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Build Your Dynasty in Nevada

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BUilD yoUr DynaSty in neVaDa
BY CATHERINE COLOMBO, ESQ. & KRISTIN TYLER, ESQ.
The words “dynasty trust” may conjure up thoughts of famous, wealthy families such as the Rockefellers or the Vanderbilts. Sure, plenty of well-known American millionaires and billionaires have set up these types of trusts to benefit their families for generations. But in reality, you don’t need to have champagne wishes and caviar dreams to reap the benefits of establishing a dynasty trust. Nevada residents with estates worth $500,000 or more should consider taking advantage of Nevada’s cutting-edge dynasty trust laws to provide for their children, grandchildren and future generations while at the same time protecting the trust assets from estate taxes, creditors and divorcing spouses.
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A dynasty trust is an irrevocable trust that leverages a person’s estate, gift and generationskipping transfer tax exemptions for as many generations as applicable state law permits. It’s used to hold assets in trust for the benefit of the beneficiaries and to allow the beneficiaries to use the trust property rather than receiving the property outright where it would be exposed to creditors and transfer taxes. A typical dynasty trust is structured to provide that, at the death of the grantor, the trust will split into equal shares for each of the grantor’s living children. At the death of each child, the trust will then split into equal shares for each of that child’s children (i.e., the grantor’s grandchildren). This division of the trust’s assets will continue for as long as the trust continues under state law. At each division, if the initial assets of the trust are exempt from the generation-skipping transfer tax, the assets will never be subject to an estate tax (until the expiration of the trust under state law). Most states have a statute, which is normally referred to as the rule against perpetuities, that
governs how long a trust can last in that state. The majority of states have adopted the common-law rule against perpetuities, which provides that the length of a trust is limited to “lives in being” plus 21 years. Prior to October of 2005, trusts in Nevada were governed by the Uniform Statutory Rule Against Perpetuities. However, this all changed in October of 2005, when Nevada amended its perpetuities law. In the state of Nevada, it is now possible to protect and preserve wealth for up to 365 years.1 This lengthy rule against perpetuities provision, coupled with no state income tax, makes Nevada an ideal jurisdiction for the creation of dynasty trusts.
WHY SET UP A DYNASTY TRUST?
Perhaps the most compelling reasons to establish dynasty trusts are to build and preserve family wealth. In order to show how a dynasty trust can build wealth, let’s examine the common scenarios for estate distribution. A basic estate plan, or no estate plan, would distribute assets outright to the beneficiaries at every generational level (about every 30 years). At each generational level, the assets passed
outright to the next generation of beneficiaries are subject to estate tax. A more advanced plan using a dynasty trust structure, with the common-law rule against perpetuities, would hold the assets in trust. No estate tax would be imposed upon those assets during that period. A sophisticated plan using a dynasty trust structure, with Nevada’s 365-year perpetuity period, would hold the assets in trust for up to 365 years with no estate tax. How large can an estate grow in these different scenarios? Exhibit A, on the following page, shows the three different distribution scenarios with various after-tax growth rates based on a $500,000 estate. Using a mid-range 5.0 percent after-tax growth rate, a $500,000 estate will grow to $10,903,505 after 120 years if it is distributed to a new generation every 30 years and incurs a 50 percent estate tax at each generational level. This same $500,000 will grow to $174,455,993 if it is held in a dynasty trust for 120 years. Further, a $500,000 estate will balloon to more than $27 trillion using a 365-year dynasty trust. The difference between passing assets outside of a trust ($10.9 million) and using a sophisticated plan ($27 trillion) shows the incredible power of using a dynasty trust to build wealth.
The most compelling reasons to establish dynasty trusts are to build and preserve family wealth.
