Part 2: Asset Protection and Nevada Asset Protection Trusts, Frequently Asked Questions

Examining Nevada Asset Protection Trusts: Common Questions Our Trust Officers Receive

In Part 2, we examine typical questions regarding Nevada Asset Protection Trusts. Nevada Asset Protection is sought after globally, and among the primary reasons estate planners look to Nevada as their preferred trust jurisdiction.

In part 1, we answered six general questions we often receive about Asset Protection Trusts in general.

Click here to read Part 1.

Nevada Asset Protection

What is a Nevada Asset Protection Trust?

Also known as a Nevada Self-Settled Spendthrift Trust (SSST) or Domestic Asset Protection Trust (DAPT), a Nevada Asset Protection Trust is an irrevocable trust that protects the beneficiary from lawsuits, divorce settlements, transfer tax, and bankruptcy regulations. A Nevada SSST provides each beneficiary ownership of an equitable interest without legal title to any assets.

A Nevada Asset Protection Trust is secure from creditor claims after it meets its two-year seasoning period (discussed in Part 1), the nation’s shortest seasoning period. The trust must be administered in Nevada and requires at least one trustee to be a Nevada resident. Often, families select a corporate trustee, such as Alliance Trust Company of Nevada.

Click here to learn the pros and cons of choosing between a family member or a corporate trustee.

Many consider Nevada as the leading asset protection trust jurisdiction because Nevada’s statutes carry no exception creditors, including divorcing spouses.

Who is Eligible for Nevada Asset Protection?

Almost anyone with assets is “eligible” for an asset protection trust both in the U.S. and abroad. But, it’s not about eligibility per se. It’s more about safeguarding wealth and legacies for many generations from vulnerabilities like lawsuits and creditor claims. That said, asset protection strategies especially make sense for people vulnerable to creditor claims, such as professional service providers, business owners, and professionals who may be at a higher risk for litigation.

What are the tax benefits of protecting my assets in Nevada?

Nevada is a tax-favored environment and creates significant income tax savings for many families. Nevada has no state or corporate income tax, a benefit that could preserve large portions of wealth and offer it unhindered growth.

With options such as the Nevada Incomplete-gift Non-Grantor trust, or NING trust, those who wish to protect their substantial income from considerable taxation can take advantage of Nevada’s tax-favored environment and generate significant tax savings.

Why is Nevada regarded as a Leading Trust Jurisdiction?

Nevada is considered across the U.S. and internationally as one of the most advantageous locations to establish a trust. Some key reasons for this include:

In the recent Nevada Supreme Court case, Klabacka vs. Nelson, Nevada’s no exception creditor, including divorcing spouses statute, was tested. The assets within the Nevada Asset Protection Trust remained safe.

If you have more questions about Nevada Asset Protection that we didn’t cover here, please contact us. We’re happy to answer your questions and help you take advantage of Nevada’s favorable tax and estate laws.

Part 1: Asset Protection and Nevada Asset Protection Trusts, Frequently Asked Questions

Six Common Questions Regarding Asset Protection Trusts

Part 1 focuses on general Asset Protection Trust questions we often receive from families and advisors. Part 2 focuses on Nevada Asset Protection Trusts.

Click here to read Part 2.

General Asset Protection

Asset protection can seem complicated, but it’s essential to understand how to preserve and protect your estate fully. With multiple protection strategies and your choice of jurisdictions to establish a trust, we’re sure you have questions.

While we won’t answer every question you have here, this FAQ serves to help you understand asset protection basics.

What is an Asset Protection Trust?

An Asset Protection Trust is an irrevocable trust created to protect beneficiaries from the potential negative consequences of transfer tax laws, divorce settlements, and bankruptcy regulations. The assets are legally titled to the trust, while the beneficiaries own an equitable interest in the trust assets.

What states allow for Asset Protection Trusts?

Seventeen states allow for Domestic Asset Protection Trusts: Alaska, Delaware, Hawaii, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

However, states are individual trust jurisdictions, and their asset protection laws vary. See the table below of industry-regarded leading trust jurisdictions.

 

What May I protect with asset protection?

