will can also take a great deal of time, particularly in the pandemic’s current environment. The probate court process usually is very time consuming, and with the court closures due to COVID-19, the process has become even slower. Many probate courts are not currently open, and those that are open may be experiencing longer processing times due to backlogs. Additionally, probate can take several months before your loved ones actually gain access to your assets upon your death.

Establishing a will through probate is also a costly process. You will most likely want to hire an attorney, and in many cases, the process will cost more than it would to establish a trust.

What is a Revocable Trust?

A revocable trust is a living trust that can be changed or canceled by the grantor at any time during the grantor’s life. The assets within a revocable trust only transfer to its beneficiaries after the grantor has passed.

As the grantor of a revocable trust, you are still able to:

  • Utilize the assets within the trust
  • Distribute income earned to yourself
  • Adjust the provisions of the trust
  • Close or modify the trust at any time

 

When you establish a revocable trust, you will need to name a trustee who is responsible for managing the assets in the trust. In most cases, the grantor names themselves as the trustee and also names a successor trustee. A successor trustee manages the distribution of the trust’s assets after the grantor’s death.

Avoiding probate is a primary objective for many who establish a revocable trust v. a will. Additionally, trusts can maximize the efficiency of asset transfer to future generations.

What are the Benefits of a Revocable Trust, Especially During COVID-19?

As you consider whether a will or a trust might be right for your financial plans, you will want to factor in how COVID-19 has affected each.

Avoid Probate

Opting to establish a will during the pandemic means that you might be subject to further delays in addition to the already lengthy probate process. However, establishing a revocable trust allows you to avoid the time and cost associated with the probate system.

Avoid Complications and Stress

If you decide to use a will instead of a trust as part of your estate plans and your family has property in multiple states, know that your loved ones must go through the necessary probate proceedings in each separate state. This creates tedious work and additional stress for your family at an already difficult time.

Gain Financial and Legal Expertise

If you decide to establish a trust instead of a will, you also have the option to utilize a third-party, corporate trustee. Using a corporate trustee means that you will have the financial and legal expertise of a neutral party acting on behalf of the interests of the beneficiaries. It also relieves the trustee responsibilities of any children or family members in a way that a will does not.

Adding a Pour-Over Will to Your Revocable Trust

If you do decide to establish a revocable trust as part of your estate planning, you will want to consider adding a pour-over will to your trust.

A pour-over will automatically add any assets that were not included in your revocable trust to the trust upon your death. This avoids the possibility that remaining assets would instead be subject to the laws set by the jurisdiction in which a grantor passes away.

Conclusion

While avoiding probate is generally the primary reason people choose to establish a trust v. a will, there are many other benefits to including a revocable trust in your estate planning, especially during the current health pandemic.

Including a corporate trustee as part of your estate planning can further ease confusion and stress. Alliance Trust has helped many people just like you establish a revocable trust. Reach out to speak to an expert and find out if you might benefit from the many Nevada trust strategies such as Asset Protection.

COVID-19: Why Estate Planning is More Important Than Ever

A brief overview of the two most common estate planning strategies

The current global health crisis has left many people uncertain about the future. Now more than ever, having a financial plan in place is crucial. Not only should you consider your immediate and short-term financial goals, but you should also look at long-term planning. Specifically, what plans do you have in place to make sure your wishes are carried out and your family is taken care of after you are gone?

We review the basics of Estate Planning and what to consider in light of COVID-19.

What is Estate Planning?

Uncertain times can undoubtedly make you think, or even worry, about the future. Making sure you have a plan for your financial investments and assets can help ease your concerns.

Estate planning is the process of planning and arranging for the distribution of an estate that you accrue during your life. Although many people don’t consider themselves to own an ‘estate,’ the reality is that nearly everyone does. Therefore, it is essential to understand what estate planning does to protect your family and how to establish one properly.

