Supreme Court to Address State Taxation of Trusts

Why Two State Trust Cases Have Escalated to the SCOTUS and What That Could Mean for Estate Planning

BREAKING NEWS from the Supreme Court in Washington D.C. While much of the estate planning community is at the Heckerling conference in Orlando, the U.S. Supreme Court of the United States (SCOTUS) decided on Friday to grant a writ of certiorari in The Kimberley Rice Kaestner 1992 Family Trust v. North Carolina Department of Revenue case.

The Cases Broken Down

The crux of the Kaestner case is whether the state of North Carolina should be able to constitutionally tax trusts where the only connection to the state is that the beneficiary is a resident. In the state of North Carolina, the taxpayer won throughout the entire court system, but the state appealed successfully to the US Supreme Court.

Another similar case, Fielding v. Commissioner of Revenue, is being appealed to the SCOTUS with taxpayer response due on January 21st. The facts of the Fielding case are broader than the Kaestner case, so the outcome is of interest to the greater estate planning community. The Fielding case addresses whether the state can tax a trust where the grantor was a resident of a ate during the creation of the trust, and one beneficiary was a Minnesota resident, but there are no other ties to the state of Minnesota within the trust itself.

Like Kaestner, Fielding won in the Minnesota state courts, and the state appealed to the SCOTUS.

It has been decades since the SCOTUS has addressed the state taxation of trusts. However, there are quite a few cases beyond the Kaestner case with address state trust taxation, including:

  • McCulloch v. Franchise Tax board (Calif, 1964)
  • Taylor v. State Tax Commissioner (N.Y. 1981)
  • Pennoyer v. Taxation Div. Dir. (N.J. 1983)
  • Potter v. Taxation Div. Dir. (N.J. 1983)
  • In re Swift (Mo. 1987)
  • Blue v. Department of Treasury (Mich. 1990)
  • Westfall v. Director of Revenue (Mo. 1991)
  • 1992, Quill Corporation v. North Dakota. (1992)
  • District of Columbia v. Chase Manhattan Bank (1997)
  • Chase Manhattan Bank v. Gavin 1999
  • South Dakota v. Wayfair 2018

Constitutional Issues

Three older U.S. Supreme Court cases all dating before 1947 addressed the constitutional issues with state taxation. Safe Deposit and Trust Company v. Virginia held that the Due Process Clause prohibits a state from taxing a trust based on the residence of beneficiaries.

In Guaranty Trust Co. v. Virginia the court held that Virginia could tax residence beneficiaries on distributions they received from a non-resident trust.

Greenough v. Tax Assessors of Newport held that the Due Process Clause did not prevent the city of Newport from imposing a personal property tax on a resident trustee of an otherwise non-resident trust.

It is probably unconstitutional for a state to tax an otherwise non-resident trust solely because the guarantor was a resident. However, if that state’s court system is utilized, for example, because of a probate proceeding in that state, chances are better than the state does have authority to tax the trust.

The trust industry is keenly following the Kaestner and Fielding cases, and it will be interesting to see whether they are heard together or separately in the SCOTUS, presuming the court will also hear the Fielding case.

Alliance Trust Company is following both cases closely and will provide updates as new developments arise.

Using NING Trusts to Significantly Reduce State Income Tax Liabilities

Why Wealthy Families are Choosing to Shift Their Wealth to the Tax Favored State of Nevada

The state of Nevada is considered a tax-favored environment, allowing maximum tax protection over trusts and estates. That’s just one of the reasons why more and more people are choosing Nevada as to establish their trusts.

The “NING” trust or Nevada Incomplete-gift Non-Grantor trust reduces state income tax liabilities and simultaneously provides asset protection benefits.

For people with substantial income, assets or large capital gains who could generate significant Federal and state income tax shifting a trust from its current state to a state with more favorable tax laws, such as Nevada, could create significant income tax savings.

While moving to Nevada would allow someone to take advantage of these benefits, relocating family is often not an option. However, by establishing a NING and transferring assets from the existing trust into the NING, the trust will only face Federal capital gains taxes.

