Discover the Pros of a Nevada Trust
Clients weigh many factors when contemplating establishing a trust as part of their estate plan, including how to minimize estate taxes and protect their assets for their loved ones. The State of Nevada’s trust-friendly laws and legal and tax benefits for out-of-state residents as well as for those who have established residency make it an ideal solution to consider. Benefits include (but are not limited to):
Savings on fiduciary income taxes:
In many states, a trust’s realized capital gains and accumulated ordinary income are taxed at rates between 5 and 10 percent, with rates in California as high as 13.3 percent and currently under consideration for further increases. Nevada, on the other hand, does not have a state income tax, and therefore does not impose any fiduciary income tax on Nevada trusts. Income accumulated and capital gains realized in a Nevada trust are not taxed by Nevada, providing the potential for considerable tax savings.
Long-term “Dynasty” Trusts:
The Nevada Legislature adopted the Uniform Statutory Rule Against Perpetuities to allow an interest in property to last 90 years, or 21 years after the death of an individual living at the time of the interest’s creation, whichever is longer. The statute was later modified to allow 365-year interests, allowing trusts in Nevada to last 365 years. For individuals wanting to pass their wealth down to children, grandchildren and successive generations, these long-term trusts are thought of as a way to share the wealth within a family for generations to come.
Ability to Use Electronic and Digital Media:
Nevada permits electronic wills, NRS 133.085, and electronic trusts, NRS 163.0095. The statute refers to the Nevada Uniform Electronic Transactions Act (UETA), which is Chapter 719 of the Nevada statutes. For an electronic will to be valid, it must be created and maintained in an electronic record as defined in the UETA, and contain the date and electronic signature of the testator. It must also include an authentication of the testator which can be any of the following: a fingerprint, retinal scan, voice recognition, video recording, digitalized signature or facial recognition. The statute also requires the electronic signature and seal of a notary, or of two or more attesting witnesses.
For a variety of reasons, your clients may not want to inform their trust beneficiaries about their trust or their interests in it. Nevada statutes provide this flexibility, allowing grantors to wait until their children have graduated from college, for example, before knowing about the trust.
Favorable Tax Treatment for Long-Term Trusts
A client’s ability to contribute assets to a trust that will continue for generation after generation without the imposition of any transfer tax, and potentially no state income tax, is an extraordinary opportunity when compared to the alternative of passing assets outright, from generation to generation, subject to a federal transfer tax at each generation. Based on a $12.06 million contribution to a trust, a 5 percent after-tax rate of return on the investment assets, a new generation every 25 years, and a federal estate tax of 40 percent applied at each generational transfer, the GST-exempt trust would have an approximate value of $468 million after only 75 years. The same sum of $12.06 million held outside of a trust (and subject to a gift tax or estate tax upon transmittal to each successive generation) would have an approximate value of $101 million.
Federal estate tax rate: 40%
Return on investment assets: 5% annually
No state income taxes
No distributions from trust or consumption of principal or income.
No basic exclusion amount used to offset taxable amount in future years.
Careful Planning and Avoiding the Potential for Other States to Impose an Income Tax on a Nevada Trust
While Nevada trusts offer many strategic benefits — particularly if drafted with supportive modern trust provisions — taking advantage of them requires careful planning and collaboration amongst clients’ tax, legal and wealth advisors. For example, although Nevada will not impose an income tax on a Nevada trust, depending on the circumstances another state might impose a state-level income tax on the Nevada trust. Examples include the following:
Many jurisdictions will treat a trust as a resident trust, and subject to state income tax, if the trust has a fiduciary residing in that state, or if the trust administration occurs in that state. For example, if a Nevada trust has an individual co-trustee or investment or distribution advisor located in states including California, that state would consider the trust to be subject to its tax regime. Similarly, if a Nevada corporate trustee delegates a major portion of its trust administration duties to an affiliate in another state (i.e., the affiliate has full discretion to manage the trust’s investment portfolio without any supervision by the Nevada trustee), there is a risk that the affiliate's state would consider the trust to be resident and fully taxable in that state.
If a Nevada trust has source income from an operating business or real estate located in another state, that state will likely claim that it is entitled to tax at least a proportionate share, if not all, of the trust’s federal taxable income. Portfolio managers of Nevada trusts should be aware of investments that could generate source income from a high-tax state. Investments like hedge funds and private equity funds often have layers of entities, and managers should be mindful that a fund could allocate state-sourced income to a trust on a Form K-1.
Request the full 24-page white paper to learn more about:
Flexible Provisions to Achieve the Grantor’s Objectives
Timing of notice to beneficiaries
Methods for modifying a trust in Nevada
Two procedures specific to Nevada
Decanting existing trusts
Explore solutions enabled by Nevada trusts for common high-net-worth client situations.