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

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

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

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

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

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

What are My Options?

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

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

Why Choose a NING?

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

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

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

The Components of a NING Trust

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

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

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

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

Who Should Consider Establishing a NING

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

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

Should YOU Establish a NING?

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

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

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

STEP Orange County Conference 2019 Session Highlights

Summarizing STEP Orange County 2019, February 4 – 5

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

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

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

STEP OC 2019 Monday Morning Sessions Recap

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

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

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

What’s Changed in Life Insurance and ILIT Trusts

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

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

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

Charitable Planning Under the Tax Cuts and Jobs Act

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

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

When to Use the Unified Credit

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

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

Strategies to Resolve Conflict Within Families

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

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

Afternoon STEP OC Sessions Recap

Strategies for High Net-Worth Mexican Families

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

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

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

A Creditor’s View on Asset Protection Trusts

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

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

STEP OC 2019 Monday Morning Sessions Recap

Life Insurance as a Portfolio Stabilization Tool

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

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

The History of FACTA and the New OECD Initiative

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

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

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

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

How Families Transfer Both Wealth and Values Through Generations

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

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

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

Selecting the Best Jurisdiction for Domestic Asset Protection Trusts

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

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

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

Wrapping Up STEP OC 2019

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

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

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

Third Annual STEP Alpine Conference January 17 & 18, 2019 Interlaken, SUI

STEP Alpine 2019 Sessions Recap

A well-attended and lively STEP Alpine Conference recently wrapped up at the Congress Center, Kursall, in Interlaken, Switzerland. Both Martine Rhoda, Director of European Development, and Greg Crawford, President of Alliance Trust Company of Nevada, attended the two-day event.

STEP Alpine Highlights

Opening Keynote

After the opening remarks and welcoming the Keynote speaker, Elhad As Sy, Secretary General, International Federation of Red Cross and Red Crescent Societies took the stage.

The Secretary-General reminded us all that global problems are much harder to solve in a fractured world, and that no one is truly isolated from global issues.

Those unfortunate enough to be born in situations (and regions or countries) are suffering misfortune that is beyond their control. What they want is what we all want–and should collectively strive for–freedom from disease and stability and peace.

These very basic desires are commonalities of humanity. The Secretary-General thanked the audience and those benefactors that the professionals in the audience represent for the continued support of these efforts.

It was an inspiring beginning to the two-day affair.

Compliance and Privacy, Still Prevailing Themes

The theme of the conference was two sides of the same coin. Both what is new and what is consistent in our industry. Day one focused on the “new,” the continued increasing regulatory and compliance requirements. Day two focused on the original goals of the field: providing valuable services to clients.

The first industry-focused presentation began with three presenters and a panel discussion from David Russell, Filipino Noseda, and Count Francis von Seilern-Aspang.

It was noted that the treatment of trusts, assets and cross-border families are now quite inconsistent with several other trends towards protecting information and personal privacy in the EU region.

GDPR is almost 100% inconsistent with the CRS, and yet seems to be okay because of “fiscal voyeurism” practiced by the media and certain tax authorities. Recent rulings by the European Court of Justice appear to support a fundamental right to privacy. The audience noted the hypocrisy that elected officials claim a right to privacy for themselves, but not for commoners.

Budgeting Challenges Governments

The government budget problems facing many of the developed countries may be at the root of the issue. Governments are not generally pursuing growth strategies and instead are appealing to voter frustration and populist uprisings. The political will to debate economic policies is minimal when it is much easier and more popular to scapegoat particular classes of people for political gain (e.g., immigrants, the upper-class).

Thus, in this environment, selective “transparency” for certain types of people–the wealthy–is now politically expedient.

The new level and detail of information gathered by multiple firms and government agencies are staggering and often redundant. Information is the new oil in the Odeon economy, and information has become extremely valuable. It is a matter of time before various databases are hacked, or the information gathered is sold into the black market (see the recent sale of personal information by Argentinian tax authorities).

While the GDPR has significant penalties for companies which fail to protect their data, there are no such penalties for governments.

Yet, despite all of this information being gathered in the name of transparency, it is not clear that this will lead to higher tax compliance. The analysis of the U.S.A.’s FATCA efforts and initial data coming from the OECD suggest that the amounts of levels of tax evasion ballyhooed to get both FATCA and the CRS passed were “exaggerated’” to put it mildly.

Looking Ahead: Trust Structures

So, what then does the future hold? Trusts have been in place for 1,000 or more years, and continue to be needed by families at all levels of wealth. Competence, expertise, professionalism, structure, and wisdom are not a given in all families and can be most effectively brought to the table or bolstered in the form of a trust structure.

Trust structures are needed now more than ever. They can provide solutions and continuity for the families who need them. Those that continue to advise families on how to help solve these age-old problems will continue to be in demand.

Combating Tax Fraud In the U.K.

