In my last installment (Who Is Qualified to Serve as Administrator of an Estate?), I wrote about Boris and Natasha and the Big Fight occasioned by Boris dying without a will. As you may recall, Boris had two adult children from a prior marriage when he married Natasha. He and Natasha had two children before Boris died without a will. His property was substantial and all of it was acquired prior to his marriage. What happened to the property on his death?
The good news is that no one was disinherited, and the property did not escheat to the state. Nevada law provides for property to go to your closest relatives if you die without any estate planning in place. In a community property state such as Nevada, a married person’s property may be either community or separate, or some combination of the two. Separate property is property acquired before marriage, as well as property acquired by gift or inheritance during marriage. All property earned during marriage, or purchased with earnings during marriage, is community property. These characterizations can be changed by a written agreement if the couple wishes.
For Boris and Natasha, all of Boris’s property was separate property and he left no will. Nevada law provides that in such case, the surviving spouse is entitled to one third of the separate property, and—because he had more than one surviving child—the children were entitled to equal shares of the remaining two-thirds. Boris did not put any of his assets into joint tenancy with Natasha, but if he had, Natasha would have succeeded to such assets. Once the estate administration finished, Natasha received one-third of Boris’s assets; the couple’s minor children received one-third subject to a guardianship or trust until they became adults; and Boris’s two adult children received the remaining one-third in equal shares.
Irrevocable 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.