Estate planning ensures that your wishes are fulfilled, your family is protected, and your estate value is maximized during transfer to your beneficiaries. In addition to providing clear instructions of your wishes, estate planning can help you reduce estate taxes and other expenses by streamlining the distribution of your assets.

An effective estate plan will benefit and protect the next generation (multiple generations in Nevada) of your family and other beneficiaries. In addition to financial arrangements, an estate plan also covers your medical wishes, which can offer further peace of mind during a pandemic.

What are the benefits of Estate planning?

In the face of a global pandemic, having your affairs in order will provide peace of mind for you and your family. While peace of mind during a health crisis is one clear benefit, there are other tangible benefits as well.

  • Privacy for you and your loved ones
  • Clear directive on the division of assets
  • Direct charitable donations
  • Reduce or eliminate estate, transfer, and gift taxes
  • Protect your estate from mismanagement, creditor claims, and divorcing spouses

What to Include In an Estate Plan

An estate includes personal residences, insurance, retirement accounts, personal possessions, household goods, vehicles, intangible assets, and more. And while nearly everyone has an estate, there are different ways to approach estate planning.

Estate planning encompasses several different components, and you may have some of these documents and plans already in place. However, during the pandemic, it is crucial to confirm that you have a comprehensive and current plan in place and to review and update any outdated documents.

Basic Estate Planning Strategies

While wills and revocable trusts are the two most common estate planning solutions, Alliance Trust administers complex, modern, and personalized estate planning solutions as well.

Last Will and Testament

A last will and testament give instructions to the court of your final wishes, including who is in charge of implementing them, how the property is to be distributed, and who will care for any children under the age of 18. However, you may consider using a revocable trust instead of a will for several reasons. When you create a will, any documents filed with the probate court become a matter of public record, and you may want to avoid this for privacy reasons. The probate court process is also very time consuming and expensive, and the current health pandemic has slowed down probate courts even further.

Revocable Trust

A revocable trust means that all of the assets within it remain in your possession while you are alive. You may amend or revoke your revocable trust at any time.

Many people prefer to use a revocable trust instead of a will. A revocable trust will accomplish everything that a will accomplishes, but avoids the expense and time associated with the probate court process. During the pandemic, many courts are not accepting probate petitions. This may further delay setting up your will, and you will want to keep this in mind as you decide which is better for you.

Pour-Over Will

If you decide to go with a revocable trust, you may want to add a pour-over will to your estate planning. The pour-over will is a type of safety net to ensure that any assets not included in your revocable trust will “pour-over” into the trust upon your death.

Essential Estate Planning Roles

Grantor

The grantor is the person who creates or establishes a trust. The grantor will decide what property and assets to include in the trust, as well as who the beneficiaries will be. As the grantor of a revocable trust, you may change or terminate the trust at any point until you die.

Beneficiary

The person or persons who receive the benefit (often asset distribution) from a trust are the beneficiaries. The grantor decides who these individuals are, and the trustee works to make sure the interests of the beneficiaries are being protected throughout the maintenance and distribution of the trust.

Trustee

If you establish a trust as part of your estate planning, you may want to assign a corporate or third- party trustee to manage the execution and distribution of your trust.

A corporate or third-party trustee can offer many valuable benefits such as legal and financial expertise, but can also provide a consistent and unbiased perspective to uphold the trust’s integrity throughout all transactions and for multiple generations.

Click here to learn more about selecting a corporate trustee v. a family member trustee.

Conclusion

Having an estate plan in place can provide you and your family peace of mind during this time of uncertainty. Now is a great time to review your plans and to consider strategies that will further streamline your assets and maximize your wealth.

If you would like to establish a trust to minimize your estate transfer costs and potentially trim taxes, Alliance Trust Company of Nevada’s trust officers are here to help guide you through the process.

