The Nevada Advantage: The Tax Planning Strategies and Trustee Services Available with a Nevada-Based Trust

Nevada is fast-becoming the state of choice for high-net-worth individuals and families seeking greater flexibility, optimal tax savings and maximum protection in their financial and estate planning. Nevada has grown to become one of the most “trust friendly” states in the country and challenging Delaware in popularity as a trust situs.

A Nevada trust situs can offer trustee services and tax planning strategies that protect assets from state tax liabilities and provide benefits such as greater asset protection. They also offer personal trustee options and the ability to prospectively modify existing trust documents to reflect changing laws and circumstances.

Here are seven key features that make a Nevada based trust an exceptional tool for building and preserving wealth:

1. Compounding tax savings

Unlike most states, Nevada does not have a state income tax. A Nevada trust will generally only be accountable for a federal income tax. By comparison, a trust located outside of Nevada may also be responsible for sizable state income tax. The lack of state income tax is important to consider when building comprehensive tax planning strategies, as it has a significantly positive compounding effect on the long-term growth potential of wealth. 

2. Extended perpetuity protection

Nevada law allows interests to be held in trusts for up to 365 years, effectively protecting the transfer of assets from one generation to the next free from tax burdens. California law, by contrast, allows trust protections for only 21 years after the death of the last trust beneficiary who was alive when the trust was created or 90 years after the creation of the trust. There is no federal law against perpetuates

3. Directed trust protection

Nevada is one of only a few states that allows for the use of directed trusts, which allows certain decisions related to the trust to be made by designated advisors. Through a directed trust, investment, distribution and other decisions may be placed in the hands of a family member, a trusted advisor, or long-term business associate, while administrative and other decisions are maintained with the personal trustee. As an example, responsibility for a closely-held business or concentrated holding may be placed with an advisor, while oversight of the broader investment portfolio is given to the personal trustee. Many other states do not have similar directed trust statutes.

4. Decanting and non-judicial settlements option

Trusts are generally formed to continue for many years if not decades, making it difficult to predict the impact of future changes in trust or tax laws. In Nevada, property from one trust can be appointed, or “decanted,” to a second trust to address changes in the law or to simply consolidate or separate assets.

Nevada also has a well-established Non-Judicial Settlement process, which allows interested parties in a trust agreement to correct mistakes, address ambiguities, and change administrative provisions without the need for court approval.

5. Domestic asset protection trust

Nevada is widely considered to be the best jurisdiction for a Domestic Asset Protection Trust. It is one of the only states that has a two-year statute of limitations for existing creditors (versus four years in other states). In many cases, trust property is not subject to the personal obligations of the settlor, even if the settlor suffers a legal judgment or becomes insolvent.

6. Nevada uniform prudent investor act

Nevada’s adoption of the Uniform Prudent Investor Act includes an important provision that a trustee’s decision relating to investments in individual assets must be evaluated, not in isolation, but in the context of the portfolio as a whole. Diversification is generally required unless the purposes of the trust are better served without diversifying. This provides a trust with greater flexibility.

7. Conversion of income interest to unitrust interest

Often, trust beneficiaries have conflicting interests when it comes to income yield and principal growth. Since the personal trustee has a fiduciary duty to both, one option to help resolve the conflict is to convert an income interest trust into a total return trust, also known as a unitrust. Under Nevada law, the unitrust requires an annual or more frequent distribution to the income beneficiary based upon a fixed percentage of the trust’s fair market value. This allows for the opportunity to invest for long-term growth, which benefits the remainder beneficiary, while also meeting the income beneficiary’s needs. A unitrust can also be converted back to the original income trust.

These unique features of a Nevada trust situs offer high-net-worth individuals and families clear advantages in tax planning strategies, seeking to maximize the long-term value of assets and reduce tax exposure, particularly as it pertains to the preservation and growth of inter-generational wealth.

It is important to note that by the very nature of a trust, the decisions made at the time of formation may have a long-lasting impact on assets which, in many cases, cannot be undone. Seeking the assistance of trusted legal, tax and trustee services, as well as financial advisors is critical to ensuring that a Nevada trust is structured to meet the intended goals.