Non-Grantor vs. Grantor Trusts

Trusts are set up as either grantor or non-grantor, and it’s important to understand the difference.

Grantor trusts expose the creator of the trust to the taxes incurred by the trust. Non-grantor trusts are set up as their own entities incurring all taxes at the trust level instead of passing them on to the owner of the trust.

Things get murky because every state has its own taxation rules and definitions about which trusts should be considered a resident.

For example, to take advantage of a NING or Nevada’s favorable tax laws in general, a non-grantor trust with a Nevada trustee should be established. By establishing a non-grantor trust in Nevada and appointing a Nevada trustee you can be sure that you’ll minimize or completely eliminate taxes from your state of residence.

A New Aggressive Strategy for Substantial Gains

If a substantial gain is on the horizon, wealthy families can take advantage of ING trusts to adopt a more aggressive tax strategy. ING’s help reduce state income tax at the trust level by establishing it one or more years before a large gain becomes available.

One word of caution, there are specific steps you should follow to ensure that your strategy is not viewed as tax evasion, it’s always best to employ professional guidance to understand how to establish your ING ethically.

Structuring a NING for Maximum Benefit

Since the purpose of establishing a NING trust is to avoid additional taxing, it’s important to properly structure the trust to avoid gift tax. Proper structuring also ensures that the trust really is taxed in Nevada instead of the settlor’s home state.

Remember that NING stands for Nevada Incomplete-Gift Non-Grantor Trust, so when assets are transferred to the trust, it must be in the form of an “incomplete gift.”

Transferring assets as an “incomplete gift” allows the owner of the trust to include your investments in your estate without needing to file a Form 709 gift tax return.

NING Trusts vs. DING Trusts

The DING Trust did come before the NING trust, so one may wonder which is the better situs for a trust, Nevada or Delaware?

While both states allow settlors to appoint a grantor for their trust and take advantage of favorable tax laws, several Delaware rulings have allowed divorcing spouses and creditors to gain access to an asset protection trust. Nevada has never allowed such access in rulings and therefore has more iron clad protection than any other state.

How the Other States Feel About ING Trusts

It’s no surprise that other states aren’t happy about non-grantor trusts and their tax-avoidance benefits, some have even gone as far as banning such trusts.

While both Delaware and Nevada have successfully deflected attempts by other states to tax grantors, that likely won’t stop states from attempting to gain access whenever they can.

However, several statutes in the state of Nevada prove that the state values and protects trusts and estates which are established there and is the safest bet when choosing where to create an ING trust.

To learn more about establishing a NING, please contact Alliance Trust Company.

2017 Tax Reform Act Creates Estate Planning Opportunities

The window for historical estate planning exclusions is open. For now…

On December 22nd, President Donald Trump signed the 2017 Tax Reform Act into law doubling the estate and gift exclusion, and generation-skipping transfer (GST) exemption amounts. This is the most significant tax reform since 1986.

How the 2017 Tax Reform Act Affects Your Estate Planning Strategies

The 2017 Tax Reform Act doubles the lifetime gift and estate exclusion (The 2018 Unified Exemption) and GST tax exemption from $5 million to $10 million with the intention of adjusting for inflation. However, in 2026, the lifetime gift and estate exclusion and GST tax exemption drop back to their base amount of $5 million.

If you accept the fact that taxes are political, and that politics are cyclical, then it follows that the estate tax is indeed likely to be reduced at some point in the future. Indeed, as recently as 1997 under the Clinton Administration the estate tax was level was just $600,000. For those who follow football more than politics, that was when Tom Brady was a QB at Michigan.

While the 2018 Unified Exemption is slated to sunset in 2026, the exemption is vulnerable to change.

The time to take advantage of the new 2017 Tax Reform Act exemptions is now.

Lifetime Gift and Estate Exclusion and GST Tax Exemption Amounts: Then and Now

Before the 2017 Tax Reform Act

The inflationary adjustments in the new tax law increase the base $5 million to $5.49 million for the tax year 2017. Before the Act, the 2018 exclusion amount was set at $5.6 million for inflationary adjustments. The estate, gift, and GST tax rates are 40%.