Some of the most common (not an exhaustive list) asset protection applications estate planning professionals utilize are:

  • Irrevocable Trusts
  • LLC’s
  • U.S. Trusts
  • International Trusts
  • Gifts
  • Family Limited Partnerships

To understand which form of asset protection is best for you and your family, contact Alliance Trust Company of Nevada.

What is a seasoning period?

A seasoning period, also known as a statute of limitations, is the period from which wealth is transferred into a trust to when the trust legally protects the assets in the trust.

As you can see in the table above, Nevada and South Dakota carry a two-year seasoning period, and Delaware and Wyoming four-years. Depending on a family’s situation, it may be crucial to protect assets as soon as possible.

What does it mean when a trust is irrevocable?

An irrevocable trust is one that cannot be modified or terminated without the permission of all beneficiaries. When assets transfer into the trust, the grantor no longer has rights of ownership to the assets.

Are there any circumstances in which one can modify an irrevocable trust?

In general, an irrevocable trust is one that cannot be modified. However, Nevada is one of only a few states that allow modifications on an irrevocable trust. The process of decanting is one way to modify an irrevocable trust in the state of Nevada. With proper legal guidance, an effective modification for many reasons is possible.

Above are the basics of an Asset Protection Trust. In Part 2, we take a closer look at Nevada Asset Protection Trusts, arguably the number one trust jurisdiction for asset protection.

Feel free to contact us if we may answer more questions.

Foreign Grantor Trust: The Basics

Care for Your Off-Shore Beneficiaries

Foreign families with loved ones in the U.S. may wish to set up a foreign grantor trust. The foreign grantor trust allows international families to take advantage of tax benefits, increased flexibility, political stability, and secure asset protection laws.

What is a Foreign Grantor Trust?

A foreign grantor trust is both a foreign trust and a grantor trust. The trust is not subject to U.S. income tax on income produced by non-U.S. situs assets. 

A revocable foreign grantor trust established in the U.S. remains revocable until the death of the grantor at which time it becomes irrevocable. The irrevocable trust benefits the U.S. beneficiary, but any U.S. situs assets are then subject to U.S. tax. 

If the settlor has the power to revoke the trust, it is considered a revocable trust for U.S. tax purposes. If the grantor is both the settlor and owns the assets in trust, it is also considered a grantor trust and is not subject to U.S. tax on non-U.S. sourced income.

Two Important U.S. Tax Tests: Court and Control

A revocable trust must fail two tests before becoming a foreign grantor trust. Otherwise, it is considered a domestic trust.

  • The trust fails the court test if it is not subject to the primary jurisdiction of a U.S. court.
  • The trust fails the control test if no one associated with the trust has any decision-making power over the trust.

 

What Happens to the Trust After the Grantor Dies?

Upon the death of the grantor, the revocable trust becomes irrevocable. The U.S. situs assets within the trust are now subject to U.S. estate tax. It is possible to restructure the trust to benefit the beneficiary further.

The foreign grantor trust will now need to pass both the control and court test to become a domestic trust. At this point, trust jurisdiction becomes essential. A jurisdiction with no state income tax is beneficial and Nevada does not carry state income tax.

Benefits of Nevada Situs

The state of Nevada offers beneficial tax laws, powerful and secure trust laws, and flexible trust administration. Nevada has no state income tax and allows dynasty trusts up to 365 years.

Foreign grantor trusts are complicated, this means you must tailor them to your situation. It’s imperative to speak to a professional to ensure your family attains its off-shore wealth planning goals.

THREE SIGNIFICANT U.S. TRUST TAX CASES, ONE ISSUE: NEXUS BETWEEN A STATE AND A TRUST

When are states permitted to tax undistributed trust income?

As I am researching another precedent-setting trust case for an upcoming virtual continuing education panelist discussion for IICLE (Illinois Institute for Continuing Education), it’s hard to ignore the trend we see regarding trust taxation.

In 2018, we closely followed the Fielding case’s trajectory with our business development director, Jouko Sipila, living in Minnesota and company president, Greg Crawford, gaining his graduate degree at the University of Minnesota. We watched as Fielding won in Minnesota’s Supreme Court and as the case landed on the steps of the Supreme Court of the United States.

Also, on the SCOTUS steps at the time was the Kaestner case out of North Carolina. As many of us are very aware, SCOTUS denied hearing Fielding but argued Kaestner, and the rest is history.