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Exhibit A - $500,000 estate
After-Tax Growth 2.5% 5.0% 7.5% 10.0% Value of Dynasty Trust After 365 Years $4,103,749,779 $27,105,920,788,920 $145,565,835,080,702,560 $641,652,790,156,695,300,000 Value of Dynasty Trust After 120 Years $9,679,075 $174,455,993 $2,937,553,024 $46,354,534,409 Value of Property if No Trust After 120 years (50% tax every 30 years) $604,943 $10,903,505 $183,597,084 $2,897,158,713
For clients with slightly larger estates, the results are even more incredible. For example, $1 million invested at 5.0 percent after-tax growth will grow to $21,806,998 if assets are passed outright. In 120 years, that same $1 million can grow to $348,911,985, in a dynasty trust. After 365 years in a dynasty trust, that $1 million can grow to $54,211,841,577,840.
Protecting the assets in trust becomes a major issue once you see how large an estate can grow over 365 years. The manner in which a trust is drafted will affect its ability to keep creditors at bay. There are three basic ways to draft trusts: Mandatory Distribution Trusts, Support Trusts and Discretionary
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DRAFTING DYNASTY TRUSTS FoR MAXIMUM CREDIToR PRoTECTIoN
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Trusts. Each of them provides a different level of asset protection.
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Mandatory Distribution Trusts do exactly what you expect them to do: they require the trustee to make distributions to beneficiaries at certain times according to the specifications of the trust. These trusts may require the trustee to distribute a certain percentage of the trust assets to a beneficiary at staggered ages such as 25, 30 and 35. Other types of Mandatory Distribution Trusts may require annual distributions of income. Distributing trust assets outright to a beneficiary moves the assets into the beneficiary’s own potentially taxable estate and exposes the assets to an environment where they can be reached by the beneficiary’s creditors and/or divorcing spouses.
MANDAToRY DISTRIBUTIoN TRUSTS
In this type of trust, the beneficiary is often the sole trustee and is able to make distributions to himself using the HEMS standard. Because distributions are subject to an ascertainable standard (HEMS), the beneficiary has a property interest in the trust’s assets and a right to compel distributions. This means that in some jurisdictions a Support Trust can be pierced by certain exception creditors. More specifically, Support Trusts can be attacked by creditors holding the following types of claims: (1) alimony or child support, (2) claims for necessary services or supplies rendered to the beneficiary, such as medical treatment, (3) claims for services rendered and materials furnished that preserve or benefit the beneficial interest in the trust, and (4) claims by the United States or a state to satisfy a claim against the beneficiary, such as a tax lien.2 While a Support Trust offers significantly higher levels of asset protection than passing assets outside of a trust, it is not bulletproof and can be attacked by statutory and judicially created exception creditors.
SUPPoRT TRUSTS
Support Trusts allow the trustee to make distributions of trust income or principal for the support of a beneficiary based on the standards of “health, education, maintenance and support” (HEMS).
Discretionary Trusts offer the highest level of asset protection because they give an independent trustee the sole discretion to make distributions to a beneficiary without an ascertainable standard. These types of trusts usually use a dual-trustee structure. The beneficiary can act as the investment trustee and make investment decisions for the trust. An independent trustee is tasked with approving any distributions out of the trust. The trust agreement gives the independent trustee absolute discretion to decide when and how much of the trust assets should be distributed to a beneficiary. The beneficiary can only compel a distribution from the trust if it can be shown that the independent trustee is abusing his discretion by failing to act, acting dishonestly or acting with an improper purpose in regard to the motive in denying the beneficiary the funds sought. Using this dualtrustee structure may seem more complex, but it is certainly simpler than defending a trust from attachment by a beneficiary’s creditors. Discretionary Trusts provide greater asset protection than Support Trusts because the beneficiary does not have a property interest in the trust assets of a Discretionary Trust. Therefore, the beneficiary does not have to rely on a spendthrift clause to protect against
DISCRETIoNARY TRUSTS
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creditors. A spendthrift provision provides that a beneficiary cannot encumber, pledge or sell his beneficial interest in the trust nor can a creditor attach the beneficiary’s interest. The goal of this provision is to protect the beneficiary from his own bad spending habits so that he cannot squander his interest in the trust. Spendthrift provisions in Support Trusts cannot fully protect against creditors, as a trust relying solely on its spendthrift provision for asset protection can be attacked by exception creditors.3 As a leading state in the arena of creditor protection, Nevada has recently amended its laws to provide that property will be exempt from execution by a creditor if a trust contains a spendthrift provision and property has not been distributed from the trust.4 Essentially, this means that in Nevada a creditor cannot force a distribution from a trust with a spendthrift clause. Neither the beneficiary nor the beneficiary’s creditors can force a distribution from a Discretionary Trust.
