Robert Powell’s Retirement Portfolio: You may not be rich enough to land in the Pandora Papers, but you may still need a trust
So maybe you’re not a former or current head of state, or a wealthy oligarch, or media or a sports personality such as those named in the Pandora Papers. But why should those folks get to protect their assets or shield income from being taxed, and not you?
Well, the truth is that you, too, can establish a trust. You just need what the rich have: Access to a professional who knows what type of trust to establish, where to set it up, and what trust company to use. And it wouldn’t hurt to have enough money to make it worth your while, perhaps a business that you’re about to sell, for instance.
Steve Oshins, an attorney with Oshins & Associates, is among those professionals. For many years he’s been tracking the best states in which to establish various types of trusts: domestic asset protection trusts, dynasty trusts, non-grantor trusts and the like.
And, according to Oshins, South Dakota, Nevada, Delaware and Alaska are the top four states in which to create a trust. But there are other states as well, including Tennessee and Ohio.
Other financial advisers also place Nevada high on the list of states for creating a trust.
“Nevada is consistently ranked as a favorable United States trust jurisdiction for the many estate planning advantages that people gain,” said Philip Herzberg, a lead financial adviser at Team Hewins. “These cutting-edge laws, paired with a state income tax-free environment and relatively generous execution exemptions, have enabled Nevada to become a go-to-state for estate planning and asset protection.”
Top states for asset protection trusts
But there are nuances when it comes to which state is best for certain types of trusts. For instance, Nevada and South Dakota are the best states in which to establish an asset protection trust, such as domestic asset protection trust or DAPT, according to Oshins. An asset protection trust is a self-settled spendthrift trust that an individual creates for himself that is protected from creditors, according to the Legal Information Institute.
Assets passed to this newly created irrevocable trust are generally protected from the transferor’s creditors starting two years after the transfer to the trust,” said Herzberg. “This two-year statute of limitation makes Nevada law superior to the laws of many other domestic asset protection jurisdictions, since the required waiting period in most other states is four years.”
Also Nevada is the only jurisdiction that does not provide for exception creditors, such as divorcing spouses or pre-existing torts, said Hertzberg.
“In other jurisdictions, the exception creditor could still pierce through the trust, even if the trust creator has made it past the statute of limitations and there are no fraudulent transfer issues,” he said.
A DAPT under Nevada statute is beneficial in that a creator serving as a trustee can hold and exercise any other power under the trust, including the power to remove and replace a trustee, direct trust investments, and execute other management powers, said Herzberg.
Nevada is also a good state in which to establish a Nevada Incomplete Non-Grantor or NING trust, which is simply a non-grantor DAPT. A non-grantor trust is an irrevocable trust that is drafted so that the taxable income is taxed to the trust itself, except as to any taxable income that is distributed to a beneficiary. A distribution of taxable income to a beneficiary is taxed to that beneficiary and the trust receives a corresponding deduction so there is no double tax.
According to Oshins, the typical person who sets up a NING (or DING trust if set up in Delaware) is a resident of a state with a high state income tax who is either selling a business or other asset that will have a large capital gain or who has an asset, such as a brokerage portfolio, that has sizable distributions that would be taxed by the client’s home state if the client hadn’t set up the non-grantor trust.
Oshins also said non-Nevada residents who want the highest level of asset protection and may need to access the trust assets later are establishing something called a hybrid DAPT. That’s a trust for beneficiaries other than the transferor where the transferor can be added as a beneficiary at a later date.
Top state for dynasty trusts
South Dakota, meanwhile, is the top state in which to establish a dynasty trust. That’s a trust designed to avoid gift and estate taxes by passing wealth down through family generations, said Oshins.
But Nevada also works for dynasty trusts, said Herzberg. “The Nevada dynasty trust, if structured properly, can enable money inside the vehicle to pass through multiple generations without incurring additional estate or generation-skipping taxes,” he said.
The Nevada dynasty trust allows a grandparent, for instance, to transfer assets to the trust, below the amount of the $11.7 million per individual estate, gift, and generation-skipping tax exemptions for 2021. “Continuing for 365 years, the dynasty trust builds vast gains over time by holding and investing the money for beneficiaries – the children, grandchildren, great-grandchildren, and beyond,” said Herzberg.
There are many ways to fund a dynasty trust, including using life insurance or by selling interests in a business to the trust, Hertzberg said. Consider making annual 2021 exclusion gifts of $15,000 per person to the trust, so the money is not subject to gift taxes.
“The money in the trust will appreciate during the rest of your lifetime and will be out of your estate,” said Herzberg. “You can then leave more money to the trust at death. Any further appreciation in the trust after your death should be free of additional transfer taxes, if appropriately structured. The upshot is the dynasty trust effectively ensures that family wealth is not dissipated in a couple of generations.”
As for decanting trusts, Oshins said Nevada and South Dakota are equal. Decanting trusts are those in which a trustee distributes the principal from one trust into another new trust with different terms for one or more of the same beneficiaries.
Choose the right trust company
But, said Oshins, it matters less which of the top states you use to establish a trust and more your choice of trust company.
“I always tell people that you don’t have to go to the number one state,” he said. “You can go to the number one, two, three, or four state. The most important thing is generally the choice of trust company that you use to get your jurisdiction. I’d rather go to the number three or four state with a cooperative, reasonably priced trust company than the number one state with (a trust company) that’s overcharging me because I’m wealthy, and not cooperative and slow.”
So, how might you go about picking a good trust company?
The key is working with a professional who can vet the best one for your needs, Oshins said. And the best ones will one, charge you a flat fee and not a percentage of the assets, unless they are managing the assets. “The cooperative ones are charging a reasonable, but low flat fee,” said Oshins. “And it should be a flat fee whether there’s $1 trillion or a $100,000 in the trust. If they’re doing basically the same work, it’s the same fee.”
The best trust companies are also fast “in accepting the trusts,” said Oshins. You don’t want to use a trust company where its legal department sends back 20 pages of changes to your trust document, and then it takes a month of back and forth accepting the trust documents. “That’s uncooperative,” said Oshins. You also don’t want to work with a trust company that takes a long time to approve distributions from the trust.
“We want someone who’s fast, reliable, accurate and reasonably priced,” he said. “And then I don’t care if you go to the number four state or the number one state. You did well if you picked the right trust company.”
As for the Pandora and Panama Papers, Oshins said it’s much ado about a few bad actors. Most of the people establishing trusts are merely do what’s legal.
“Nobody ever writes a story that has a headline: (Attorney) successfully sets up a trust for a client,” said Oshins. “There’s nothing interesting there. Right?”