Tag Archives: Trustee

‘Decant’ an Irrevocable Trust

Trust DecantIrrevocable may not mean what you think it means when it comes to trust planning.  Thanks to a process known as “trust decanting,” a trustee can change irrevocable trust terms. The decanting process occurs by figuratively pouring the trust assets from an old trust to a new trust agreement.  Just as one decants wine by pouring from an old bottle to a new one, a trustee can move trust assets to a new, more favorable trust. Nevada, along with 20 other states, has very favorable decanting laws in place. 

There are limits as to what can be accomplished with decanting.  Trustees cannot alter a beneficiary’s already-vested interests in a trust.  However, a trustee can push back the age at which the beneficiary receives a payout.  Importantly, the trustee can change the governing law of the trust by moving the situs of the trust.  Nevada is the premier domestic self-settled spendthrift trust state so many trustees look to move their assets to Nevada.  In addition, if there is no successor trustee named, decanting can make it possible to name a proper successor trustee. 

Nevada law is very favorable because there is no statutory requirement to notify beneficiaries of the decanting.  The trustee does not need to provide beneficiaries copies of the existing or new trust documents.  These privacy protections greatly favor the use of Nevada trust laws.  The trustee has discretion to seek court approval for the decanting process but is not required to do so.  In reality, the vast majority of trustees seek beneficiary approval before starting the procedure to decant the trust assets.

There are uncertain implications for gift, income, and generation-skipping transfers taxes. The Internal Revenue Service has not issued guidelines related to the federal tax issues presented by decanting.  However, the IRS has solicited comments for several years now and guidance should be forthcoming.  Even without federal income tax guidance, there are state income tax savings to be achieved by moving trust assets to a state like Nevada without income tax. 

Nevada is Premier Self-Settled Spendthrift Trust State

On June 4, 2011, Governor Sandoval signed Senate Bill 221 which strengthened Nevada’s already outstanding self-settled spendthrift trust laws.  The most beneficial aspect of the new legislation relates to changing the situs of existing asset protection trusts to Nevada without restarting the statute of limitations period.  Nevada has two primary advantages over the other 13 states which permit self-settled, spendthrift trusts.  First, Nevada is the only state without a statutory exception allowing creditors to pierce the trust.   Second, Nevada has the shortest statute of limitations period to protect a transfer to the trust.

The new legislation makes the following changes effective October 1, 2011:

1. More Trust Types (CRT, QPRT, GRAT) Qualify

The new bill specifically allows charitable remainder trusts, qualified personal residence trusts, and grantor retained annuity trust to qualify under the statute.  Also, the bill allows the settlor to use real or personal property owned by the trust without limiting the scope of the protection provided by the spendthrift trust.

2. Tacking of Statute of Limitations Period for Trusts Migrating to Nevada

This new provision allows settlors who have established asset protection trusts in other states with less favorable laws to change the situs to Nevada without restarting the statute of limitations.

3. Limited Trustee Liability

Nevada law already protects an advisor to the settlor or trustee of a spendthrift trust from claims unless the claimant can prove by clear and convincing evidence that the advisor knowingly and in bad faith violated Nevada law, and that his actions directly caused damage to the claimant. The new legislation now also protects the trustee of a spendthrift trust unless the claimant can make the same showing as to the trustee.

4.  “Last in, First out”

The bill clarifies that later transfers in trust are disregarded for purposes of determining whether a creditor may bring an action with respect to an earlier transfer to the trust.  The new language makes clear that a more recent
transfer for which the statute of limitations period has not run will not spoil
the whole trust.

5.  Decanting Spendthrift Trusts

Now, the trustee of a self-settled spendthrift trust may decant the trust into another spendthrift trust without affecting the statute of limitations period applicable to the assets in the original trust. The date the property was initially transferred to the original spendthrift trust will be the deemed transfer date for the property even after it has been decanted into the second spendthrift trust.

6. Limitation of Actions Against Spendthrift Trust

This provision clarifies that no action of any kind may be brought at law or in equity against the trustee of a spendthrift trust if at the date the action is brought an action by a creditor with respect to a transfer to the spendthrift trust would be barred.  Prior to this, questions arose whether Nevada’s four year statute of limitations for fraudulent transfers applied in lieu of the two year statute of limitations period for spendthrift trusts. In addition, a creditor may not bring an action with respect to a transfer of property to a spendthrift trust unless the creditor can prove by clear and convincing evidence that the transfer (i) was a fraudulent transfer or (ii) “violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor.”

7.  Unauthorized Agreements by Trustee are Void

SB 221 clarifies that the settlor only has rights and powers conferred specifically in the instrument, and any agreement between the settlor and trustee attempting to grant or expand those rights is void. This provision solidifies the use of the NV self-settled spendthrift trust as a completed gift trust, which will bolster its use as an estate tax avoidance method.

You can contact an experienced Nevada estate planning attorney at 775-688-3000.

Nevada Trust Income Subject to California State Income Tax

A Nevada trust may become subject to California state income tax depending on the residence of the trustee or beneficiaries of the trust.  An individual is a California resident if he or she is in that state for other than a temporary or transitory purpose, or if he or she is domiciled in California but is outside the state for a temporary or transitory purpose. Cal. Code Regs., tit. 18, § 17014, subd. (a).  California regulations provide that the income of a trust is subject to California income tax “if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident, regardless of the residence of the settlor.”  § 17742(a). Therefore, even if the trust creator (settlor) is a Nevada resident, the trust income can be subject to California tax based on the residence of the trustee or beneficiary.

If a Nevada trust has two trustees, one trustee is a Nevada resident and one trustee is a California resident, then one-half of the trust income is subject to California income tax.  Where the taxability of trust income depends on the residence of the fiduciary and there are two or more fiduciaries, the taxable income is apportioned according to the number of fiduciaries resident in California.  § 17743.

For those who may be considering a California financial institution as a trustee, this could subject the trust to California tax.  The California regulations specify that “the residence of a corporate fiduciary of a trust means the place where the corporation transacts the major portion of its administration of the trust.”  If the trust company or financial institution will conduct the majority of its trust administration within California then the trust income will be subject to California tax.

- Jason Morris