A Conversation with Steve J. Oshins Part III
On Nevada Asset Protection and Trust Planning: A Conversation with Steven J. Oshins, Esq., AEP (Distinguished) Part III
Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC ( www.oshins.com ) in Las Vegas, Nevada, with clients throughout the United States. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He is listed in The Best Lawyers in America® and has been named The Best Lawyers’ Las Vegas Trusts and Estates “Lawyer of the Year” twice.
Mr. Oshins kindly agreed to an in-depth, four-part interview on Nevada asset protection and trust planning. Part I of this conversation focuses on the Nevada Asset Protection Trust; Part II on the Hybrid Nevada Asset Protection Trust and the NAPT plus LLC(s) Structure; Part III on the NING Trust; and Part IV on Nevada Dynasty Trusts as well as recent developments.
Part III: The Nevada Incomplete Non-Grantor (NING) Trust
Schoenblum : One potential state income tax strategy for some taxpayers has been to make a completed transfer for gift tax purposes to an out-of-state trust established in a no state income tax such as Nevada. How does a NING Trust differ from this strategy in its design and advantages?
Oshins : A NING Trust isn’t a completed transfer for gift tax purposes. Therefore, our clients aren’t constrained by the gift tax exemption amount. This is very important since many of these NING Trusts receive extremely large dollar amounts of transferred assets. Unlike a completed gift trust where estate tax planning is a primary motivator, a NING Trust is primarily used as a state income tax savings tool.
Schoenblum : A few years ago, the IRS issued several private letter rulings (201310002, 201310003, 201310004, 201310005, and 201310006) involving a New Jersey domiciliary. Before these rulings, the assumption of prior letter rulings was that a testamentary special power to appoint held by the settlor was adequate to make the entire transfer to the trust incomplete. What was the new ingredient added to the Incomplete Non-Grantor (ING) Trust blueprint in the above listed rulings issued in March 2013 and what was the relationship to Nevada?
Oshins : I did the Nevada attorney review work for the client who obtained the series of private letter rulings, so I know this one very well. My friend Bill Lipkind is the attorney who obtained the rulings. In order to make the lifetime portion of the transfers to the trust incomplete for gift tax purposes, the trust needed a lifetime non-general power of appointment over the corpus for health, education, maintenance and support in a non-fiduciary capacity. Nevada had a huge advantage over other competing states at that time since many other states didn’t allow asset protection trusts to include lifetime powers of appointment.
Schoenblum : In order to ensure that the NING Trust is not a grantor trust, adverse parties are needed to have a say with regard to distributions. Accordingly, a NING Trust instrument provides for a Distribution Committee (also sometimes referred to as a Power of Appointment Committee). All members of the Distribution Committee must be beneficiaries?
Oshins : Yes. They must be adverse parties which means they must be beneficiaries in order to have interests that are adverse to one another to meet these requirements. Otherwise, it would be a grantor trust for income tax purposes.
Schoenblum : At least how many members must the Distribution Committee have and why?
Oshins : We use a minimum of three members. If you include the settlor on the committee (which depends upon how you draft it), then this would be at least three members other than the settlor. Otherwise, there would be gift tax issues.
Schoenblum : Can the NING Trust creator’s spouse be included as a beneficiary of the trust and as a member of the Distribution Committee?
Oshins : No.
Schoenblum : Due to the concern with the number of Distribution Committee members, can minors serve on the Distribution Committee through their guardians? Has this been addressed in any recent NING Trust private letter rulings issued by the IRS?
Oshins : Yes, one of the options we have as we’re taking down drafting information from a client is to include minors on the Distribution Committee. For each minor, we can appoint a separate guardian in the trust agreement to act on behalf of that minor until the minor is 18. So I tell the client to make sure to call me when a child reaches 17 to see if we need to have the guardian resign from the committee before the child reaches age 18 and might not be a desired Committee member. Yes, this was approved in another series of private letter rulings obtained by Attorney Bill Lipkind where I did the Nevada review work. So we use the exact language that Bill got approved by the IRS.
Schoenblum : Can you summarize the various ways that a distribution can be made from a NING Trust?
Oshins : There are three ways. The first is by the unanimous vote of the Distribution Committee. The second is by a majority of the Distribution Committee plus the settlor. And the third is a distribution of corpus made via the settlor’s reserved lifetime non-general power of appointment for health, education, maintenance and support in a non-fiduciary capacity.
Schoenblum : In the case of a NING Trust, it is not enough for the trust to be set up in a no income tax state, but also in a state that has enacted domestic asset protection laws?
Oshins : Yes. It must be set up in a state that has domestic asset protection trust laws. Otherwise, it will be taxed as a grantor trust. I have heard attorneys mistakenly think it can be set up in any state with no state income tax, but they are wrong.
