We began our series on Simplifying Nevada Trusts by discussing the importance of determining the client's priorities. In our final installment of the series, we will review the various trust types, discussing which trust is the best fit for achieving your client’s specific goals.
Domestic Asset Protection Trust
A domestic asset protection trust, or asset protection trust, is the right tool for those clients who prioritize asset protection and asset control. In exchange for these benefits, clients with an asset protection trust forgo both income tax and estate tax mitigation; clients are still liable for state income tax on trust assets, and cannot reduce their estate's size with a domestic asset protection trust.
Spousal Limited Access Trust (SLAT)
The primary purpose of Spousal Limited Access Trust (SLAT) is to provide financial support to a current spouse. With a SLAT, asset trust protection and estate tax reduction are combined in one trust.
Since a SLAT gets funded with a completed gift, the gifted asset is removed from the client’s estate. Reducing an estate’s size may reduce the estate taxes due at theclient’s ultimate passing. In exchange for these benefits, the client is still liable for taxes on trust assets (as a grantor trust). Also, the client must be willing to forgo some control over trust assets when using a SLAT. A SLAT can also be a Non-Grantor Trust which will have all income taxed at the trust level. This could allow you to escape state income tax if the trust is setup in a state like Nevada.
Those prioritizing minimizing state income tax today – and a future estate tax bill – should consider a dynastic trust. A completed gift to a dynastic trust means ample tax benefits – but at the cost of asset control. However, with the right trustee in place, a client can rest easy, knowing that their legacy is secured.
Irrevocable Life Insurance Trust (ILIT)
As a completed gift, assets in an ILIT exist outside of the client’s estate. This makes sense – given that the purpose of an ILIT is to pay estate taxes. Of course, with the increased estate tax limits, now an ILIT – holding a well-maintained permanent life insurance policy – can provide for generational wealth.
Intentionally Defective Grantor Trust
An Intentionally Defective Grantor Trust is a tool for inter-generational wealth transfer, where asset control and asset protection are the client's priorities. By design, this legacy-planning tool keeps grantors on the hook for income taxes, but assets in the trust are not counted towards the client’s estate – as is the case with a SLAT.
Nevada Incomplete Non-grantor (NING) Trust
The Nevada Incomplete Non-grantor (NING) trust is the right tool when looking for income tax savings. In addition to state income tax savings, a NING trust offers asset protection. As with the SLAT and dynastic trust, clients must be willing to give up some level of asset control to take advantage of these benefits. Finally, a NING can only work for (and can provide state income tax savings on) those assets that are intangible: stocks, bonds, private equity, venture capital, a private note, etc. A NING cannot be funded with physical real estate, or any asset with a tax nexus to the client’s state.
Which Trust Types Matches Your Client’s Goals
Determine what your client’s priorities are. From there, work towards determining which trust type can help them achieve their financial and life goals.
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Jeffrey: As we talked about grantor and non-grantor and we learned about completed versus incomplete gifts. Let's stack these things up. So in the case of those six different vehicles, I want you to remember the completed versus incomplete and the grantor versus non-grantor. That domestic asset protection trust, which some lawyers refer to these as just an asset protection trust. They strike the word domestic and other people have different acronyms for that but most asset protection trust I find end up being grantor trusts and incomplete gifts. So the grantor has retained the payment of the taxes. The grantor has retained the ability to… its included in his or her estate. And the reason they did it is because they want to asset protection and control. Those are the two key features to them over and above as they ranked and prioritize everything else. Is that consistent with your experience or?
Jeffrey: Okay. Alright. So if you have a client, when they prioritize these six boxes and they prioritize asset protection and control, that is the most important to me then asset protection trust or domestic asset protection Trust gets that job done. It loses on the grantor side because they are still paying the income tax and they're still paying the estate tax. But if asset protection and control are the most important, that's the kind of trust you want to be talking about. I'm going to let you talk about a slat. It's still a grantor trust, but now it's a completed gift from an estate tax standpoint. So in what circumstances is that often used?
Ann: Primarily it is used because you want to support a spouse right or you use the fact that you're married as an advantage in supporting a spouse but really you are willing to have the estate tax planning added to the portfolio. So if you call that asset protection trust somewhat of a starter kit and then you because you of course have a bonded relationship with a spouse, so trust is there which means control maybe can be dissipated a little bit. You're going to get all the asset protection trust. You have a grantor trust, right? But you have really a completed gift for the benefit of another person who you happen to be married to. So you are adding to the asset protection. Not the income tax side, but to the asset protection benefits, you are adding , removing an asset from your estate while still giving beneficial interest to the person you hopefully trust the most in the world.
Jeffrey: No change in the income tax.
Ann: Nope. We're not ready to go there.
Jeffrey: Just an estate tax freeze, so to speak.
Ann: So we’re removing one over from just a straight asset protection trust because we are maximizing our planning when it comes to estate taxes as to some portion of your assets.
Jeffrey: All right, so the third column happens to be my personal favorite. So I want to pay no income taxes on earnings and I want everything to happen outside of my estate. So that's the world that I love to thrive in and so a dynastic trust or one that gets transferred for 365 years, if reducing estate tax, reducing income tax, and providing a legacy so that the great-great great-great grandchild that you'll never meet has some skin in the game… wants to thank old great-great-grandpa. This is the kind of vehicle because it removes everything out of the taxpayers estate both from an income and an estate tax. Fair?
Ann: Yes, it is a completed gift. It's taken care of everything and for those of us who are comfortable with a well-crafted trust, right? That allows us to give up control and trust in the beneficial interest and trust in the trustees and the advisors that we're going to work this correctly, so the control can be given up easier, this type of trust, this is all the bells and whistles. This is what does it.
Jeffrey: Most of you are familiar with ILITS. Insurance trusts, irrevocable life insurance trust. So this is a grantor trust. So there's no big income tax advantage, but it is a completed gift. So it's out of your estate. Any other key features or benefits that you see this being utilized for? A lot of professionals are used to them.
Ann: A lot of professionals are used to it and it previously did have a different purpose, which its primary purpose was to replace an income tax or sorry an estate tax hit. But I would just say that one other purpose of the ILIT now is that it really can create, if you have a good policy, it really can create some stability in a hit of wealth down the road that has some certainty to it, right? If it's a good policy, if it's being maintained, if it's been watched, it can add x amount of millions of dollars when everything else out there has some uncertainty. So I tend to say if there's an eyelid and a good policy available to us, it's a nice supplement to the estate.
Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc. Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.Subscribe to the Dunham Blog