After the 2017 Tax Reform Act

Doubling the base exclusion amount to $10 million while adding the adjustment for inflation increases the lifetime gift and estate exclusion and GST exemption to a staggering $11.2 million for the tax year 2018. The amount doubles for married couples to $22.4 million. The estate, gift, and GST tax rates remain at 40%.

So What

With a historical combination of events, the 2017 Tax Reform Act creates a window of opportunity  in the estate planning arena:

  • Tax exemptions double the $5.6 million in 2017 to $10.98 million in 2018 per person (not per household)
  • New exemptions are scheduled to sunset back to $5 million in 2026
  • Ability to combine the new exemption increases with existing discounting methods available under IRS 2704

To put into perspective how historically advantageous the new estate tax laws are, in 2001 (less than 20 years ago) the estate tax exclusion amount was $675,000 with a maximum tax rate of 55%. Bumping the estate tax exclusion amount to over $11 million holding a maximum federal estate tax rate of 40% makes reviewing your existing estate planning strategies to leverage the new laws prudent and necessary.

Especially Advantageous In Nevada

The 2018 Tax Reform Act carries massive impacts on estate planning and highlights the advantages of Nevada as a situs for your trust. With a substantial demographic wave now heading into retirement, estate planning is on the minds of many Americans. And, they have just been presented with a unique, temporary opportunity to leverage Nevada Trust Laws for even more significant family benefits.

Gifts into a Nevada Dynasty Trust for your family can grow outside of your estate now and for generations to come. An added advantage is Nevada’s ironclad asset protection laws. Nevada Asset Protection protects your assets from your beneficiaries’ creditors when properly structured.

Learn more about applying the 2017 Tax Reform Act to your estate planning strategies.

Heckerling Estate Planning Conference 2018

3 Anticipated Topics at Heckerling – the Premier Conference for Estate Planning

The Heckerling Institute on Estate Planning is holding its 52nd Annual estate planning conference in Miami this coming January. The Heckerling wealth symposium is the nation’s premier conference for trust officers, wealth management professionals, attorneys, and other professionals in the trust and wealth management space.

As trust professionals ourselves, we keep our finger on the pulse of these crucial events and want to help you navigate which sessions will help you understand the trust landscape further. While there are dozens of valuable sessions, we’ve focused on three topics that are of interest to our audience.

Alliance Trust Company of Nevada will be an exhibitor at the Heckerling estate planning symposium, so if you have any questions about these or other topics, please stop by and introduce yourself.

Topic 1: Dynasty Trusts

As a trust company based in Nevada, we’re experts on the Dynasty Trust. This generation-skipping trust holds assets for multiple generations and is hugely beneficial in taking advantage of advantageous tax maneuvers. Additionally, in the state of Nevada, assets of both U.S. and non-U.S. citizens can remain in a dynasty trust for up to 365 years without being subject to distribution.

Several cases, such as Klabacka v. Nelson, 133 Nev. Adv. Op. 24 (May 25, 2017): Nevada DAPT Protects Against Spousal/Child Support Claims and the Matter of Daniel Kloiber Dynasty Trust u/a/d December 20, 2002 (Court of Chancery of Delaware) contribute to Nevada’s robust trust laws and make Nevada the ideal situs to establish your trust. It’s important to learn how to properly structure your dynasty trust to achieve maximum tax benefit, beneficiary involvement, the proper appointment of trustees, including the option for a corporate trustee, and to learn about the flexibility and control that’s available to you when establishing a dynasty trust.

In the session at the Heckerling symposium titled “Care and Feeding of a Dynasty Trust: High Protein or Low Fat,” Diana S.C. Zeydel will talk you through some best practices for maintaining your trust. We can answer any additional questions you may have in the expo hall.

Topic 2: U.S. Tax Law and Non-U.S. Trust Law

Establishing a trust within the U.S. allows foreign families to take advantage of and benefit from its trust laws. It’s important to understand how U.S. and non-U.S. taxes will affect your wealth before establishing foreign trusts.

