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. 

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

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

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

Changes to Exemption

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

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

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

How Federal Tax Reform Affects State Tax

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

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

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

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

What to Watch Out For

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

Learn more about Trust Decanting.

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

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

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

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

Learn More About the Tax-Favored State of Nevada

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

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

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

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

Softening the Blow of California Income Taxes with a NING Trust

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

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

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

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

Should New Millionaires Establish California Trusts?

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

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

NINGs Could be the Answer to California State Tax

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

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

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

Why Nevada?

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

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

Does the Benefit Outweigh the Risk?

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

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

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

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

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

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.

U.S. Supreme Court Looking at Two Cases Relating to State Taxation of Trusts

Minnesota and North Carolina appeal to the Supreme Court in Trust Taxation Cases

The United States Supreme Court will review two petitions for a writ of certiorari from the states of North Carolina and Minnesota. Both states lost cases in their respective State Supreme Courts where the state laws were deemed in violation of the United States Constitution under Due Process Clause. Both states have appealed to the U.S. Supreme court for review.

A Breakdown of the Original Cases

Case 1: North Carolina

The Case: North Carolina Department of Revenue, Petitioner v. The Kimberly Rice Kaestner 1992 Family Trust Current North Carolina Practice: North Carolina taxes trusts based on beneficiary residency. The Original Conclusion: “The North Carolina Supreme Court concluded that a trust and its beneficiaries are legally separate – in other words, that beneficiaries are outsiders to a trust. On that basis, that majority (of the NC Supreme Court) expressly disregarded the trust beneficiaries’ in-state residency and other contacts with North Carolina. That analysis led the majority to conclude that the trust at issue lacked a constitutionally sufficient connection with the state.”

Click here to view the case filings.

Case 2: Minnesota

The Case: Cynthia Bauerly, Commissioner, Minnesota Department of Revenue, Petitioner v. William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. Macdonald, et al. Current Minnesota Practice: Minnesota taxes trusts based on the residency of the grantor when the trust becomes irrevocable. The Original Conclusion: “The grantor’s connections to Minnesota are not relevant to the relationship between the trust’s income that Minnesota seeks to tax and the protection and benefits Minnesota provided to the trusts’ activities that generated that income. The relevant connections are Minnesota’s connection to the trustee, not the connection to the grantor who established the trust years earlier. A trust is its own legal entity, with a legal existence that is separate from the grantor or the beneficiary. Nor did the court find the grantor’s decision to use a Minnesota law firm to draft the trust documents to be relevant. Thus, the grantor Reid MacDonald is not the taxpayer, the trusts are.”

Click here to view the case filings.

What Are the States Asking For?

Both states believe they have the right to tax the trusts under due process clause, given legal abstractions of trusts. The Minnesota Supreme Court concluded that the trust is separate from the Grantor, but the connections between Grantor and the state of Minnesota were not sufficient to tax the trust. Similarly, the North Carolina Supreme Court ruled that a beneficiary and a trust are legally separate and the connection between the beneficiary and the state of North Carolina are not enough to tax the trust.

The question presented by the State of Minnesota: Does the Due Process Clause prohibit states from imposing income taxes on statutory “resident trusts” which have significant additional contacts with the state, but are administered by an out-of-state trustee? The question presented by the State of North Carolina: Does the Due Process Clause prohibit states from taxing trusts based on trust beneficiaries’ in-state residency?

A Constitutional Reminder: The Due Process Clause of the Fourteenth Amendment provides that [n]o state shall…deprive any person of life, liberty, or property, without due process of law.” U.S. Const. Amend. XIV § 1.)

What Lower Courts Had to Say in Regard to Their Decisions

From Minnesota Writ: “This Court has not spoken on the issue in decades, and its precedents point in opposite directions. As a consequence, state appellate courts are deeply divided on the correct answer. Some state appellate courts have held that a state may impose an income tax on a trust even when the trustee resides out-of-state, so long as the grantor resided in-state when the trust became irrevocable. Other courts have required, on top of grantor residence, that the trust have some additional contacts with the state during the tax year. One other state high court has held that a state may tax a trust as a resident if a beneficiary of the trust resided in the state during the tax year.”