Summarizing the 54th Annual Heckerling Institute on Estate Planning

Popular Estate Planning Topics and Innovations Presented By Industry Leaders

13-17 January 2020 @ The Marriot World Center, Orlando, FL

The weeklong 54th Annual Heckerling Institute on Estate Planning included 4,000+ attendees, including Alliance Trust Company of Nevada representatives Lou Robinson (CFO), Jouko Sipila (Managing Director), and Anthony DeMartini (Trust Officer). We have collaborated to compile the below summary covering the highlights from the conference.

Those who are interested in reading the full American Bar Association reports may do so here.

2020, an Election Year With Many Implications

Potential estate planning developments from the upcoming 2020 election was a highly popular topic at Heckerling. The Federal Estate and Gift Tax Exemption that is currently set at $10mm is subject to inflationary adjustments (the 2020 exemption is $11.6mm). However, the exemption raised significantly in 2017 and is set to sunset back to $5mm after December 31, 2025, barring any changes from Congress.

Many speakers, including Managing Director and Senior Fiduciary Counsel at Bessemer Trust, Steve Akers, presented this window of opportunity and encouraged estate planners to take advantage of it sooner rather than later.

Attorney Martin Shenkman (Marty) went even further, stating that it is critical to do the planning now as there may be potentially adverse consequences if estate planners do not take action. Depending on the 2020 election results, it is plausible that changes to the federal exemptions could become effective as early as January 1, 2021 (laws may be signed in 2021, and then retroactively applied to the beginning of 2021). Democratic proposals could reduce the gift tax exemption to a mere $1 million emasculate many estate planning techniques. A key to planning is to assure clients access to funds transferred.

Most practitioners believed that planning done in 2020 would be grandfathered in, which we historically have seen. Otherwise, a constitutional challenge may occur. But it is not worth the risk to many clients.

I reached out to Marty for a brief comment:

“While no one can predict the results of the 2020 or 2024 election, it certainly seems safer for clients of wealth to plan before options may be legislated away.”

Many commentators also encouraged planners to build flexibility into their current estate plans. The framework for selecting the appropriate estate plan is often complicated and is even more challenging, given the uncertainty in the political landscape.

Grantor or Non-Grantor Trusts?

Grantor v. non-grantor trusts was discussed extensively, and the choice for the clients would depend on a variety of factors, including, but not limited to:

  • Client net worth
    • Now v. future
  • Grantor tax bracket
    • Now v. future
  • Beneficiary tax brackets
    • Now v. future
  • Basis of client assets and potential gains
  • State income tax implications
  • The need to swap assets for basis step-up
  • Ability and need to borrow from and installment sales to a trust

The SECURE Act of 2019

While the Alliance Trust team did not consider the SECURE Act to be Heckerling’s primary theme, the Act was discussed extensively at Heckerling 2020. As background, the Act makes considerable changes to retirement planning. Under the old law, a designated beneficiary could “stretch” distributions from a plan over the beneficiary’s remaining life expectancy.

Stretching distributions were particularly beneficial when the designated beneficiary is much younger than the IRA owner. The motivation to stretch distributions was driven by the lower marginal tax rate of smaller distributions, and the delay of the taxes due on those distributions while the funds grow tax-deferred.

The SECURE Act places 10-year caps (for designated beneficiaries) and 5-year caps (for non-designated beneficiaries) on the permitted time to exhaust the plan or IRA assets. There doesn’t seem to be a “quick fix” way to obtain the stretch. Presenters said to take the wait-and-see approach as there might be more guidance from the IRS, and structures could develop over time.

Other presenters mentioned that the Act killed the “stretch IRA.” Clients may spend their IRA funds during retirement due to their lower marginal tax rates, implement life insurance strategies, and leave other assets for their heirs.

Using a The Beneficiary Deemed Owned Trust (BDOT) provision may help in certain circumstances. Although to make sense, it would depend on the marginal tax rate bracket of the beneficiary v. the grantor. Also, leaving an IRA to a Charitable Remainder Trust (CRT) is a possibility.

Kaestner and Fielding Understated?

