There is little doubt Nevada has taken over as the top trust jurisdiction in the United States. For years the estate planning community has looked to states like Delaware and Alaska for their favorable tax and asset protection laws. Not anymore. The top estate planners in the country are increasingly using Nevada as their preferred out of state trust jurisdiction for high net worth clients and their families.
Nevada enacted its domestic asset protection statute in 1999. A Nevada asset protection trust (NAPT) is an irrevocable trust in which the creator of the trust is also a permissible beneficiary. Two years after the creator transfers a portion of their assets to the trust, those assets should be protected from all creditor claims. A Nevada asset protection trust is a vehicle to protect assets from creditor claims which are becoming more prevalent in our highly litigious society.
Nevada is unique with one of the shortest statutes of limitations, with most domestic asset protection trust states having a four-year statute. Nevada is also one of only two states that have no exception creditors. These are creditors that can pierce the trust irrespective of a state's statute. Nevada has none. Sixteen of the nineteen domestic asset protection trust states have exception creditors, including a divorcing spouse for child support and alimony, in addition to other potential creditors.
Nevada does not have a state income tax. Therefore, a trust sitused in Nevada will be responsible for filing a federal income tax return, but there is no corresponding Nevada tax or filing. Investable assets held inside a Nevada trust can compound substantially without having to pay state income taxes. To learn more about which states are most tax-friendly for the wealthy, read the recent USA Today article posted in January 2020: https://www.usatoday.com/story/money/2020/01/29/the-most-tax-friendly-states-for-the-rich/41060485/
A directed trust allows for the separation of a trustee's roles among multiple parties. The old traditional trust had one trustee responsible for the investment, distribution, and administration of a trust. A handful of states have enacted directed trust statutes which allow the investment and distribution functions to be handled by a family member, friend, or other trusted advisor while leaving the administrative functions to a corporate trustee.
The unbundling of trustee services gives trust grantors, beneficiaries, and their professional advisors more control over a client’s estate plan. Clients prefer the separation of duties, flat trustee fees, and the greater flexibility of a directed trust arrangement.
Decanting is the act of pouring assets from an old trust to a new trust with more favorable terms. For years estate planners struggled with the simple fact that irrevocable trusts were irrevocable and could not be changed. Nevada's decanting statute allows for the modification of an irrevocable trust to address changes in trust law and dynamics within families that could not have been predicted. Some of the most commons reasons to decant are to change drafting errors, trustee provisions, distribution standards, and governing law.
The length of time a trust can last is dependent on the state’s "Rule Against Perpetuities." In 2005, Nevada's laws were amended to allow a trust to last for 365 years. This means a trust in Nevada can last for 365 years without the trust assets being subjected to an estate tax levied at each generation. The current estate tax exemption for 2020 is $11.58M for an individual and $23.16M for a married couple. Any amount over these thresholds is subject to an estate tax of 40%. These current estate tax exemption amounts push Dynasty Trusts down to #5 on our list of why Nevada is the #1 state for trusts. One thing we do know about estate taxes is they are subject to change. If the estate tax exemptions are lowered through sunset of the current law, or through a change in administration, the Dynasty Trust would move up in the ranking of why Nevada is the #1 state for trusts.
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