The next presentation, “Data Exchange: Its Fate and Its Risks” began after lunch. Tessa Lorimer (Withers, U.K., Consultant) notes that the U.K. has dramatically increased its tax investigation capabilities now that it receives information pursuant to the Common Reporting Standards (CRS).

We reached out to Lorimer for more insight:

“The information will give Her Majesty’s Revenue and Customs (HMRC) reasonable grounds to suspect tax fraud and thereby access the international criminal treaties. The criminal treaties allow HMRC to send a Letter of Request to foreign jurisdictions requesting the use of coercive powers to have evidence remitted to the U.K. suspects located and extradited in the U.K. to stand trial and assets are restrained and confiscated abroad.

“Recent U.K. legislation has dramatically increased both criminal and civil penalties for tax fraud in anticipation of the aggressive international tax investigations of the future.”

David Walbank, QC, described the significantly increased risk to people who become subject to a CRS Criminal Investigation. Most significantly, the Criminal Finances Act of 2017 reverses the burden of proof in such cases. Additionally, the evidentiary trends regarding search and seizure are tending to give more power to the authorities. These powers now border on draconian “Unexplained Wealth Orders,” and he expects it authorizes to launch high-profile, headline-grabbing cases in the future.

Securing Enterprise Data

The presentation concluded with some practical insights into how to secure enterprise data from Dr. Cristian Zamfir, COO of Cyberhaven. We reached out to Dr. Zamfir for insight, and he stated, “Data is now the common denominator of most corporate risks. The foundation for managing these risks is to discover where sensitive data is, who is accessing it, and how it is processed: in other words “data flow mapping,” which is now done manually. The answer to modern risk management in the context of GDPR and other recent compliance legislation is to automate the data flow mapping process.”

Visit Cyberhaven to learn more.

New Regulatory Developments in 2020

The next presentation covered “New Developments On the Regulatory Front” and began with an update on new Swiss Trustee regulations coming into effect in 2020. David Wilson, partner at Schellenberg Wittmer, noted that 2020 is designed to be a transition period for Swiss trustees, who have not been licensed to date.

Wilson comments that “Trustees’ anti-money laundering policies remain but, going forward, their implementation will be supervised by Supervisory Organizations, that will replace the existing self-regulatory authorities.”

Wilson’s session garnered a lot of attention as his audience took extensive notes.

Global Regulatory Approaches

Richard Grasby then contrasted different types of regulatory approaches to the industry from jurisdictions around the globe. Regulators range from lighter approaches that are really just focused on AML policies, to large scope requirements that delve into the quality of trust operations and depth and experience of personnel.

Private Trust Companies, called Family Trust Companies in Nevada (NRS 669A), were raised as a possible structure for some as they can in some instances be exempt from pending Swiss registration requirements. Business and family ties are vital factors to consider for a Private Trust Company, which can be likened loosely to a single family office.

Fabianne De Vos Burchart cautioned that PTCs must be run professionally, or he fears that many will be challenged in the future for being little more than an elaborate nominee agreement.

Blockchain as a Trust Asset Worldwide

The final presentation of day one is a very popular topic at recent STEP Conferences around the world, Blockchain.

Philipp Buchel discussed the original benefits of bitcoin and the blockchain, a no Third-party, low fee currency, and transfer network. Unlike traditional assets, there could initially be no freezing or censorship. The blockchain itself is simply a ledger/database structure to prevent docile-spending.

How Blockchain Laws Are Evolving

But the laws are evolving differently in different countries regarding property rights in this new class of asset. In the U.K. the law is developing so that the coin holder is the owner, while in the U.S.A. courts are taking the position that the private key or code that unlocks the coin(s) is the legal owner. Regardless, storage is the most critical issue.

To date, trustees have been unwilling to hold the private keys to these assets. Bitcoin and other currencies titled to trusts are being done via LLCs, or special purpose trusts to limit trustee liability. However, it is clear that clients will need better answers going forward than the current trust company solutions.

The day concluded by noting that these are no longer just issues for early adopters or technology geeks; companies such as the shipping company Maersk which recently shifted its container procurement and management system to the blockchain are expecting to save hundreds of millions of Euros a year as a result.

After a terrific cocktail hour and dinner sponsored by Schellenberg Wittmer, the 300+ attendees turned in for the evening. Special congratulations go out to the STEP Swiss and Liechtenstein Federation Student Award winners who were recognized during dinner.

Day Two – Serving Client Needs

Day Two shifted the theme of the conference from regulation and compliance to serving client needs into the future.

Uncovering the Truth About Lost Family Fortunes

The first day two presentation, “The Next Generation: Challenges and Opportunities” covered a phenomenon that cuts across all societies and commonality of humanity discussed at the conference open by the Supreme General- it is the sad but simple fact that by the fourth generation, most family fortunes have been lost or squandered.

The psychology of attachment between a parent and a child was discussed in the context of tremendously busy, international families. Communication in these situations is commonly low, and children are patronized for too long.