We discussed the Kaestner and Fielding cases in detail last year.

Linn v. Illinois Department of Revenue

Linn, Kaestner, and Fielding all have nuanced differences, but they share the same issue: When is a state allowed to tax a trust’s undistributed income? The three cases argued over their states’ nexus with the trusts and turned to the U.S. Constitution’s Due Process Clause in courts.

The Illinois Department of Revenue founded their argument on an Illinois statute stating that a “‘resident” means: An irrevocable trust, the grantor of which was domiciled in this State at the time such trust became irrevocable.” But, as stated above, there must be nexus between a state and the taxable entity. Otherwise, it is unconstitutional for a state to tax the entity even if a state’s statute looks to support such taxation.

Like Minnesota, Illinois taxed the undistributed income of an irrevocable trust based solely on a grantor’s residence when the grantor established the trust. As Illinois argued the case, there were no IL precedents, and the courts sourced out-of-state trust case precedents to find direction.

Before the Illinois Fourth District Appellate Court decided on the Linn case, Illinois partly relied on establishing nexus, particularly with irrevocable trusts, if the grantor’s residence was Illinois when the trust was established.

Essentially, before the Linn case, Illinois believed that once an irrevocable trust was established in Illinois, that trust would always be an Illinois trust.

Linn Facts

A.N. Pritzker established an inter vivos trust–not a will, nor testamentary trust– in Illinois in 1961 with Illinois trustees named. 40+ years later, in 2002, the trustee distributed property from the IL trust to a new trust in Texas. At this time, the trust was primarily administered in TX, with some of the trust provisions remaining under IL law. In 2005, a TX court modified the TX trust removing all references to IL law.

As of 2006, after the Texas court modification to the trust instrument:

  • No beneficiaries lived in IL;
  • No trustees lived in IL;
  • IL had no custody of assets in the TX trust;
  • No mention of Illinois in the trust document.

However, the Illinois Department of Revenue (IDR) argued that in 2006, the trust was, in fact, a resident of IL because the TX trust came from the IL trust. Without the IL trust, there is no TX trust.

The Texas trustee argued that the IDR violated the due process and commerce clauses.

I reached out to an Illinois private wealth attorney for comment.

Jeffrey Glickman of Katten Muchin Rosenman commented:

“The facts in Linn were overwhelmingly in the taxpayer’s favor – there was no fiduciary in Illinois, there was no beneficiary in Illinois, there were no assets in Illinois, and now there was no mention of Illinois in the trust instrument – and so not only was this short of a minimum connection with Illinois, it was arguably no connection at all. 

The Department of Revenue was trying to essentially argue that ‘if it doesn’t look like a duck, and if it doesn’t quack like a duck, it’s still a duck if it was born here.’ 

The strong facts are likely what led the trustee and beneficiaries to push back on the Department of Revenue – doubtfully, were they motivated to act to recover the $2,729 tax deficiency – but instead, here was a clear case to show that the arcane Illinois statute was no longer workable in a more modern trust administration landscape.”

Once again, we see the issue of nexus with a trust established initially in one state where circumstances of residencies involved within the trust changed drastically.

Like Kaestner and Fielding, the Illinois Fourth District Appellate Court concluded that for the tax year of 2006, “what happened historically with the trust in Illinois courts and under Illinois law has no bearing” and that the trust is receiving benefits from Texas, not Illinois.

Linn wins.

Take-Aways

We continue to see a trend towards the “high courts,” deciding that a significant and existing nexus between a state and an entity must exist for the state to tax the entity constitutionally. Historical facts that have since changed may not stand up in court. But, historical facts continue to give states a leg to stand on when deciding to tax entities.

Thus, when migrating a trust or assets to a state with trust laws suited for your needs, it seems prudent to explore strategies that support such moves in states’ eyes too. For example, decanting a trust and moving only the high-value assets to a state with better tax advantages removes the taxable assets from the original state, placing the assets in a new trust domiciled out-of-state.

Also, the residences of those you or your client appoint with trust roles can significantly impact the taxability of a trust. Furthermore, understanding the governing laws in all states involved with a trust is imperative when migrating a trust and assets.

