Nevada does not impose any state income tax on income accumulated in, and capital gains realized by, an irrevocable trust. Consequently, trusts created and administered in Nevada might not be subject to any state income tax on such income, depending on several factors, including the laws of the states where the trust’s grantor and/or advisors or beneficiaries reside, and whether there is source income from a state other than Nevada. Nor does Nevada tax the trust income that a trustee actually distributes to beneficiaries. In addition, Nevada does not assess any tax on the value of intangible personal property held in a trust, such as public and private securities, bonds, mutual fund shares, copyrights, patents, royalties, life insurance and annuity contracts, and partnership interests.
WEALTH ENHANCEMENT WITH DYNASTY TRUSTS
Unlike many states that limit the duration of a trust, Nevada has extended its rule against perpetuities to 365 years for all property held in trust. If structured properly, assets transferred to an exempt dynasty trust can
benefit generations of the grantor’s descendants without incurring additional gift tax, estate tax or generation-skipping transfer tax.
Nevada courts have the option to keep all actions under seal to protect the privacy of the grantor and the beneficiaries.
ASSET PROTECTION THROUGH A “SELF-SETTLED” TRUST
Effective estate planning should include strategies for preserving and shielding your assets from creditors’ claims. Nevada law allows individuals to create self-settled trusts that, under certain circumstances, may protect their assets – especially intangible financial assets – from the claims of unforeseen creditors. A Nevada asset protection trust
may present an alternative for clients who do not wish to take on the expense, complexity, tax reporting and compliance obligations of an offshore trust in order to safeguard their assets. Anyone interested in creating an asset protection trust should consult with their legal and tax advisors. With a properly structured Nevada asset protection trust, a client may be a beneficiary of the trust and retain certain powers over the trust, such as the power to manage the trust assets. Generally, creditors may initiate a challenge to a self-settled asset protection trust within a “tail period” of two years. During the tail period, assets remain protected unless a creditor proves by clear and convincing evidence that the client’s transfer of assets was a fraudulent transfer. Once the tail period expires, the Nevada Spendthrift Trust Act does not permit any challenge to a trust. Nevada, unlike some other states, does not currently have classes of “exempt” creditors who can challenge the trust after the expiration of the tail period.
Nevada law allows trustees to determine an appropriate and prudent mix of investments while taking into account such factors as the current economy, tax consequences, risks, expenses, time horizon, beneficiaries’ ages, cash flow and other needs of current and future beneficiaries. Nevada permits the bifurcation of investment responsibility, which can be useful if a trust holds interests in closely held investment entities or operating businesses and the client wants freedom from trustee involvement with the management of these assets. Since a trustee acting under a so-called “directed” or “administrative trust” has limited liability for the investment advisor’s performance, the trustee will not intervene in the advisor’s investment decisions.
Nevada law allows for contests challenging the validity of trusts before or after a grantor’s death. Under Nevada law, upon a revocable trust becoming irrevocable (either by its terms or due to the grantor’s death) a trustee is permitted to give notice to any beneficiary, heir or interested person of the existence of a trust, which starts a 120-day period for the person to contest the validity of the trust. One effect of the statute is to compel a dissenting person to mount a challenge to the validity of the trust while the grantor is still living and able to provide testimony potentially negating lack of capacity or undue influence if the trust becomes irrevocable by its terms during the grantor’s life. There is also a clearly defined period during which the validity of a trust can be challenged after a grantor’s death. Nevada law also recognizes the validity of no-contest or in terrorem clauses in trusts with some enumerated exceptions.