A classic case study of an Asian family was discussed, as well as the fact that many financially successful parents just assume that their children will have the same passion and interest in the family enterprises that they do. As practitioners, we know this is often not the case. Parents who are strong role models need to allow children to find their own path.

It was a very skilled and diversified panel, with Her Supreme Highness Therese of Liechtenstein, Joshua Seth Rubenstein of Katten Muchin in New York and Dr. Marina Walter, MD from the University of Geneva.

We had to step out for networking meetings during the next two presentations which covered the mental capacity of aging clients and the special needs of globetrotting families.

The Swiss-U.K. Axis

The final presentation before lunch was titled the “Swiss-U.K. Axis.” It is often said that the U.S. and the U.K. have a historic “special relationship,” but there is also one between the Island of the U.K., and the island of stability in continental Europe, Switzerland.

Jane Owen, Her Majesty’s Ambassador to the Swiss Confederation and the Principality of Liechtenstein noted that there are over 150 flights from various U.K. airports to airports in Switzerland each and every day. Much of the discussion focused on what the U.K. could learn from Switzerland in advance of Brexit while noting much remains uncertain.

Global News

After lunch, the agenda continued with “News from Switzerland, Liechtenstein and the rest of the World.”

Joshua Rubinstein led off the discussion with an update on the U.S.A. tax law changes, and how it helps business owners. Litigation trends regarding trust issues in the U.S.A. are also increasing, mainly as age and dynasty trusts interplay with inheritance issues and expectations.

Modern relationships and 2nd and 3rd marriages only increase potential family friction and legal contests. It was also noted that the legal erosion of attorney-client privilege is eroding in the U.S. as well, but not to the same degree as other jurisdictions.

One important point – do not use a work email address to correspond on personal litigation matters. Create a personal email account specific to the case and only use it for sensitive correspondence to better protect privileged documents.

New Developments Worldwide

The rest of the world came next, with David Russell updating the conference on new developments in the Middle East. Jurisdictions there have taken different approaches to adopt model legislation, noting that Dubai has adopted a style of the American Uniform Trust Code.

There was actually a technical glitch in this section, so if you would like a copy of the slides or to discuss these sections further, please let us know.

Liechtenstein and Switzerland Updates

Saving the best for last, the update on Liechtenstein and Switzerland came next. Patrick Brunhart noted that this year is the 300th Anniversary of the Principality and its reputation continues to improve around the globe. The country will continue to be a small but important financial center in the future.

Switzerland will continue to be a jurisdiction offering top-end solutions to sophisticated clients. The country can never become a low-cost “factory” solution provider, as the cost of doing business here is simply too high to compete in that segment of the marketplace.

Influencing the Debate – Swiss Trust Laws and Regulations

The last presentation of the day blended many of the themes of the first two days and sparked a lively and important discussion to wrap up the conference. The presentation title was “The Great New Questions for Trustees – Your Chance to Influence the Debate.”

A discussion of the new regulations facing Swiss Trustees began the presentation, reviewing some of the highlights of the discussion from the day before.

The prospect of specific Swiss trust laws was discussed, and in classic Swiss fashion, an impromptu vote was held. The audience generally felt that the regulation of trustees was a good development, while they were less enthusiastic about new Swiss trust statues. The overall goals and purpose of regulations were also discussed in the context of protecting clients from bad actors in the world of trusts, and the practitioners in the room from being tainted by bad actors as well.

Looking Forward to STEP Alpine 2020

With that, the Third Annual STEP Alpine Conference concluded. The Fourth Annual STEP Alpine Conference is tentatively scheduled for the same location on January 16 & 17, 2020. STEP should confirm this in the weeks to come, and we at Alliance Trust Company of Nevada look forward to seeing you there!

If you would like to discuss the conference details further, or how Nevada trust structures can benefit your clients, please contact Martine Rhoda in Geneva at (add cell phone and email).

STEP ASIA Hong Kong Recap

A Breakdown of New and Important Information Discussed at STEP ASIA 2018

STEP ASIA at the Grand Hyatt in Hong Kong took place from November 19th-21st and was a sold out event despite only 12 Americans attending (due to the event taking place over the American Thanksgiving Holiday). Because of the interest in the event and to increase the potential size, STEP Asia is considering moving the conference to a hotel across the harbor in Kowloon in 2020. STEP Asia 2019 will take place in Singapore.

Tuesday Presentations

STEP began by updating the organization’s standardized membership qualifications across jurisdictions. The industry continues to evolve rapidly from a regulatory perspective.

Mandatory Disclosure Rules

The conference hit the ground running with a presentation from Jonathan Midgley followed by a panel discussion of Mandatory Disclosure Rules (MDRs).

The digitalization of information makes personal information sharing (CRS and MDRs) possible, but that’s not necessarily a good thing for privacy.

