A recent Bloomberg.com article noted that some of the nation’s wealthiest families are renting addresses in South Dakota. Why? So they can shelter wealth from the Federal Government by limiting or avoiding the Federal Estate Tax and the Federal Generation Skipping Transfer Tax (the “GSTT”).

The GSTT is another federal tax imposed on wealth transfers that is imposed in addition to the Federal Estate Tax and can be levied at each generation level. Luckily, you can limit or avoid paying these taxes by establishing your Trust in Nevada. Using Nevada as your Trust’s jurisdiction can be better than South Dakota because Nevada law allows for the creation of a completed gift, self-settled spendthrift trust (the “NVSSST”), which provides better protections than South Dakota trusts receive.

Once you have started the process of sheltering your wealth by creating a NVSSST, the next step is making sure Nevada law controls your Trust so you will achieve maximum tax benefits. As a Nevada resident, Nevada law will control. If you move to another state and still want to take advantage of Nevada’s tax-friendly trust laws, you will have to maintain a legal nexus with Nevada. You can do this by renting an address in Nevada and continuing a few key administrative tasks in State, such as having a Nevada Trustee handle paperwork and file tax returns.

You may have heard that President Obama has called for closing this dynasty trust “loophole” (the NVSSST is a dynasty trust) in his annual budget proposals. Despite the President’s call for action, Congress appears disinterested in making changes to your ability to shelter wealth through these trusts. Presumably, Congress sees no reason to act since imposing taxes on these trusts will not actually generate any federal revenue for almost 90 years—roughly the course of 3 generations from grandparent to grandchild, when a taxable distribution is expected on assets that are not sheltered from the GSTT.

This is good news for anyone who has established a NVSSST since the longer Congress procrastinates, the longer assets can remain in these “perpetually” tax-exempt trusts, growing larger over time. An example of the financial benefit used by Bloomberg.com shows that $1 million invested in a dynasty trust such as the NVSSST earning twelve percent a year would swell to $1.9 billion (yes BILLION) over ninety years. By comparison, if the investment were subject to state income tax, federal estate tax, and the GSTT, the investment would only be worth $488 million (one-fourth of the $1.9 billion) over that time.

As stated by many, “we have a tax haven in our midst” in Nevada. If you are using a NVSSST to protect your wealth, I applaud you for embracing creative and effective legal ways to reduce your taxes. If we can assist you in securing your wealth in this manner, please give me a call to discuss the options.

When you established your irrevocable trust, the purpose was to guarantee your wishes were carried out even if your beneficiaries did not fully appreciate the terms you selected for the trust. There are times, however, when changed circumstances mean your well-planned trust will not do what you had planned. Nevada has adopted a favorable trust decanting statute that grants the Trustee broad discretion to decant an irrevocable trust. Decanting is less expensive and more private than the alternative of seeking trust reformation before the Court. The process of decanting a trust in Nevada is relatively simple. The Trustee essentially empties out the existing trust into a newly created trust. It can be helpful to have the consent of the beneficiaries, but this is not required under the Nevada statute. There are plenty of reasons to consider decanting, and the primary ones are to update or amend trust provisions, to address changed circumstances, for federal or state tax planning, or to change the trust situs.

The Outdated Trust

If your trust is outdated, decanting can be a means to update or modernize trust provisions, or to make clarifications in the law governing the trust document. Decanting can be used to improve administrative provisions such as changing a trustee’s ability to delegate specific functions or decisions. It can also be a tool for combining multiple trusts so that administrative costs are reduced. Decanting may also be used to clarify governing law and insure uniform requirements for administration when the trustee and beneficiaries live in several different states.

Changed Circumstances

When a trust has become irrevocable, but circumstances have changed, trust decanting can be a means to accommodate these changes. For instance, decanting permits the transfer of assets to a supplemental needs trust that will allow a disabled beneficiary to receive public benefits. Through decanting, the distribution provisions of a trust may also be changed. For instance, instead of the trust terminating when a beneficiary reaches a certain age, the trust can be continued throughout that beneficiary’s lifetime. A more mundane, but still important, reason to decant is to correct drafting errors.

Federal and State Tax Planning

In some circumstances, trust decanting may also be used to maximize generation skipping transfer taxes. It may also help reduce or eliminate state taxes by avoiding a state’s fiduciary income tax or the interplay of different state income tax provisions. These issues require more complex planning, but the results can be financially advantageous.

Trust Situs

Decanting may be used to “migrate” or “redomicile” an irrevocable trust to a new jurisdiction. If laws in the state where the trust was drafted no longer provided the expected benefits, changing the trust situs can remedy the situation. A trust’s situs has important consequences for tax, asset protection and other factors, so this may be a significant consideration in making sure the goals and purposes of your irrevocable trust are realized.