Trusts

Trusts are very flexible arrangements.  They can be used to achieve many different objectives.  Not surprisingly, there are many different kinds of trusts.  Too many to discuss here, so I will just cover some of the basics.

Typically, a trust has three (3) parties.  The person that puts his or her assets into a trust is called the “settler” of the trust.  Other nearly synonymous words describing someone who creates a trust are “trustor” and “grantor”.  There is also a “trustee” of a trust.  The trustee is responsible to manage the assets in the trust.  The third category of parties to a trust arrangement is the “beneficiaries”.

If you think of the ownership of an asset as being a bundle of rights, then in creating a trust, the grantor of a trust might be thought to give the legal aspects of the ownership of an asset to a trustee.  At the same time, the grantor of the trust gives the equitable aspects of the ownership of that asset to the beneficiaries.  So now, you have a Trustee with the legal rights such as the right to sell an asset, or borrow against it, managing the asset for the benefit of the beneficiaries who have the right to use the asset (the equitable aspects of ownership). 

In a typical revocable trust, the person who creates the trust, i.e. the “grantor”, retains the right to revoke the trust arrangement and gives the legal aspects of the ownership of his or her house, for example, to himself as “trustee”.  The trustee holds the house, in trust, for the benefit of the “beneficiary”, who happens to be the same person as the grantor and the trustee.  If the trustee changes, that is, if someone designated by the original grantor of the trust, becomes the trustee in place of the grantor himself, the beneficiary, who may or may not be the same person as the grantor, still has the equitable right to live in the house.  This might be important if the grantor has health issues and can no longer efficiently act as the trustee, but still wishes to live in the house with the management help of the new trustee.  This division of the legal and equitable aspects of the ownership of the house might also be important if the grantor dies.  The trustee then follows the directions in the trust document which has become irrevocable and allows the deceased grantor’s disabled child to continue to live in the house for example; or, the trustee may be directed by the trust agreement to give the house to the deceased grantor’s children.  It is important to notice that it is the transferring of the legal aspects of the ownership of the trust assets from one trustee, to another, that allows the house to pass from the deceased grantor to new owners without probate. 

The trusts people are most familiar with are revocable trust arrangements that have become popular because they avoid the costs and delays associated with probate.  Revocable trusts however do not give us the ability to achieve income tax or estate, gift or generation skipping transfer tax savings.  For that, we need an Irrevocable trust.

Lets say you have some stock that you bought several years ago.  The stock has done very well and is now worth a lot more than you paid for it.  If you sell the stock you will have to pay long term capital gains tax on the difference between what you sell it for and what you paid for it years ago.  Your income taxes are already too much, so the idea of more taxes is not appealing.

One type of irrevocable life insurance trust that you might consider forming is a charitable remainder trust (CRT). The trust itself is irrevocable and has some attributes of a charitable entity.  You can give your stock to the CRT and receive a charitable deduction that you can use to reduce the income taxes you are paying.  You also designate someone (perhaps yourself) to receive income from the trust for your lifetime or a period of years.  At the end of the period you designated, whatever is left in the trust goes to the charity and the trust terminates.  The CRT can be used to reduce income taxes and estate taxes.  CRTs are often used in conjunction with irrevocable life insurance trusts as part of an effective estate plan.

Another type of trust that is very effective now, because of our historically low interest rates, is in many ways the reverse of the CRT described above.  The type of trust I am alluding to is called a charitable lead trust (CLT).  To illustrate, lets say you have an asset worth $1,000,000.00 that earns 6% after tax income annually.  You are 65 and you know this asset will grow in value substantially.  You would like your children to have this asset at your death, but by then the estate tax on transferring the asset to them might be prohibitive.  You could establish a CLT now and transfer the asset to it.  The trust would pay an annuity of $60,000.00 per year to a charity of your choice.  You would have to pay a gift tax when you establish the trust based on the $1,000,000.00 value of the asset less the present value of the annuity to be paid to the charity, for your lifetime.  The gift tax at the current 40% rate would be $94,098.00.  The value of the asset passing tax free to your children would be several million dollars. 