The discussion noted that personal privacy concerns are swinging the pendulum back to “common decency,” but has overcorrected towards disclosure and has a long way to go to recover.

The Organisation for Economic Co-operation and Development’s (OECD) 40-page rulebook regarding MDR’s for marketing, promoting, and service provider retroactive disclosure rules are legally troubling. There are currently no protocols for what is a reportable event, and it can cover a broad range of activities.

The creation of a database which will house names and demographic information without the knowledge of the accused is profoundly concerning. The fundamentals of substantive and procedural criminal law are violated. This should trouble all, as severe principals and freedoms are being violated.

While advising wealthy cross-border families is not a crime, failing to record a “reportable event” can be one if your local jurisdiction adopts model OECD language. The audience at STEP ASIA was encouraged to fight these laws with their local bar associations.

The goal of the OECD is likely to “name and shame” individuals, as MDRs have no legal effect. In this business, reputation is everything and individuals named in the MDRs will have no due process with these accusations in databases, and may not even be aware of their inclusion. They will have no rights of the accused typically seen in free societies.

Does this mean that individuals named could be denied access to border crossings while traveling? It’s possible.

The governments’ thirst for tax enforcement information is broadly dismissing individual privacy rights and legitimate safety issues. Here’s the reality – tax prosecution is often used as a form of political suppression and many governments participating in the CRS are little more than criminal gangs hiding behind the cloak of government.

Society generally agrees that increased tax compliance does not justify the means that are now being taken to get there.

There are specific social values which need to be protected and are more important than the theoretical elimination of all crime: Values such as the right to no self-incrimination, use of torture, rights of the accused, etc. This should also apply in the area of tax enforcement. If one argues that tax enforcement is somehow different than the other areas of law enforcement, that can be a slippery slope.

An Update on the PRC

Highlights of the presentation:

There is still no estate duty in the People’s Republic of China (PRC), despite annual rumors of such. The estate duty laws of 125,000 USD exemption level, then 55% drafted in 2004 have never been implemented.

Wills and estate plans are being used with increased frequency in Asia and the PRC, usually adopted by the first group, those with international experience, and Asians concerned about the fate of their family businesses, the second adoption group. This trend should continue with the aging population and large sums of 1st generational and regional wealth being transferred.

An update on blockchain from 2017 STEP ASIA in Singapore: During this panel, attendees were reminded that bitcoin was created in 2008 as a peer-to-peer electronic cash system, not a tool for speculation. However, there is still great potential in blockchain technology.

The blockchain now is similar to where the internet was in 1994 – most people did not have an email address in 1994, and we are now very early in blockchain adoption. However, the proof of concept stage was passed long ago.

Certain governments are financing the development of this field, eyeing it as a long-term alternative to using the U.S. dollar, and its usefulness is increasing.

Legal issues related to possession vs. action in regards to property laws need to be sorted, and the question needs to be asked: what is “custody” of an asset in a digital context?

Fundamental activities of banking institutions, including the payment of dividends, coupon payments, and corporate actions can all be recorded on a peer-to-peer system allowing huge savings at the expense of banks.

Tuesday Afternoon Presentations

Cyber Security with Richard Stagg and Robin Youill

Security has four elements:

  1. People
  2. Procedures
  3. Technology
  4. Physical Security

All four areas must be tested in routine circumstances, and in times of emergency/crisis.

People tend to be over-dependent on technology solutions and overlook the #1 risk: the quality of the people surrounding them. Many security firms use out-sourced labor, allowing the risk of “an inside job” to grow exponentially.

For digital communications, a VPN is essential, hacking into public wi-fi is too easy.

A Fresh UK Tax Update

This is not your mother’s sleepy HMRC any longer. The commission is looking very closely at domicile issues and challenging them like never before. The risk of becoming a “deemed domicile” and falling into the UK tax net is increasing if not correctly structured. Even evidence of prior non-dom approval is being requested. You need to have kept your favorable ruling letter from the ’80s or ’90s, because it’s you’re responsibility to produce it, not the HMRC’s.

The good news is that several trust strategies still work for tax-minimization of non-UK assets. A few ideas include “Will Trusts” which are similar to dynasty trusts, these do not pay the 10-year periodic charges and are a great way to minimize taxes. Several types of trusts can limit gains vs. incomes. Properties have special considerations, and you must be careful that if using loans, the loan itself is not deemed a UK asset. You also need to be sure to do this type of planning before you consider returning to the UK.

Policial Risk Planning

The focus of this session was on the value of using Investment Protection Treaties. These treaties between countries usually provide an arbitration right if an overseas investment is negatively and unfairly impacted by government action, local regulators, tax authorities, or the court system. This is becoming more of a factor in today’s geopolitical environment.

Over 300 of 700 filed cases since 1989 have found relief. The use of a holding company or trust in a favorable country generally changes the character of the investment to benefit from the treaties. China and Germany have the most treaties, and those in the U.S. and EU tend to be more narrow. Financing these arbitration claims is an additional option.