Speakers also touched on the Kaestner and Fielding trust taxation cases. However, Kaestner and Fielding were not discussed to the extent we expected, as Kaestner was the most significant trust case heard by SCOTUS in nearly a century. Click here to read our analysis on Kaestner and Fielding.

The conference seemed to focus more on federal tax issues rather than state taxes. Or perhaps, since neither Minnesota (Fielding) nor North Carolina (Kaestner) legislatures have acted to update their laws, which were found unconstitutional, some commentators are waiting to find out what the new laws, in fact, even are before focusing on state taxation. (North Carolina Dept of Revenue website still has the pre SCOTUS rules on its website https://www.ncdor.gov/taxes/estate-trusts/general-information)

Around the Globe

International topics were also discussed with many global families looking to migrate assets to the U.S. for a variety of reasons, including political, social, safety, privacy, fear of litigation, and family reasons, to name only a few.

And, how the 2008 Financial Crisis opened eyes across the globe to the need to geographically diversify their wealth. The U.S., with its strict privacy laws, rule of law, and strong democracy, has become an attractive jurisdiction for global wealth.

Trusts with S-Corps: A Cautionary Tale

Trusts with S-Corps were a popular topic as well. Presenters gave guidance to practitioners that while the trusts holding S-corps can be drafted, estate planners must be prudent in order not to invalidate their clients’ S-corp status.

There are two general alternatives:

Qualified Subchapter S Trusts (QSSTs)

QSSTs carry many requirements, including that there must be a sole income beneficiary and that the trust distributes all the income. QSSTs are widely treated as a “disregarded entity” for tax purposes.

Electing Small Business Trusts (ESBTs)

ESBTs are more flexible than QSSTs. However, all income is taxed at the highest marginal income tax rate (for 2020: 37%), leading to an ever-higher federal tax penalty than regular trusts.

Misc Heckerling Topics That We Enjoyed

Special Needs Trusts

Special Needs Trusts came up at Heckerling 2020, and the importance of drafting differences between Self-Settled and Third Person Settled trusts, especially when it comes to distribution language.

SALT Deductions

Speakers also gave SALT deduction structures some attention – though some commentators thought the economic benefits might only be marginal. Still, estate planners should evaluate client situations on a case-by-case basis.

Conclusion

In summary, we found the week to be very productive and informative. The Alliance Trust team wants to thank the esteemed speakers, the attendees, and those who stopped by our booth to say hello.

Feel free to reach out to our business development director, Jouko Sipila, with any questions or to further discuss Heckerling 2020. jsipila@alliancetrustcompany.com

Deciding Between a Will and a Trust? The Distinctions You Need to Know

The Basics of Wills and Trusts  and What You Need to Know About Probate

We get a lot of questions about the differences between a will and a trust – but there are a few more distinctions we think you should know. Understanding how to protect your assets and your family requires knowledge of what protections your will, trust, or testamentary trust actually grant you and your beneficiaries.

What is a Will?

A will is a legal document that is used to direct the distribution of assets, and, when applicable, to appoint guardians for children. An attorney drafts your will, and you can work with them to update it as frequently as needed to ensure it’s still applicable to your current situation.

What happens when you don’t have a will?

When a person passes without a will, it’s called dying “intestate.” If this happens, the state distributes the deceased person’s assets according to the laws of the state.

The Basic Components of a Will?

A will is made up of several parts, including the people involved. Every will has a testator, an executor, and a beneficiary, here’s a brief explanation of these roles:

Testator: A testator creates a valid will to be executed upon death.

Executor: The person who carries out the wishes of the testator according to the will.

Beneficiary: A beneficiary is a person (or persons) who inherits the assets and/or estate left by the deceased in the will. A beneficiary can also be an entity (e.g., charity, business, trust) rather than a person.

A will, or testamentary will, is prepared by the testator and signed in the presence of witnesses. To ensure the will is comprehensive and makes legal sense, it’s best to prepare a will with professional assistance from an attorney.