It is important to review revocable trusts periodically.  Unlike revocable trusts that are generally grandfathered into the law that existed at the time the irrevocable trust was established, a revocable trust continues to be subject to changes in the law.  There have been two changes in the estate tax law that are catching people with previously drafted revocable trusts off guard.  The exemption against the estate tax has grown in recent years from $600,000.00 to more than $5,500,000.00. Secondly, it is no longer necessary to have all or part of the first decedent’s assets go into an irrevocable trust on the first death to preserve the first decedent’s exemption.  Many revocable trusts, drafted a few years ago, require a married couples’ assets to be divided when the first of them dies.  The first decedent’s share of their assets are required by the trust document to be put into an irrevocable trust upon the first death.  This seriously restricts the survivor.  In many cases, the survivor has no idea that their living trust required such a thing.  Learning about it after a spouse has passed away can be very distressing.  Please make sure to have your revocable trust reviewed if a loved one should become ill.  

Wills

Nevada recognizes three different kinds of Wills.  Holographic, Electronic, and what I call a formal Will.   A holographic Will is a Will in which the person making the Will writes it out in their own handwriting.  It has to be dated and signed by the person, but it doesn’t have to be notarized or witnessed.  It should be on blank paper with no other writing on it.  A fill in the blanks form does not qualify as a holographic will.   

NRS §133.085, Electronic Will provides as follows:

1.     An electronic will is a will of a testator that:

a.     Is written, created and stored in an electronic record;

b.     Contains the date and the electronic signature of the testator and which includes, without limitation, at least one authentication characteristic of the testator; and

c.     Is created and stored in such a manner that:

i. Only one authoritative copy exists;

ii. The authoritative copy is maintained and controlled by the testator or a custodian designated by the testator in the electronic will;

iii. Any attempted alteration of the authoritative copy is readily identifiable; and

iv. Each copy of the authoritative copy is readily identifiable as a copy that is not the authoritative copy.

2.     Every person of sound mind over the age of 18 years may, by last electronic will, dispose of all of his or her estate, real and personal, but the estate is chargeable with the payment of the testator’s debts.

3.     An electronic will that meets the requirements of this section is subject to no other form, and may be made in or out of this State. An electronic will is valid and has the same force and effect as if formally executed.

4.     An electronic will shall be deemed to be executed in this State if the authoritative copy of the electronic will is:

a.     Transmitted to and maintained by a custodian designated in the electronic will at the custodian’s place of business in this State or at the custodian’s residence in this State; or

b.     Maintained by the testator at the testator’s place of business in this State or at the testator’s residence in this State.

5.     The provisions of this section do not apply to a trust other than a trust contained in an electronic will.

6.     As used in this section:

a. “Authentication characteristic” means a characteristic of a certain person that is unique to that person and that is capable of measurement and recognition in an electronic record as a biological aspect of or physical act performed by that person. Such a characteristic may consist of a fingerprint, a retinal scan, voice recognition, facial recognition, a digitized signature or other authentication using a unique characteristic of the person.     

b. “Authoritative copy” means the original, unique, identifiable and unalterable electronic record of an electronic will.

c. “Digitized signature” means a graphical image of a handwritten signature that is created, generated or stored by electronic means.

The requirement of a formal Will are that it be in writing and be signed by the Testator, or by an attending person at the Testator’s express direction, and it has to be attested to by at least two competent witnesses who subscribe their names to the Will in the presence of the Testator.   

Only people who are of sound mind and who are over 18 years of age are able to do a Will in Nevada.

It is important to realize that the property of the decedent can pass by legal means other than by the probate of the decedent’s Will.  If property is held in the form of title that provides for joint ownership, then the title is going to control how the property passes even if the decedent’s Will says something different than the title. Property can also pass by arrangement such as pay on death or transfer on death.

Beneficiary designations on insurance contracts and individual retirement accounts are also examples of how property interests might pass from the decedent to others, without involving the decedent’s Will.

If the decedent does not have a Will, then he or she is said to have died intestate. The decedent’s property will pass to his or her heirs as determined by the laws of intestate succession.  The process of administering the estate of a decedent that has died without a Will is similar to the process for probating a Will.  The Probate Department of the Second Judicial District Court has a very informative website that illustrates the process for both situations.

Wills are important to tell how the bodily remains of the decedent are to be disposed of.  It is also important to make guardianship provisions for minor children in a Will.

Having a Will that names an executor or personal representative and streamlines the probate process by giving the executor necessary powers to deal with the decedent’s property can make the task of administering the decedent’s estate much easier and less expensive.  It is important to cover the issues of compensation for the executor and whether or not the executor should be required to post a bond.  A Will may also be used to revoke prior wills and to make it clear that the most current Will is to be relied upon as the expression of the decedent’s wishes.  

Although the cost of creating a Will as opposed to a trust is initially much less, the cost of proceeding under a Will can dramatically exceed the costs incurred for proceeding under a trust.