Understanding the tax differences between revocable and irrevocable trusts, which assets are subject to U.S. taxes, and how to avoid certain taxes are just a few of the things you need to understand as you make the vital decision of establishing situs for your trust.

The session titled “Two Systems Separated By a Common Language: U.S. Tax Law Meets Non-U.S. Trust Law,” presented by M. Read Moore and Alec R. Anderson will help shed some light on the often complicated topic of foreign trust taxes.

Nevada is arguably the most favorable state to establish your foreign grantor trust due to its friendly trust laws. We would love to tell you more about the benefits of establishing your U.S. trust in Nevada.

Topic 3: Trust Protection for Beneficiaries

There are multiple perspectives from which to understand trust protection for your beneficiaries. If you want the full picture, you’ll have to look at protection through the eyes of the drafting attorney, the trustees and administrators, and the creditors or others who may seek access to your trust.

In the session titled “Trust Asset Protection Through a Tri-Focal Lens,” Daniel S Rubin, Terrence M. Franklin, and Michael M. Gordon will speak from their perspectives about the protections afforded trust asset protection.

Alliance Trust Company also has a unique view on this topic, as the state of Nevada has the strongest trust protection in the U.S. Tested in the courts and supported by precedents (Klabacka vs. Nelson, again), Nevada has a strong history of protecting trusts from outside entities and preserving wealth.

We’ll See You There!

We hope you’re planning on joining us in January to learn more about these and other topics to gain a greater understanding of the wealth management space. You’ll learn best practices from leading experts, gain greater insight into changing rules and regulations and gain confidence in the terms and situs of the trusts you’re establishing.

About Alliance Trust Company of Nevada

Alliance Trust Company of Nevada works with attorneys, financial advisors, CPAs and insurance professionals from around the world to provide flexible trustee services and the benefits of Nevada trust situs.

Founded in 2005, Alliance Trust Company of Nevada is fully-independent and 100% employee-owned.

As a firm established by independent advisors, for advisors, we offer flexible trustee services to various allied professionals locally, nationally, and internationally.

Alliance Trust Company is an independent trust company – not a subsidiary or affiliate of any brokerage house, insurance company or bank. We engage our clients and their established teams of professionals without interference.

Nevada leads the nation in both domestic and global asset protection and wealth management. We help our clients benefit from Nevada’s favorable trust laws through a variety of trustee services and asset management.

Alliance Trust Company of Nevada in The Economist

The Economist

Typically well-reasoned and published since 1843, many believe that the Economist is the finest English-print magazine in the world.  The magazine tackles complex global issues with a balance and perspective that only a 170+ year history can provide.  That is why, in the context of the media fury surrounding the “Panama Papers,” that the Economist’s suggestion to publish individual global tax returns (April 9th edition) deserved to be publically questioned.  To the credit of the publication, Gregory Crawford’s letter to the Editor is published in the April 30th print edition.  In the letter, the President of Alliance Trust argues that no benefit will come from such a disclosure plan or the OCED’s related “Common Reporting Standards.”  The impact of sharing detailed personal financial information with rogue governments around the world will not increase U.S. tax revenues by a cent.  In fact, the only meaningful outcome of the proposals is to violate basic personal privacy significantly increase the physical and financial risk to law-abiding citizens and their families around the world.

The Government of Kazakhstan knows my retirement account balance?

Nytimes_hq

The New York Times “Room for Debate” opinion pages recently asked Gregory Crawford, The President of Alliance Trust Company in Reno to comment on the Panama Papers and the advantages of and lawful usages of shell companies.  In this piece, Greg notes that the vast majority of these companies are used legally, providing a layer of security and privacy for international families in an increasingly dangerous world.