hono r roll
The State Bar of Nevada Board of Governors and the Access to Justice Commission extend a special thanks to the following attorneys who generously accepted cases in February 2010 through the Legal Aid Center of Southern Nevada, Washoe Legal Services, Nevada Legal Services and Volunteer Attorneys for Rural Nevadans.
Aaron D. Shipley Albert Marquis Alisa Koot Amy Tirre Aneta Mackovski Arun Gupta Brandon Barkhuff Bruce Beesley Christian Hale Cliff Marcek Corinne Price Craig Bourke Dan Waite David Krieger David Stoft Diana Hillewaert Elizabeth Brickfield Gerald Gillock Ivy Gage Jamie Zimmerman Jason Stoffel Jeff Geen Jeffrey A. Silvestri Jennifer Merideth Jenny Routheaux Joseph P Schrage . Karen Wilson Kim Surratt Kris Ballard Kristen Gallagher Kristin “Katie” Woods Lawrence Rouse Malik Ahmad Mario Fenu Maximiliano Couvillier Michael Rawlins Mohamed Iqbal Nadia Jurani Patrick Murch Paul Gaudet Paula Gregory R. Christopher Reade Radha Chanderraj Randall Adams Rena McDonald Richard McKnight Rosa Solis-Rainey Sean Lyttle Stephanie Landolt Stephanie Lee Terry Moore William curran William Kapalka
DRAFTING DYNASTY TRUSTS WITH MAXIMUM FLEXIBILITY
Clients may express concern that keeping assets in trust for beneficiaries, rather than distributing them outright, will tie up assets and result in unnecessary complication for the trust’s beneficiaries for the duration of the trust. Clients may also be concerned that the terms of the dynasty trust will be set in stone and will not be applicable to future generations of the client’s descendants. This does not have to be the case, as a carefully and welldrafted trust can provide flexibility and continuity for a trust’s beneficiaries. As long as the trust document contains a few key provisions, trust beneficiaries need not be locked into rigid trust terms. As the grantor of a trust, it is often difficult to predict the circumstances and predicaments that will affect the grantor’s children or grandchildren, let alone their descendants 365 years in the future. It is imperative that a dynasty trust allow beneficiaries to adapt to the needs of the future. One way this can be accomplished is through the use of limited or special powers of appointment. A special testamentary power of appointment is the power to change how the trust’s assets are to pass after the beneficiary’s death. This power can be drafted as broadly as the client sees
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aSk a lawyer, Brief SerViCeS, CliniCS, anD ClaSSeS
Amy Friedlander april Green Barbara Gruenwald Brian Blackham Bryce Alstead Christian Hale christopher carr Craig Etem David Mann Debbie Bensch Dixie Grossman Eric Lerude Ethan Birnberg Gabrielle Jones Graeme Reid Ian Silverberg Jennifer Peterson Jennifer Tsai Joe Riccio Kait McLendon-Kent Kenneth Ching Leah Wigren Madelyn Shipman Mandy McKellar Mario Fenu Mariteresa RiveraRogers Mark Liapis Muriel Skelly Nadia Jurani nikki Dupree Pat Phair Peter Anderson Rhonda Forsberg Rich Williamson Richard Cornell Robert Blau Ryan campbell Soraya Veiga tamara Jankovic Tera Hodge Vicky Mendoza
BoLD honors multiple cases accepted and/or sessions conducted within the month. May 2010 Nevada Lawyer 11
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fit. The power of appointment can be drafted to allow the beneficiary to appoint the trust assets to anyone other than himself, his estate, his creditors or the creditors of his estate.5 If drafted properly, a power of appointment allows the beneficiary to change the disposition of the trust assets. The power of appointment can then be used to cut out deviant beneficiaries or to equalize the financial status among the trust’s other beneficiaries. By drafting powers of appointment in a broad manner, the terms of the trust will not be locked, which will allow beneficiaries of the trust to adapt to the changing circumstances and needs of the beneficiaries throughout the life of the trust. A broadly drafted power of appointment is an effective way to add flexibility to a dynasty trust. Another way to provide flexibility to a dynasty trust is to allow the trust’s beneficiaries to have the ability to remove and replace trustees. This power provides both continuity and flexibility for the beneficiaries of a trust. The ability to remove and replace trustees does not grant the beneficiaries any rights to access the trust’s assets and the Internal Revenue Service has ruled that beneficiaries can