There are other types of wills, but they are less likely to be carried out after the testator’s death. An example of a non-testamentary will is a holographic will. A person writes and signs a holographic will, but not in the presence of a witness. 

While a will covers many assets, there are several exceptions, such as life insurance payouts. Because life insurance policies name beneficiaries, the will cannot override that distribution. For more comprehensive asset protection, you may want to consider establishing a trust.

A will is subject to the probate court, which takes time and costs money, a will also becomes a part of public record, which could be a privacy issue for people.

What is Probate?

Probate is the legal process distributing a deceased person’s estate as designated in their will or by state law or both.

When a person passes without an established trust, the probate process typically proceeds as follows:

  1. The will or the probate court appoints a trust administrator or executor.
  2. The court determines if the will is valid, so it makes sense to draft your will with the help of an attorney. Your will must also have the appropriate witnesses according to your state’s laws.
  3. The court inventories all properties and assets. They cannot be sold nor distributed until the probate process completes.
  4. The court appraises all properties and uses the assets to pay all debts and taxes that may exist.
  5. Assets are distributed according to the will if a valid will exists and according to state law if a valid will does not exist.

 

Why Do You Want to Avoid Probate?

In addition to probate being a public process, it also allows for people to challenge the will, leaving the fate of the will in the hands of the court. Probate is not a quick process. On average, it takes six to nine months to complete. During the probate process, assets become “frozen,” meaning they can’t be sold nor utilized by beneficiaries.

Maintain Family Harmony

Moreover, often, the surprising drawback for families that go through a probate process is that it may disrupt family harmony during an emotional time. Family members may feel entitled to assets or may feel they have a more precise understanding of the intentions of the testator than other family members. Or, as mentioned above, family members may challenge a will forcing avoidable issues with other family members.

A properly established trust ensures that a grantor’s vision and intentions come to fruition.

What is a Trust?

A trust is a legal agreement that takes effect as soon as you create it, unlike a will that only takes effect when the testator passes. The trust distributes wealth at a point specified by the grantor.

Trusts are flexible (but do not have to be flexible) agreements that are easily customized to meet the needs of the grantor and the beneficiaries. Contrary to wills, trusts avoid probate court: they do not become public record, and the family maintains a deeper level of privacy.

The Basic Construction of a Trust

The roles of those involved with a trust are similar to those of a will but with slightly different terminology:

Grantor: The grantor establishes a trust.

Executor: The executor is the person or business entity responsible for the execution of the trust.

Beneficiary: The beneficiary receives distributions from the trust.

There are two basic types of trusts – inter vivos (living) and testamentary. 

Living Trust

A grantor establishes a living trust when they are still alive and is either revocable or irrevocable. Revocable trusts have more flexibility than irrevocable, but both types avoid probate and help retain privacy.

A trust allows the grantor to decide who receives trust distributions and when. The trust gives complete control to the grantor, avoids probate, and, when combined with a will, creates a comprehensive estate plan.

Testamentary Trust

Not all people establish trusts ahead of time, some trusts come into existence when the grantor dies, and their will directs the formation of a trust. This type of trust is called a testamentary trust.

When a person creates a will, they can specify the creation of a trust upon their death; this does not avoid probate. After assets named in the will go through the probate process, the court creates a trust. Because of this, the trust will always be under the control of the court. 

Sometimes people choose to do a testamentary trust over a revocable living trust because it seems “cheaper” upfront. However, the cost of probate court alone could render this untrue.

Conclusion

A properly established trust will maintain a grantor’s legacy while circumventing the time-consuming and often costly probate process. If you’re looking at the big picture, you can often save time, money, and mitigate family tension by establishing a trust.

Nevada carries the most advantageous trust laws in the U.S. when it comes to privacy, asset protection, and flexibility. Alliance Trust has many estate planning attorneys that may assist you in establishing or evaluating an estate plan that meets your needs now and for many generations. 