How OffShore and On-Shore Courts Look at Reserved Power Trusts

Much of the early discussion in this session was on the Pugachev case, which could take up a day of presentations on its own. However, reviews of claims of illusory trusts, sham trusts, and fraudulent transactions were also detailed.

It was clear to the presenters that on-shore courts view trusts with too many reserved powers, and with a high degree of skepticism. Alternatively, offshore courts are not very sympathetic to the views of on-shore courts. On-shore courts take a family court approach to trusts, a naturally skeptical and sometimes even hostile view to the trust structures.

It should be noted that the only permissible claim against a trust in Nevada is that of fraudulent conveyance. Sham and alter ego claims are forbidden by statute. This is not the case for many offshore reserved power trusts.

Wednesday Presentations

Wednesday included a very detailed presentation on the new American tax code and new planning opportunities for American taxpayers, and non-American taxpayers. Non-U.S. citizen strategies were largely not impacted by recent trust law changes.

Property Ownership in the U.S.

The details of property ownership in the U.S. were shared with a few slides and scenarios. U.S. property is an attractive asset for PRC citizens. Avoiding the estate tax of 40% above 60,000 USD is not difficult if the appropriate structuring options are put in place.

For U.S. persons, the use of an intentionally defective grantor trust (IDGT) is highly recommended to take advantage of the relatively high estate and gift tax exemptions. If leveraged properly, assets which are still exposed to the estate tax regime can be used and taxes paid from these assets. Many regard this structure strategy as superior to the GRAT which lacks the ability to use the GST exemption.

If you would like to discuss or review any of these presentations or strategies with Alliance Trust, contact us to set up an appointment.

Interview of Supreme Highness Prince Michael of Liechtenstein

The thoughtful and reflective interview of Supreme Highness Prince Michael of Liechtenstein reflected on 900 years and 36 generations of rule, and the more modern family ownership of Liechtenstein Global Trust (LGT Bank) the largest family-owned financial institution in Europe.

He discussed religious wars, expropriations, as recent as 1939, and managing family dynamics from generation to generation in a manner that families of all sizes of wealth could learn from.

The Wrap Up

The bon voyage BBQ held at the Hyatt pool was well-attended, and even a little rain did not dampen the spirits of the STEP Asia attendees.

If you’re interested in next year’s conference, mark your calendars for November 3rd-5th in Singapore.

For more information about establishing your trust in the U.S. and the state of Nevada, we’re here to answer your questions.

Understanding Nevada Asset Protection Trusts

Why Nevada’s Asset Protection Trust Laws Keep Your Wealth Safer Than Any Other State

The state of Nevada has dominated the asset protection space and positioned itself as the most beneficial situs to establish an asset protection trust.

Precedent-setting cases and favorable trust laws have launched Nevada to the forefront of the estate planning industry and allowing trustees and estate planners flexibility, privacy, and the power to protect wealth and assets more securely than any other state.

The Benefits of Nevada Law

Nevada’s trust advantages continue to grow and have edged out other states with similar trust provisions. Here are some of the ways that Nevada takes asset protection measures further.

Nevada’s advantages include:

Nevada carries no state or corporate income tax.

Federal taxes take a significant chunk out of trusts and returns made on assets so establishing a trust in a state with no income tax can help preserve a large portion of wealth.

Nevada carries no state or corporate income tax, protecting your wealth from additional taxes and allowing it more unhindered growth.

Nevada carries a 24-month statute of limitations or “seasoning period.”

Every state carries a different statute of limitations ranging from 1.5 years to 5 years. While Nevada carries a two-year statute, the language in the Nevada code reinforces that trusts are actually still protected during the two-year seasoning period.

Zero exception creditors, including divorcing spouses.

In the recent case of Klabacka vs. Nelson, Nevada sets a new precedent that its asset protection laws are the most robust in the nation.

In a similar case in Delaware, the courts sided with the divorcing spouse, weakening the state’s asset protection laws.

The grantor is able to name an independent financial advisor to manage trust funds.

Anyone can take advantage of Nevada’s favorable trust laws as grantors can name a Nevada resident or a Nevada trust company as trustee or co-trustee, this includes international families and businesses as well as domestic families.

Nevada Asset Protection Trusts are irrevocable but flexible.

In Nevada, the trust settlor is allowed to make decisions regarding powers related to managing the Nevada Domestic Asset Protection Trust (NDAPT). Though the term irrevocable sounds final, in Nevada, there is actually a great deal of flexibility in these trusts.

What is a Nevada Asset Protection Trust?

Simply put, an asset protection trust limits creditor access to the value of the beneficiary’s interest in the trust. The asset protection trust protects the value of the assets and legally protects them from lawsuits and other claims.

