Why are Nevada asset protection trusts the best?
Currently, twenty states have authorized the use of asset protection trusts. Nevada has many advantages over many of these states:
- Nevada does not tax the income of trusts. Most states do.
- The statute of limitations on the transfer of assets is only twenty-four months while most states require three or four years to establish the protection of these trusts.
- Nevada allows for directed trusts, which enables the grantor to name an independent financial advisor to manage the funds of the trust.
- Most importantly, the Nevada legislature is continually improving the laws in this area, in each legislative session.
Anyone in any state can set up an asset protection trust in Nevada. You just need a Nevada resident trustee or co-trustee
What is an asset protection trust?
An asset protection trust is also known as a self-settled spendthrift trust. The person creating the trust is called the settlor (or grantor) of the trust. In this type of trust, the grantor is also the beneficiary of the trust and can receive distributions from the trust for his or her lifetime.
If properly drafted and administered, the assets held by the trust are unavailable to the grantor’s creditors. For example, if the grantor has an asset protection trust in place and funds it with $500,000 in cash, stocks, or real estate, and is later sued by a third-party, that third-party cannot make a claim against the $500,00 held by the trust. The only exception to this rule is that the third-party may gain access to the funds if they can prove that the original transfer of assets to the trust was fraudulent as to that creditor.
Asset protection trusts can provide significant peace of mind to those concerned about losing their assets to a lawsuit or other claim.
Do I lose control of my assets?
This is a very common question in estate planning. The answer depends on the type of trust in which you transfer your assets.
Most people transfer assets to a revocable living trust. Transfers to a revocable living trust provide no barriers to assets going into (or out of) the trust. However, transfers to irrevocable trusts have substantial restrictions on how the grantor can get assets out, if any.
For most revocable living trusts, after the death of a spouse (or if it’s a single individual, after the death of an individual) the trust will become irrevocable. After that point, the trust instrument will dictate very precisely how assets are to come out of the trust. However, during a grantor’s lifetime, while the trust is revocable, there are no restrictions.
Irrevocable trusts carry a different purpose. The trust instrument will dictate how assets come out of the trust. A grantor must be very careful when transferring assets into the trust that they understand exactly how the assets will be distributed. It’s important to make sure that if the grantor wants to reserve the right to retrieve assets from the trust, that their estate planning attorney understands that goal.
How do I transfer assets?
The transfer of assets into a trust can be accomplished in two ways.
1. Testamentary – done after probate, and the judge orders the transfer of assets. 2. During the grantor’s lifetime, in which case they are doing their own probate, which is much easier, allowing them to transfer their assets while leaving.
For things like real estate, you transfer the deeds. In business formations, you are transferring the ownership of the stock or LLC interest.
With respect to bank accounts, brokerage accounts, annuities, etc., you are changing the account owner to the trust you’ve established by just naming the trust as the new account owner. Assets that don’t have titles, like home furnishings, can be handled by simply executing an assignment of those assets to your trust. Also, don’t forget car titles, credit accounts, and things of that nature.
The probate process can be one way to do it, or you can elect to do it in their lifetime and save a lot of money in probate.
How much does probate cost?
Probate can be costly, depending on the size of the estate. Estimates range between 2-7% of the gross estate. Each state has legislation governing how much executors can charge and how much attorneys can charge.
The biggest cost issue is that you must go to court, and you need an attorney to do that.
Larger estates, which typically have more complex and harder-to-value assets, require appraisals for business interests, real estate, and artwork. Appraisals are required by the IRS at the time of the estate tax return.
Once the estate tax return is filed, you then have a long waiting period to discharge the assets and transfer them to a trust or the beneficiaries. This can take up to two years.
What is probate?
Probate is a court-supervised process. The court appoints a personal representative of the diseased person, often referred to as the executor of the estate.
The executor’s duty is to find all the assets and liabilities of the diseased person and to manage all the assets during the probate process. The executor also has the responsibility of notifying the beneficiaries of the probate.
Often probate can be extended or lengthened due to hard-to-find assets or closely held businesses, or sometimes waiting on appraisals, and things that are required to provide an estate tax return.
If an estate tax return is required, it must be filed within nine months of the death of the deceased. It often takes up to a year for the IRS to issue back a letter, thereby letting the estate close. Therefore, probate can be a costly and timely process, sometimes taking up to two years.
What is a dynasty trust?
A Dynasty Trust is simply a trust that spans a substantial period of time. These trusts are drafted so that wealth can be preserved in a trust for various generations. Wherein, the grantor dictates how much wealth is distributed to the trust and how this wealth is to be invested and eventually distributed to the beneficiaries. However, in designing Dynasty Trusts, it is imperative the grantor keeps an eye on two important points:
1. The estate tax ramifications. 2. The law of the forum state in which the trust is to be designed.
Concerning the estate tax ramifications, the Internal Revenue Code (IRC) allows some wealth to be placed into the Dynasty Trust and to skip generations almost indefinitely. However, the amount of wealth that can be put in these trusts is severely limited by the IRC. The generation skipping tax exemption is the limit of what can be put in this trust, and it is often a moving target.