have the power to remove and replace trustees for any reason without risking estate tax inclusion.6 The grantor of a trust can also hold the power to remove and replace trustees.7 The best way to draft a dynasty trust for a financially capable beneficiary is to draft the trust as a Beneficiary Controlled Trust. A Beneficiary Controlled Trust makes it possible for the beneficiary of the trust, by serving as the investment trustee of the trust, to be given virtually identical rights in the trust property as he would have with outright ownership of the trust property. For example, the beneficiary can be given all of the following rights in trust that can also be given with outright ownership: (1) the right to indirectly access the income, (2) the right as trustee to manage and control the property, (3) the right to use the property, and (4) the right to transfer the property during life and to determine who will receive the property after the beneficiary’s death. By allowing the beneficiary to serve as the investment trustee of a dynasty trust, alongside of an independent trustee for distribution purposes, the trust assets are insulated from creditor and divorce problems. The assets can also be protected from estate taxes, which is a result that could not occur if the assets were owned outright by the beneficiary.
DYNASTY TRUSTS FoR THE AVERAGE CLIENT
In order to avoid probate in Nevada, a person needs a pour-over will along with a revocable trust to hold his or her assets. Most revocable trusts are drafted to distribute the trust assets outright to the beneficiaries at a designated time such as once the beneficiary reaches a certain age or upon the death of the last living grandchild. An easy way to take advantage of Nevada’s 365-year dynasty trust law is to draft the client’s revocable trust as a dynasty-revocable trust so that the trust assets are held in trust, rather than distributed outright. Using this method, the trust assets can benefit many generations while growing the family wealth in a creditor-protected environment. Another way to use the dynasty trust strategy is in conjunction with an irrevocable life insurance trust (ILIT). People create ILITs to own life insurance
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in order to keep the value of the insurance out of their taxable estates. Upon the death of the insured, the proceeds of the policy are paid to the ILIT. These life insurance policies are often worth $1 million or more. As such, we recommend drafting the ILIT as a dynasty trust with Nevada’s 365year perpetuities period to keep the policy proceeds in trust for the benefit of the beneficiaries for many generations. A person need not be a resident of Nevada to take advantage of Nevada’s lengthy rule against perpetuities. When creating ILITs, people can take advantage of Nevada’s 365-year perpetuity period by naming at least one Nevada-based trustee.8
CoNCLUSIoN
Nevada’s sophisticated dynasty trust laws can help build and preserve wealth for many generations whether you are working with a high-level casino executive or a successful small business owner. No matter how your clients have attained their wealth, they all have one thing in common: they want to maximize the legacy they leave to their family. Who knows – if you take advantage of Nevada’s 365-year dynasty trust laws, your average Joe client could be the next great American tycoon.
catheRine coLoMBo anD KRiStin tyLeR are both attorneys at Oshins & Associates, LLC. They practice primarily in advanced estate planning, asset protection and business planning. They can be reached at (702) 341-6000 or via e-mail at ccolombo@oshins.com or ktyler@oshins.com, respectively.
1 NRS 111.1031. 2 Restatement Second of the Book of Trusts, Section 157. 3 Restatement Second of the Book of Trusts, Section 157. 4 NRS 21.090(dd). 5 IRC Section 2041(b)(1). 6 Priv. Ltr. Rul. 97-46-007 (Nov. 14, 1997). 7 Rev. Rul. 95-58, 1995-36 IRB 16. 8 NRS 166.015.
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