We are happy to assist you. We Are Nevada.

 

Selecting a Successor Trustee: Is a Family Member Really the Best Option For You?

Should You Choose a Corporate Trustee or Appoint Someone You Know?

When a family establishes a revocable trust, the grantor is, in many cases, the trustee as well. However, a revocable trust requires that the grantor appoint a successor trustee. The successor trustee is on standby until the acting trustee dies or becomes mentally incapacitated and is unable to manage the trust.

You may think you know whom you would choose as a successor trustee, but it’s not as simple as appointing a family member and calling it a day. The successor trustee has many essential functions that take up a lot of time and resources. If your family appoints this person, you must consider how other family members will view it and ensure there are no conflicts of interest.

The other option is to appoint a third-party corporate trustee as the successor trustee. Is one option better than the other? The answer is both yes and no, depending on your situation. Let’s dive into both options.

Appointing a Family Member as Successor Trustee

In many cases, families appoint a surviving spouse, child, trusted advisor, or friend as successor trustee. While this solution seems cost-effective and straightforward, there are considerations to be made and questions to ask:

  • Does the trustee have adequate time to devote to the trust?
  • Will the trustee be able to separate personal feelings and exercise sound judgment toward beneficiaries?
  • Will a surviving spouse be able to take on all trust management duties during the grieving process or while caring for an incapacitated spouse?
  • Can the trustee understand and analyze investments within the trust or possible investment opportunities?
  • Will there be tension or resentment among family members if this trustee is appointed?

Pros of Appointing a Family Member

  • Family members or close friends may not charge an administration fee for their role as successor trustee.
  • A family member understands the unique dynamics of the family, including long-standing feuds, substance abuse, etc.
  • A member of the family may view this duty as less of a burden and therefore put more effort into settling or managing the trust than a family friend.

Cons of Appointing a Family Member

  • It could create tension among siblings or other family members.
  • If a family member has no trust experience, they may accidentally abuse the trust and be liable for damages.
  • A family member may lack the time and knowledge necessary to execute the trust successfully.

Appointing a Corporate Trustee as Successor Trustee

A corporate trustee serving as successor trustee will undoubtedly charge a fee for their services; this alone can cause families to forgo that route. However, there are significant advantages to going the corporate trustee route that must be explored. Here are some questions to ask:

  • How complex is the trust, and how many assets will the successor trustee be responsible for?
  • Are there minor beneficiaries or other considerations that would cause the trust to continue after the death or incapacitation of the grantor?
  • Is there significant family tension that could necessitate a third-party trustee?

Pros of Appointing a Corporate Trustee

  • Avoid family tension that arises from choosing a family member as trustee.
  • A corporate trustee will handle any filings, investments, distributions, tax considerations, and more.
  • The corporate trustee handles all recordkeeping and preserves valuable assets to benefit future generations.

Cons of Appointing a Corporate Trustee

  • The trustee may not understand your individual family dynamics.
  • There are always fees associated with a corporate trustee.
  • A corporate trustee may be stricter in making distribution decisions than you’d like.

Can You Appoint Co-Trustees?

Yes, it is possible to appoint both a family member and a corporate entity as co-trustees. This is not the right option for every family as you will incur both trust administration fees and may need to pay the family member too. The family member will also still have a great deal of responsibility. However, if a family still wants personal involvement, but with the added benefit of an impartial third-party and trust management benefits, this could be a great option.

Putting it All Together

Ultimately, you can structure your trust and trustee selection the way you envision. Your family dynamic and trust assets will have a lot to do with the final choices you make. Whether you choose a family member, a corporate trustee, or take a blended approach, your choice of successor trustee should serve to benefit your family members.

Alliance Trust Company of Nevada has years of experience as a corporate trustee and can answer any questions you have regarding the management of your trust.

Is a Foreign Grantor Trust Right For You?