From North Carolina Writ:

“This case asks whether the Due Process Clause prohibits states from taxing trusts based on trust beneficiaries’ in-state residency—a question on which nine state courts have split. Because of the Tax Injunction Act, this federal constitutional question is usually litigated in state courts. State courts are divided in their answers to this question, however, because they lack modern guidance from this Court.”

“With that decision, North Carolina joined the ranks of eight other states that have reached conflicting decisions on the question presented here. Five states have concluded that the Due Process Clause forbids states from taxing trusts based on trust beneficiaries’ in-state residency. Four states have concluded the opposite.”

The United States Supreme Court has not ruled on trust taxation since 1947 (Greenough v. Newport 331 U.S. 486 (1947)) and states say that since state courts are split regarding their rulings of trust taxation that a review by the Supreme Court is needed.

Where Concluding States Land

Four state courts have concluded that the Due Process Clause allows states to tax trusts based on trust beneficiaries’ in-state residency:

  • California in McCulloch v. Franchise Tax Board, 390 P.2d 412 (Cal. 1964)
  • Missouri in Westfall v. Director of Revenue, 812 S.W.2d 513 (Mo. 1991)
  • Connecticut in Chase Manhattan Bank v. Gavin, 733 A.2d 782, 802 (Conn. 1999)
  • Illinois in Linn v. Department of Revenue, 2 N.E. 3d 1203, 1209 (Ill. App. Ct. 2013) – but note that Linn ultimately held that the state could not tax a trust merely because the trust’s settlor had been an Illinois resident.

 

Five states ruled against taxation of trusts:

  • New York in Mercantile-Safe Deposit & Trust Co. v. Murphy, 203 N.E.2d 490, 491 (N.Y. 1964)
  • New Jersey in Potter v. Taxation Division Director, 5 N.J. Tax 399, 405 (N.J. Tax Ct. 1983)
  • Michigan in Blue v. Department of Treasury, 462 N.W.2d 762, 764 (Mich. Ct. App. 1990)
  • North Carolina in this current case: North Carolina Department of Revenue, Petitioner v. The Kimberly Rice Kaestner 1992 Family Trust
  • Minnesota in this current case: Cynthia Bauerly, Commissioner, Minnesota Department of Revenue, Petitioner v. William Fielding, Trustee of the Reid and Ann MacDonald Irrevocable GST Trust for Maria V. Macdonald, et al. Note that Minnesota rejected both the residency of Grantor and Beneficiary.)

What is the Impact of the Recent Wayfair Case?

In South Dakota v. Wayfair the United States Supreme Court ruled that states may impose sales tax even if the seller does not have a physical presence in the state.

This case could have an impact on future Supreme Court decisions regarding taxation. Although South Dakota’s decision is not an exact template for other states, it could influence how they craft their laws.

Timing

In the North Carolina case, the writ was filed on October 9th, 2018. The taxpayer filed their brief in opposition on November 30th.

The Minnesota case writ was filed on November 15th and docketed on November 21st. The taxpayers have until December 21st to file their response.

Will the Supreme Court Take Both Cases, or One?

Some Potential Outcomes: Ruling for the states – A ruling for the states would have a significant negative impact on out-of-state trust planning and could potentially send grantors to offshore jurisdictions.

Ruling for taxpayers – This will have a significant impact on the 22 states that still impose taxes on trusts and could potentially be a clear law-of-the-land in which all states would need to amend their tax code to comply.

Both cases declined – This is an implicit win for the taxpayers, and would lead to further haggling at the state level, both in courts as well as legislation.

Because Minnesota’s Fielding case includes both grantor and beneficiary issues, the Supreme Court hearing this case would set more comprehensive precedents regarding the taxation of trusts. With the North Carolina Kaestner case, the only issue at hand is the beneficiary’s residence.

There are still a lot of questions and unknowns about the impact of the court’s decisions and a lot of speculation. Either way, there are sure to be some interesting changes ahead.

Who said trust laws had to be boring?

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 trustee 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.

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?

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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

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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

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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.

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