Schoenblum : Even if other states allow the settlor to hold an inter vivos power of appointment, the asset protection trust statutes of many states recognize exception creditors. If a state’s asset protection trust laws allow statutory exception creditors to pierce the trust and reach trust assets, is there a risk of the trust being a grantor trust? Does this make Nevada a potentially safer state for an ING Trust?
Oshins : It’s certainly safer to use Nevada since that issue goes away. But there have been rulings for DING Trusts (similar Delaware trusts) even though Delaware allows divorcing spouses, alimony creditors, child support creditors and pre-existing tort creditors to pierce through an asset protection trust, whereas Nevada does not. There is no reason to set these trusts up in any state but the leading asset protection state which is Nevada.
Schoenblum : There are two circumstances where a NING Trust is most likely to be justified. First, when a substantial one-time gain is likely to be realized. Second, when the anticipated annual investment income from intangible assets, not a trade or business, in light of the home state tax rate, would significantly exceed the set-up costs and annual administration fees relating to the NING Trust. Can you give an example of each and the potential tax savings?
Oshins : That is correct. Very often, the client will be selling his or her business, for example, so we first have the client transfer the business to a NING Trust and have the trustee sell the business. If the client lives in a state with a 10% state income tax, then even a sale with a $1 million capital gain saves $100,000. Likewise, a sale with a $10 million capital gain saves $1 million. And as you noted, the other situation where the NING Trust technique is used is where the client has assets that have a large amount of taxable income that is not sourced to the client’s home state. A large investment portfolio is a great example of this. Assume a $5 million investment portfolio that has 5% annual taxable income (such as 2% dividends and 3% capital gains). That’s $250,000 of annual income. Again assuming a 10% state income tax, the NING Trust saves $25,000 in year one and then increases the annual savings each year thereafter.
Schoenblum : Are there any issues or restrictions with respect to how soon assets can be sold after being transferred to a NING Trust?
Oshins : Technically there are no restrictions. However, there are always potential step-transaction and prearrangement arguments, so the best answer here is that the more time that can be placed between the date of transfer to the NING Trust and the date of the sale, the more likely that there won’t be a problem.
Schoenblum : Due to the low level of taxable income of a trust at which the maximum marginal rate of taxation for the federal income tax and the net investment income tax comes into play, are NING Trusts only for those already in the highest 39.6% marginal tax bracket?
Oshins : Generally, yes, but not always. For example, a California resident has such a high state income tax that we have to analyze the arbitrage between the client’s combined federal and state income tax rate versus the NING Trust’s federal income tax rate. We have had a few of these where it has penciled out. Another situation where this doesn’t matter is where the client is in the highest federal long-term capital gains bracket, but isn’t in the highest federal bracket and is going to sell a business interest for millions of dollars. The huge state income tax savings in the first year can offset being in a lower federal income tax bracket in future tax years. In other words, generally yes, but each fact pattern stands on its own.
Schoenblum : Is it recommended to have a sole NING Trust trustee located in Nevada? Let’s look at the case of a California trust creator establishing a NING Trust. What would be the consequence of having a California trustee in addition to the Nevada trustee?
Oshins : California taxes a trust in part based on whether there are any California fiduciaries. So we would avoid having any California co-trustees.
Schoenblum : Are there some forever tainted trust states that exercise such expansive taxing jurisdiction that income tax is almost impossible to avoid during the life of the trust?
Oshins : Yes, there are a number of states that tax a trust based solely on the residency of the settlor or based on the residency of a beneficiary. If that is the case, then the NING Trust doesn’t work. Also, New York abolished NING Trusts by statute a few years ago. The bottom line is that this technique doesn’t work for residents of every state. But we can easily look at the tax rules in a state in about 60 seconds and be able to tell the prospective client yes or no. It works for the residents of many of the states with a state income tax, so each person who lives in a state with a state income tax who believes he or she may benefit from a NING Trust should make sure to ask about it.
Steve Oshins was interviewed by Neil Schoenblum, Senior Vice President, Wealth Management at First American Trust of Nevada, LLC. Mr. Schoenblum specializes in asset protection and trust law, particularly the advantages offered by Nevada. He can be contacted at (702) 784-7611 or by e-mailing firstname.lastname@example.org .
Steven J. Oshins, Esq., AEP (Distinguished) and the Law Offices of Oshins & Associates, LLC are not affiliated with First American Trust of Nevada, LLC or its affiliates. The information provided above is intended for informational purposes only and should not be considered estate planning advice. Please consult an estate planning professional, financial advisor, and/or tax advisor for additional guidance.
First American Trust of Nevada, LLC is a wholly owned subsidiary of First American Trust, FSB which is a wholly owned subsidiary of First American Financial Corporation.