Considerations Before Establishing an Offshore Trust

Often international families have U.S. family members whom they want to include in their estate planning. A foreign grantor trust allows families to establish a long-term trust in the United States to benefit offshore family members.

In this blog, we’ll talk about the creation of U.S. trusts for U.S. beneficiaries by non-U.S. persons. We’ll provide an overview of revocable foreign grantor trusts and irrevocable U.S. domestic non-grantor trusts.

Keep in mind that while this overview will give you a greater understanding of foreign grantor trusts, you’ll still need to speak with a professional for your individual planning needs.

The Foreign Grantor Trust

When a person establishes a revocable foreign grantor trust in the U.S., the trust remains revocable until the settlor’s death. Upon the settlor’s death, the trust becomes an irrevocable U.S. trust which will still serve to benefit the U.S. beneficiary.

A foreign grantor trust is considered both a foreign trust and a grantor trust. Neither the trust nor the settlor is subject to U.S. income tax on non-U.S. trust income while the settlor is alive unless the trust holds U.S. situs assets at the settlor’s death.

Upon the death of the settlor, if the trust does not contain U.S. situs assets, it will not be eligible for U.S. estate tax, but it is still subject to tax from the trust’s home country.

For a trust to be considered a foreign trust, the settlor must have the power to revoke the trust. When this is the case, the trust is deemed to be foreign for U.S. tax purposes.

The trust also needs to be determined a grantor trust. It is a grantor trust if the grantor is also the settlor and the owner and is not subject to U.S. Federal income tax on non-U.S. sourced income.

Two Tests for U.S. Tax Purposes

U.S. tax implications for non-U.S. residents are far more limited than those for U.S. citizens. Foreign grantors need to be sure that their trusts fail the two tests that determine whether it’s a domestic or foreign trust.

The two tests include the court test and the control test. Passing either test means that the trust is considered domestic and is subject to U.S. Federal income tax standards rather than the more limited foreign tax standards.

The Court Test

A trust passes the court test when it can subject itself to the primary jurisdiction of a U.S. court. Trusts established under U.S. state law with a domestic trustee can usually pass the court test. Passing the court test would denote the trust as a domestic trust.

The Control Test

A trust passes the control test if one or more persons associated with the trust have the authority to exercise any control or have decision-making power over the trust. This could include beneficiaries, settlors, grantors, and more. A trust’s status can change at any point if there are changes to the people who have control over the trust. It’s vital to consult with a professional about the establishment of a foreign grantor trust and any ongoing changes.

What Happens When a Foreign Settlor Dies?

When a foreign settlor dies, the revocable foreign grantor trust they’ve established becomes irrevocable. When this happens, any U.S situs assets within the trust will be subject to U.S. estate tax. If non-U.S. holding entities exist within the trust and hold U.S. investment assets, it’s possible to restructure the trust to benefit U.S. beneficiaries.

After the death of the foreign settlor, the trust becomes a non-grantor trust making it a separate taxpayer. It is essential to ensure the trust now passes the control and the court test, making it a domestic trust.

Any income the trust now receives will be subject to U.S. Federal income tax, but it may not be subject to state income tax depending on the jurisdiction of the trust. Nevada carries no state income tax.

Which U.S. State is Best to Establish Your Trust

When you establish a revocable foreign grantor trust or an irrevocable U.S. domestic non-grantor trust, you must consider the state jurisdiction in which you’ll establish the trust. The trust laws in each state become vitally important as they will determine the taxation and governance of the trust.

Several U.S. states, including Nevada, have no state income tax. Nevada also has expanded flexibility when it comes to the administration of the trust and some of the most secure asset protection laws in the U.S. If you wish to extend the duration of the trust to benefit generations, Nevada also permits dynasty trusts up to 365 years.

Next Steps

There are many options for foreign families who wish to support U.S. beneficiaries. A foreign grantor trust in the U.S. can undoubtedly help families meet their wealth planning goals, but these trusts require much professional navigating. Alliance Trust Company of Nevada is happy to assist international families to navigate the complexities of estate planning in the U.S.