Again and again, we see the value of utilizing experienced and knowledgeable estate planning professionals (e.g., attorneys, trustees, advisors, CPAs) when hoping to make a clean transition from one state to another. We can only imagine how many tax bills are paid without question.

While seeing precedents being made across the country supporting trust jurisdictions like Nevada does not hurt our feelings, please contact us for more information on trustee services or with any other estate planning questions you may have.

Nevada Dynasty Trusts: Asset Protection For Generations

4 Reasons to Consider Establishing Your

Dynasty Trust in Nevada

Choosing the right trust strategy to protect your assets is an important and often complex decision. Dynasty trusts are a great option when you need to secure assets for generations, and they minimize or even eliminate many taxes associated with trusts including distribution, estate, inheritance, transfer taxes, and more.

Once you’ve decided that a dynasty trust is right for you, the next most important decision is where you should establish your trust. Both Nevada and Delaware are considered some of the best places to establish a trust to take full advantage of friendly trust laws, because of precedents set in both Nevada and Delaware, Nevada is often considered the better choice.

If you’re feeling unsure about establishing a Nevada Dynasty Trust, here are five reasons why it’s the best choice to pass your legacy to your family for several generations.

Nevada Dynasty Trusts: 4 Things that Set Them Apart

1. Unique Precedents Set in Nevada

Nevada has long paved the way when it comes to friendly trust laws. Moreover, several recent cases proved the state’s protection laws are second to none.

In the case of Klaback v Nelson, 133 Nev. Adv. Op. (May25, 2017): Nevada DAPT Protects Against Spousal/Child Support Claims, the Nevada courts moved to protect Eric L. Nelson’s trust from the mandated $800,000 his estranged wife was seeking in child support and alimony, choosing to allow Nelson to fulfill these obligations out of his liquid assets.

In the Matter of Daniel Kloiber Dynasty Trust u/a/d December 20, 2002 (Court of chancery of Delaware), an ex-spouse was granted access to a Delaware Dynasty trust, effectively weakening the state of Delaware’s trust laws and further establishing Nevada as the superior choice.

Currently, Nevada has the most current and robust precedents set to protect assets while still protecting those affected by life events such as divorce, especially in the case of a Nevada Dynasty Trust with the potential to last up to 365 years.

2. Minimize Taxes

With a Nevada Dynasty Trust, your assets will only be taxed at the estate level once with the federal gift/estate tax or lifetime exemption upon transfer into the trust. The Nevada Dynasty Trust allows you to allocate a generation-skipping-transfer tax exemption which is a powerful way to limit estate tax liabilities, sometimes even eliminating them altogether.

Due to the nature of the Nevada Dynasty Trust, these tax benefits are provided for an extended period of time.

3. Short “Seasoning Period”

Nevada’s seasoning period is one of the shortest in the United States. The statute of limitations during this vesting period is just two years on asset transfers to self-settled spendthrift trusts (domestic asset protection trusts).

During the seasoning period, your assets are not under the full protection of the dynasty trust. For this reason, a short seasoning period is essential to ensure the security of your assets as quickly as possible.

However, the burden of proof that creditors would have to provide to gain access to your trust during the seasoning period is quite challenging in the state of Nevada – another benefit to those looking to establish a trust in the state.

4. Flexible Decanting Statute

Trust decanting is a term taken from wine decanting in which wine is transferred from one container to another, leaving the undesirable sediment behind. With trust decanting, the terms of the trust are changeable after it has been established.

Trust decanting allows trustees to keep aspects of the trust that are still beneficial while leaving old trust provisions that are no longer wanted, needed, nor relevant behind.

Nevada allows for trust decanting without the need for court approval, which can be expensive, or notice to the beneficiaries.

Advantageous Trust Laws at Your Fingertips

An important consideration as you prepare to set up your Nevada Dynasty Trust is the use of an independent corporate trustee. Because Dynasty trusts can last hundreds of years, it’s advisable to put an independent corporate trustee in place to avoid needing to transfer trustees due to death or unforeseen circumstances.

Alliance Trust Company of Nevada is a trusted and qualified institution and is available to serve as trustee, directed trustee, or many other capacities if you choose to establish your trust in the state of Nevada.

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.

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