The grantor will need to work with a qualified estate planning attorney to fully understand what those limits are. Many states will restrict the length of time that trusts can be in existence. For many states, the maximum term is about 90 years, and some states still follow the rule against perpetuities, which is an antiquated way of measuring the length of a trust’s life. In Nevada, we are fortunate to have the longest statute of limitations for these trusts: 365 years.
So, establishing a dynasty trust in Nevada will allow the family to put assets into a trust almost indefinitely. Nevada is by far the best jurisdiction to form Dynasty Trusts.
How do you interact with a trust company?
We help new clients interpret the drafted, but not yet executed, trust. This is essential because the trustee must adhere to the terms of the trust, so it is imperative to understand what you are signing, and what it means moving forward. We try to help clients anticipate the unexpected events in life that can impact the way a trust is managed. Appointing a professional trustee is a crucial decision and appointing an independent trustee, such as Alliance Trust Company, means that we can offer you more services and flexibility than a trust company at a brokerage house or a large bank.
Will setting up a revocable (living) trust help avoid income taxes?
No. The purpose of a living trust is to avoid probate, guardianship, or conservativeship. It’s not a vehicle for reducing income taxes. In fact, if you are the trustee of your living trust, you will file your income taxes exactly as you did before the trust existed. There are no new returns to file. The only thing that changes is the title to the property you hold. It becomes titled into the name of the living trust. However, the income is still taxed to your social security number.
While some attorneys recommend a living trust have its own tax ID number, it is not required until the passing of the grantor trustee, which then transforms the trust into an irrevocable trust. It is at this point that the trust becomes a separate, taxable entity. If you obtain a tax ID number for your living trust, during your application process the computers at the IRS will tie the tax ID number to your SSN, which assures all income will still flow to you individually.
What is a revocable (living) trust is and how does it avoid probate?
A living trust is a trust that is created during life. A revocable trust is one that the trustor can change, amend, or even do away with altogether. Some trusts (known as testamentary trusts) are created after death, usually in the decedent’s death. Irrevocable wills cannot be changed. In a revocable living trust, the truster is usually also the trustee and is entitled to the use and enjoyment of the assets for life, with the assets passing to remaining beneficiaries at the death of the trustor. A revocable living trust avoids probate by giving legal title to trust assets to a specified successor trustee who then distributes the assets by the terms of the trust. The trust instrument itself provides for transfer, so it is not necessary to have a court supervise the transfer and the disposition of assets in probate.
Why should I establish a trust?
Trusts are a very flexible and useful arrangement. There are many different reasons trusts are established. Trusts can be used to control how and when assets transfer. One of the most common situations we think about with trusts is that they are created to give a mature and experienced trustee the ability and responsibility to manage assets for the benefits of a young or a person with a disability who may not have sufficient financial acumen to manage assets prudently on their behalf. Trusts are also frequently used to achieve tax benefits. The creation of a trust might be much more comprehensive and satisfactory than establishing a joint tenancy or transfer on death arrangement, for example. Trusts may also be used to avoid the expensive and time-consuming court process known as probate.
What is a trust?
A trust is an arrangement involving three parties. A trustor is someone who transfers assets into a trust. A trustee manages the assets in the trust, and a beneficiary, who is entitled to the use or enjoyment of the trust’s assets. Assets can be thought of as a bundle of rights. Some of the rights associated with the asset are what we call legal rights, such as the right to sell something, or borrow against it. Some of the rights are called equitable rights, or the right to use something. It might be helpful in conceptualizing what a trust is to realize that the trustee holds the legal aspects while the beneficiaries have the right to use the assets.
What is the difference between having a will and having a living trust?
Both a will and a living trust are similar vehicles. They set up an estate plan so you can ensure things are distributed the way you want. The important difference is that a will requires you to go through the court system through what is known as the probate process. If you set up a living trust, you can have everything dealt with before your death, and you do not have to go through the court process. Living trusts, in the long run, are much more economical, and all your assets and liabilities are not held to public scrutiny.
Why should I do any estate planning?
You need to do an estate plan to make sure you can control the process regarding your assets and liabilities when you die. If you don’t do an estate plan, you lose all control of that process. A simple example: if you don’t do an estate plan, a Nevada revised statute set the default for how your property would be distributed. You may not be pleased with that result, and by doing an estate plan beforehand, you can avoid any problems for your heirs.
What is Estate Planning?
Estate planning is a process where you take stock of all things you’ve acquired in your life, and make a plan where they will be distributed when you die. The purpose of doing an estate plan is for you to make all the decisions and see that things happen the way that you want them to, rather than have someone make that decision for you.