Five Reasons a Special Needs Trust Could Be Right for Your Family

The top five reasons you should consider a Special Needs Trust to protect family members with disabilities

Special Needs Trusts are designed specifically to benefit those with physical or mental disabilities and those without the ability to manage their own finances. Special Needs Trusts serve to protect the beneficiary financially and if structured appropriately, allow the beneficiary to continue to receive essential government assistance.

The trustee appointed to a Special Needs Trust can be a trustworthy family member or a third party trustee. Choosing the right trustee is vital to the success of the trust, especially when establishing a trust for a younger beneficiary.

Many families are unsure of whether or not they would benefit from a Special Needs Trust. It’s important to talk to a reputable trust company or attorney to get a better understanding of your specific situation.

Responsibilities of a Special Needs Trustee

  • Managing the trust in the best interests of the beneficiary
  • Keeping accurate records and preparing the appropriate reports for government programs
  • eFiling necessary federal and state tax returns
  • Meet beneficiaries’ personal needs not covered by government assistance
  • Disperse money when necessary to enhance beneficiaries’ lives while preserving funds for as long as possible
  • Uphold trust in court if necessary, and require government programs to comply with the law
  • After the death of the beneficiary or termination of the trust, the trustee will manage or distribute the trust’s assets

Why Choose a Special Needs Trust

Many families are aware of Special Needs Trusts but are unsure whether it might be right for them. It’s important to talk to a trust company or an attorney to clarify your specific situation. But first, we’ve compiled the most common reasons why families establish Special Needs Trusts.

Five Common Reasons to Establish a Special Needs Trust

Protection of Assets from Creditors

Part of an effective Special Needs Trust is ensuring the protection of the beneficiary. A Special Needs Trust protects assets in the event of a lawsuit or a divorce and can protect child support payments or accumulate assets which can benefit a disabled child in the future.

A Special Needs Trust is also beneficial when a disabled person is listed as the beneficiary on a life insurance policy. Policies are often revisited during a divorce; the Special Needs Trust will protect the rights of a disabled person listed as the beneficiary.

Allow A Beneficiary to Continue to Receive Government Assistance

We’ve seen families make the mistake of listing a disabled family member as the beneficiary of their will. Without a Special Needs Trust in place, a disabled person could lose government support, putting them at a disadvantage. Similarly, leaving assets to a disabled person that exceed $2,000 in value could also cause the loss of government support.

By directing all inheritance and life insurance benefits to a Special Needs Trust you can improve the beneficiary’s quality of life. This allows them to receive government support and services.

Preserve Family Wealth with Proper Structuring

Special Needs Trusts function similarly to other types of trusts in that they provide assets while limiting their use. When structured properly, the grantor may choose final beneficiaries for the trust after the beneficiary dies. This could include children, other relatives, or organizations.

Support Your Child Even After Your Death

A Special Needs Trust can earmark assets to support beneficiaries and provide for a variety of needs. These assets can support the beneficiary while the grantor is still alive or continue the beneficiary’s quality of life after the grantor’s death.

Ensure proper use of assets

Properly structuring a Special Needs Trust and choosing the right trustee ensures that a disabled family member will benefit from trust assets for a long time. A Special Needs Trust ensures that trustees use assets in the best interest of the beneficiary and still allow them to receive essential government services.

When paid directly into a Special Needs Trust, the government excludes assets from aid calculations. This allows beneficiaries to receive government aid even with wealth in the Special Needs Trust.

Get Started With a Special Needs Trust

If you have a family member with special needs, you may be putting them at risk by leaving them a portion of your assets in a will. When you establish a Special Needs Trust, you ensure that your family member is properly taken care of.

The structuring of a Special Needs Trust is fundamental to ensure there is no loss of services and that your family member is protected. Contact Alliance Trust Company of Nevada so we can talk to you about your specific situation and go over all of your options.

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!

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