Nevada Asset Protection Trusts have proven their strength, holding up in court most recently in the case of Klabacka v Nelson, 133 Nev. Adv. Op. (May25, 2017): Nevada DAPT Protects Against Spousal/Child Support Claims. In this case, a divorcing spouse sought access to her ex-husbands self-settled spendthrift trust and the courts sided with the trust. All alimony, child support, and other claims on the trust had to be taken from liquid assets outside of the trust.

The decision in the Klabacka case reaffirmed Nevada’s asset protection strength as other states are scrambling to keep up. While other states may defer to Nevada’s ruling in the Klabacka case, that is far from a guarantee.

Nevada Residency is not required.

If your trust is established in Nevada you may live anywhere in the world and take advantage of Nevada’s many trust benefits. Nevada also fully protects personal privacy.

Alliance Trust Company of Nevada helps people take full advantage of Nevada’s trust laws and may serve as independent trustee if the grantor is out of state. We’re available to answer any questions regarding Nevada Asset Protection.

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.

4 Reasons to Consider Establishing a Nevada Dynasty Trust

Unprecedented Protection for Generations

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 hold assets for generations, and they minimize or even eliminate many taxes associated with trusts including distribution, estate, inheritance, transfer 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 care for your family for generations to come.

Nevada Dynasty Trusts: 4 Things that Set Them Apart

1. Unique Precedents Set in Nevada

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.

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 which are no longer wanted, needed, or 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.

 

Fielding Luncheon Panel Discussion Summary

Experts in MN taxation, MN trust and estate law, and trust migration and decanting discuss possible outcomes from the fielding decision

On August 27, 2018, Alliance Trust Company of Nevada hosted a panel discussion at Seven Steakhouse in downtown Minneapolis. Attendees included Minnesota tax and trust law professionals from prominent firms throughout the state of Minnesota.

The Panel

Jouko Sipila, the Minnesota representative for Alliance Trust Company of Nevada, put together an outstanding panel to discuss possible impacts from the Fielding decision including one of the Faegre Baker Daniels attorneys that represented Fielding, an expert in MN taxation that assisted in drafting the law at issue, and an expert in trust migration and trust decanting.

Caitlin Abram, Partner at Faegre Baker Daniels

Caitlin was an integral part of the Fielding legal team. Caitlin carries vast experience in complex trust and estate transactional and litigation matters.

Caitlin started the conversation by explaining the background on the Fielding Case.

Click here to learn more about the Minnesota Supreme Court case, Fielding v. Commissioner.

Case insights from Caitlin

  • The Fielding decision will likely impact the wealth management industry in Minnesota.
  • Loss of fee income could lead to loss of tax revenue in the state, so a solution is in Minnesota’s best interest.
  • If you’re considering following in Fielding’s footsteps here are some things you need to consider:
    • Is there enough money at stake to make it worth filing claims for refund?
    • What are the connections to Minnesota among the trust’s stakeholders?
    • How do your facts differ from the Fielding case?
  • In the Fielding case, the taxpayer did not receive enough benefit from the state to justify taxation.

Bill Lunka, Director at SALT Partners

Bill is an esteemed Minnesota taxation expert bringing four decades of state and local tax experience (including 29 years with the MN Dep. of Revenue) to the discussion.

Bill discussed his views on how the Minnesota Revenue and Legislature might react to the Fielding decision. He noted that the uncertain political landscape in the state makes it challenging to predict how the law might be changed.

Case insights from Bill

  • Trusts holding real property in Minnesota will likely be subject to taxation because they receive protection benefits form the state.
  • In light of the Fielding decision, the Minnesota government has four options:
    • Do nothing.
    • Go back to the pre-1995 law.
    • See what other states are doing with the definition of a resident trust to resolve the defects identified by the Minnesota Supreme Court in the definition of a “resident trust.” Those problems include:

      • The Court found that using the residence of the grantor as the basis for the determination of the residency of the trust, a separate legal entity, was invalid.
      • Determining the residency of a trust in later tax years based on an event in a prior tax year (i.e., when the trust became irrevocable) was not valid under the Due Process Clause.
      • Making sure the state taxes appropriately according to income earned and benefits enjoyed.
    • Relitigating similar cases to Fielding would be an ineffective strategy for the Department of Revenue.

The most likely option for Minnesota is to see what other states are doing. A possible definition of a resident trust that Minnesota could follow is California’s definition of a resident trust.

Click here for more details about the California definition.

  • Existing Minnesota trusts could benefit from filing their taxes under protest as was done in the Fielding case.
  • Ultimately, practitioners need to have their clients plan and do so conservatively.

Greg Crawford, President of Alliance Trust Company of Nevada

Greg Crawford is an expert in both Nevada and California trust laws, trust migration, as well as trust decanting. Nevada is one of the fastest growing trust jurisdictions because of industry-leading tax benefits and asset protection laws. Learn more about Nevada’s favorable tax laws here.