The interest of non-US citizens using foreign grantor trusts in Nevada is increasing dramatically.  Many countries are now recklessly sharing highly-sensitive and otherwise confidential individual financial information with rogue governments around the world under the OCED’s “Common Reporting Standards.” This program, which thankfully the United States is not participating in, gathers and automatically exchanges individual  names, addresses, tax identification numbers, and financial account balances with the governments of Azerbaijan, Cameroon, China, Georgia, Indonesia, Kazakhstan, the Philippines, Russia, Senegal, Tunisia, and Uganda, to name a few.  Where the information might go from there, no one knows.   Many of these countries have Horrific human rights records and serious corruption issues.  Automatically sharing this data will undoubtedly expose law-abiding individuals to the risk of extortion, kidnapping or worse.  The United States should remain proudly “non-compliant” with the CRS and its efforts to violate personal privacy.

it is worth noting that the State of Nevada offers excellent privacy provisions when establishing business entities such as LLCs, and there are options for the US and non-US citizens to keep their financial affairs private in trust.  Please contact Alliance Trust for more information at 775-297-4000.

 

Alliance Presentations in San Diego – Recap of the Gathering

Gathering 5

Last month Alliance Trust presented at the Southern California Institute’s annual “Gathering” of elite advisors from around the country in San Diego.  The topics of the two-day seminar included a panel debating the best family trust jurisdictions, and various methods and strategies to minimize and reduce estate, state and federal income taxes.  Advisors discussed asset protection trusts and other Nevada trust options, with case studies on how they work in practice.  As a Nevada Trust Company, Alliance Trust added insight and expertise on these topics from the perspective of a trustee.  Nevada is considered to have the best trust laws in the country, providing families valuable asset protection, flexibility for planning options and tax minimization for generations.  for more information on Nevada Trusts, please call Greg Crawford at Alliance Trust in Reno at 775-297-4684.

Awareness of NING Trusts Growing Nationally

legal

Nevada Incomplete Non-Grantor Trusts (or, “NINGs”) are growing in popularity and usage across the country.  NINGs provide the grantor of the trust asset protection and the potential to minimize local and state income taxes on investable/intangible assets.  As this NASDAQ.com Article on NINGS, these types of trusts are not for everyone.

However, a family living in a high-income tax state with significant taxable income and appreciated investments (or investments expected to appreciate) can benefit from a NING. This is just one of many Nevada trust planning strategies that makes Nevada the Asset Protection Trust Rankings   If you are interested in learning more about NINGs, please read this Article by attorney Gordon Schaller and call Greg Crawford at Alliance Trust Company in Reno at 775-297-4684.

Why Sand Hill Road Uses Nevada Trust Strategies

sand hill road sign

Alliance Trust Company of Nevada spends significant time in Silicon Valley.  Our clients range from early stage Angel investors, the founders of many fast-growing technology firms, and the partners of some of the most prestigious venture capital firms in the world.  Why are so many people connected with Sand Hill Road using Nevada Trust strategies?  In a word: Flexibility.

Nevada offers exclusive options within its trust and estate laws, and you don’t have to be a Nevada resident to establish and benefit from a Nevada Trust for generations to come.

Simply put, Nevada offers flexibility around common asset protection, tax-minimization, and dynasty provisions that have many around the country recommending Nevada as the best state in the country for trusts.  Even Business Week magazine recently took notice, putting Reno on the cover for its trust and estates activity.

Interested in learning more?  Call Greg Crawford, President of Alliance Trust in Reno at 775-297-4684.

Alliance Trust Proud to Participate in Prestigious UCLA Law Panel

UCLA STEP Asset Protection

Gregory E. Crawford, TEP, President of Alliance Trust Company of Nevada recently participated in a 90-minute discussion panel covering the topics of asset protection planning and the impact of the Uniform Voidable Transfer Act (UVTA).  The panel was moderated by Professor Jerry Hesch (ACTEC Fellow), and included nationally-recognized attorneys Jeffery M. Verdon and John R. Garland, as well as Neal Rubin, Managing Director, International Custody & Asset Protection Solutions of City National Rochdale.  Nevada was highlighted by the panel as one of the best jurisdictions in the United States and world for estate planning.  The UCLA Law School STEP Conference is in its fifth year and attracts hundreds of trust and estate professionals from around the world to Newport Beach, CA each January.  For more information, please review the conference details or call Greg Crawford in Reno at 775-297-4684.

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