Case insights from Greg

  • Greg explained the California Model and the implications a similar model could have on the taxation of Minnesota trusts.
  • The state of Nevada has worked hard to make its trust laws flexible to handle different situations including dynasty trusts, directed trusts, and more.
  • Trust structures need time, and there needs to be additional motives, such as a more comprehensive review of the estate plan or asset protection.
    • Decisions motivated by taxation will catch the eye of the tax authorities.

Final Thoughts

Cases such as Fielding v. Commissioner often make grantors and trustees reevaluate their trust protections. Decanting your trust may be the best option to ensure its operating in the most beneficial way possible.

Greg Crawford, President of Alliance Trust Company, is a trust migration and decanting expert located in Nevada. With some of the most favorable tax and protection laws in the world, Nevada is a highly advantageous situs to administer your trust.

Greg and his team are ready to help you ensure your assets are protected in every possible way.

Unpacking Fielding’s Win in Fielding v. Commissioner of Revenue

Arguments from both sides and the basis for why taxing the trusts in MN was deemed unconstitutional

In Fielding v. Commissioner of Revenue, the court concluded that the contacts on which the Commissioner relied are either irrelevant or too attenuated to establish that Minnesota’s tax on the trusts’ income from all sources complies with due process requirements.

Alliance Trust Company of Nevada is hosting a panel discussion on the Fielding case and its impacts on August 27, 2018, in Minneapolis, MN. Click here to learn more.

The 3 Primary Reasons the Minnesota Supreme Court Sided With Fielding

Reason 1

The grantor’s connections to Minnesota are not relevant to the relationship between the trusts’ 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.

Reason 2

The trusts did not own any physical property in Minnesota that may serve as a basis for taxation as residents. The trusts held interests in intangible property, FFI stock.

Although FFI was incorporated in Minnesota and held physical property within the state, the intangible property that generated the trusts’ income was stock in FFI and funds held in investment accounts.

These intangible assets were held outside of Minnesota, and thus, do not serve as a relevant or legally significant connection with the state of Minnesota.

Reason 3

The court did not find the contacts with Minnesota that pre-date 2014 by the grantor, the trusts, or the beneficiaries to be relevant.

The taxpayer—holder of the legal title to the stock in FFI and the other income-producing intangible assets—is the trustee, who is not a Minnesota resident. Intangible assets are appropriately taxed as being resident in the jurisdiction where the owner of legal title—the trustee—is a resident.

The court was left to consider the extremely tenuous contacts between the trusts (or their trustees) and Minnesota during the tax year 2014. The Trustees had almost no contact with Minnesota during the applicable tax year. All trust administration activities by the Trustees occurred in states other than Minnesota.

The Argument: The Commissioner vs. Fielding

The Commissioner of Minnesota

The Commissioner contended taxing the trusts’ worldwide income based on several contacts between Minnesota and the trusts was, in fact, constitutional.

The Facts

  • Specifically, the grantor, Reid MacDonald, was a Minnesota resident when the trusts were created in 2009 and MacDonald was domiciled in Minnesota when the trusts became irrevocable in 2011, and still domiciled in Minnesota in 2014.
  • The trusts were created in Minnesota, with the assistance of a Minnesota law firm, and until 2014, the Minnesota law firm retained the trust documents.
  • The trusts held stock in FFI, a Minnesota “S corporation.”
  • The trust documents indicate that questions of law arising under the trust documents are determined by Minnesota law.
  • One beneficiary, Vandever MacDonald, has been a Minnesota resident at least through the tax year at issue.

Fielding

When Fielding filed tax returns in 2014, they were filed under protest landing in the Minnesota Tax Court. Fielding wins in the tax court. Minnesota appealed to the supreme court.

The Facts

  • No trustee has been a Minnesota resident.
  • The trusts have not been administered in Minnesota.
  • The records of the trusts’ assets and income have been maintained outside of Minnesota.
  • Some of the Trusts’ income is derived from investments with no direct connection to Minnesota.
  • Three of the four trust beneficiaries reside outside of Minnesota.

Alliance Trust Company of Nevada is hosting a panel discussion on the Fielding case and its impacts on August 27, 2018, in Minneapolis, MN. Click here to learn more.

The basis for the Minnesota Supreme Court ruling in favor of Fielding

  • A state can only tax entities in a tax year when they receive a benefit from a state and must have reasonable connections to the taxing state.
  • A single factor from the Minnesota Stat. § 290.01, subd. 7b(a)(2) (2016)–the grantor’s domicile at the time the four trusts became irrevocable–was deemed unconstitutional since it relied on that factor alone in defining the trusts as Minnesota Resident Trusts.
  • The court affirmed the decision of the Minnesota Tax Court because in the Fielding case the trust(s) lacked sufficient relevant contacts with Minnesota during the applicable tax year for the trusts to be permissibly taxed as Minnesota residents.
  • The court analogized the case to a hypothetical statute authorizing that any person born in Minnesota to resident parents is deemed a resident and taxable as such, no matter where they reside or earn their income. The court believed this would be undoubtedly outside of the State’s power to impose taxes.

The State lacked sufficient contacts with the trusts to support taxation of the trusts’ entire income as residents consistent with due process.

Attributing all income, regardless of source, to Minnesota for tax purposes would not bear a rational relationship with the limited benefits received by the Trusts from Minnesota during the tax year at issue.

Courts have said that a tax will satisfy due process if (1) there is a “minimum connection” between the state and the person, property, or transaction subject to the tax, and (2) the income subject to the tax is rationally related to the benefits conferred on the taxpayer by the State.

The court conclude that in the context of a due process challenge to the State’s taxation of a taxpayer as a resident, the court will examine all relevant contacts between the taxpayer and the State, including the relationship between the income attributed to the state and the benefits the taxpayer received from its connections with the state. Taxation needs to be fairly apportioned to activities within the state.

The court considered whether the trusts’ contacts with Minnesota were sufficient, under the Due Process Clause, to permit them to be taxed as Minnesota residents.

A state’s tax satisfies due process if there is:

  1. Some “minimum connection” between the state and the entity subject to the tax
  2. A “rational relationship” between the income the state seeks to tax and the protections and benefits conferred by the state. “there must be a connection to the activity itself, rather than a connection only to the actor the state seeks to tax”

MN Supreme Court Sets New Precedent for Defining Resident Trusts

Taxing trusts solely based on grantor residence is now unconstitutional in Minnesota

On July 18, 2018, the Minnesota Supreme Court ruled in Respondents v. Commissioner of Revenue that taxing trusts in perpetuity only based on the test that the grantor was a Minnesota resident while the trust became irrevocable is unconstitutional. This decision supports the ruling decided by the Minnesota Tax Court almost exactly one year ago. Moreover, this decision follows similar logic in cases heard in Pennsylvania, New York, and Illinois.

If you are not familiar with Fielding v. Commissioner of Revenue and Respondents v. Commissioner of Revenue, learn more by clicking here.

Alliance Trust Company of Nevada is hosting a panel discussion on the Fielding case and its impacts on August 27, 2018, in Minneapolis, MN. Click here to learn more.

Current Definition of a Resident Trust In Minnesota

Until now, Minnesota had to look back over two decades when designating a trust as a Minnesota resident.

Two common scenarios designate a trust as a Minnesota resident.

  1. A non-grantor trust typically created by a will of a decedent domiciled in Minnesota at the time of death.
  2. An irrevocable trust in which the grantor was a Minnesota resident when the trust became irrevocable.

The Commissioner of Revenue utilized the second scenario when taxing the Fielding gains in 2014. The grantor, Reid MacDonald lived in Minnesota when the four trusts became irrevocable in 2011 as planned when the trusts were established in 2009.

Fielding’s Winning Arguments

In 2014, one of the four trustees, Fielding, sold stocks from the trust realizing substantial gains. Within the current law, the Minnesota Department of Revenue collected taxes on the gains under protest.

Fielding takes his protest to the Minnesota Tax Court. Fielding’s Reasoning For Protest

  • Three of four beneficiaries lived outside of Minnesota
  • The trust’s investment accounts were administered in California
  • None of the trustees lived in Minnesota
  • The trust records were not located in Minnesota

However, on the sole basis that the grantor lived in Minnesota when the trusts became irrevocable, Minnesota collected taxes on the gains of the trusts.

Fielding won his case in the Minnesota Tax Court.

The Minnesota Department of Revenue appealed, and the case landed in the Minnesota Supreme Court, but Fielding wins again.

How will the Minnesota Department of Revenue and the Minnesota Legislature react to losing Respondents v. Commissioner of Revenue?

While the timings of any rulings and enactment of statutes is uncertain, we may speculate on what’s to come.

We reached out to our Minnesota network for insight.

Bill Lunka, with SALT Partners, a state and local tax consulting firm in Minnesota. Mr. Lunka told us that, “It is likely that the Department would respond to the Fielding decision by proposing legislation to overcome the constitutional defects in the current law. He said that “The Minnesota Legislature could change the definition of resident trust that would look to the location of the trustees and/or beneficiaries as a basis for determining whether a trust’s income is taxable in Minnesota during any given year.”

Mr. Lunka also noted that if Minnesota goes down the path of determining a trust’s residency based on the location of the trustees he thinks many trustees will, if possible, make the decision to move the trustees outside Minnesota.

At Alliance Trust Company of Nevada, we will closely monitor how the Fielding case impacts Minnesota resident trusts as new legislation materializes. It will be advantageous for many to evaluate their “Minnesota trusts” ensuring they are in a situs allowing the greatest tax and protection benefits.

Alliance Trust Company of Nevada is hosting a panel discussion on the Fielding case and its impacts on August 27, 2018, in Minneapolis, MN. Click here to learn more.

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