PROBATE

Probate is the process of proving to the Court that the decedent’s Will is genuine and then having the named Executor administer that Will under the supervision of the Court.

The Court wants to be sure that all legitimate creditors of the decedent are satisfied, if there are sufficient estate assets to do so, and that the rest of the decedent’s estate is fairly distributed to the beneficiaries of the estate as the decedent stated in his or her Will.

If the decedent didn’t have a Will, the process is similar, but because there is no named Executor, the process involves having an Administrator appointed and approved by the Court to wind up the decedent’s affairs under the supervision of the Court.  The rest of the decedent’s estate remaining after his or her creditors have been satisfied, is distributed to the intestate beneficiaries of the decedent. The intestate beneficiaries are determined by state law, and may or may not be people the decedent would have really wanted to benefit.  

In Nevada, the rules and legal procedures that determine how the estate is to be administered, differ depending on the value of the decedent’s estate.  The law attempts to make estates with smaller values, easier and less expensive to administer than larger estates.  Sometimes though, small estates have disproportionately large problems.  The categories for probates in Nevada are:

General Administration, where the assets in the decedent’s estate have a value of $300,000.00 or more. 

Summary Administration, where the value of the decedent’s assets is greater than $100,000.00, but less than $300,000.00.

Set Aside of the Estate Without Administration, where the value of decedent’s assets is $100,000.00 or less.

Even a small estate can take a surprisingly long time to complete.  The costs of administering an estate can be big.

The Nevada law governing fees for the Executor or Administrator based on the gross value of the estate less encumbrances, like a mortgage, is:

4% of the first $15,000.00

3% of the next $85,000.00

2% of the estate value over $100,000.00

The Nevada law governing Attorney’s fees provides:

4% of the first $100,000.00

3% of the next $100,000.00

2% of the next $800,000.00

 1% of the next $9,000,000.00

.5% of the next $15,000,000.00

For all amounts over $25,000,000.00 the Court will determine a reasonable fee.

We understand this can be an emotional time and there are circumstances that require a Nevada Administrator to be appointed.  We offer the services of an Administrator through our office, and can handle every aspect of the probate administration from the filing of the initial petition through the distribution of the estate.

The probate process can be emotionally demanding as well as time consuming and expensive.  We have years of experience in dealing with probate matters and will do our best to get you through the process as quickly and as painlessly as we can.

Gift Tax

There are different levels of gifting. 

Non-Taxable Gifts

Most people are aware that the gift tax does not apply to gifts of $14,000 or less to any number of recipients.  The person who receives the gift does not have to report it and neither does the person making the gift.

There is also a lesser known exemption from the gift tax for payments made directly to medical and educational facilities on behalf of other persons for qualified medical and educational expenses.  This exemption from the gift tax is not limited to the $14,000.00 per year mentioned above, and can be a big help for things like tuition.

Taxable gifts that use up your exemption

Currently we each have a $5,490,000.00 exemption against the gift tax (and the estate tax), if you make a gift to someone of $104,000.00, there is a non-taxable portion of $14,000.00 and a taxable portion that is reported on a gift tax return Form 709.  The “taxable portion” reduces your exemption from $5,490,000.00 down to $5,400,000.00.  You do not have to pay money to the government for making this gift, it just uses up part of your exemption against the gift tax, (for gifts you make while you are living), and against the estate tax, (for wealth transferring at your death). 

It is important to realize that generally it is cheaper to give wealth than it is to pass it at your death.  For example, if we assume a gift tax and estate tax rate of 50% (it is actually 40% currently) I can illustrate the difference.  If you want to give $100,000.00 to someone, after you have used up your exemption, you need $150,000.00 to make the gift.  That is because you have to pay the gift tax of $50,000.00 which is based on the $100,000.00 gift at our assumed rate of 50%.  If you want that same person to get $100,000.00 at your death, you need to have $200,000.00.  This is so because the 50% tax rate is applied to the $200,000.00 that you must have in your estate, for the beneficiary to get $100,000.00.

Fully taxable gifts

For gifts that you make after you have used up your lifetime gift tax exclusion, you have to write a check to the government on top of the amount you give.  It is also important to realize that the gift tax exemption and the estate tax exemption are linked together so if you use up the entire exemption making fully taxable gifts, then there will be no exemption left to be used against the estate tax. Another consideration is the possibility that the estate tax might be repealed in the future.  It was repealed for a short time in 2010 for example.  If you make fully taxable gifts now, to take advantage of the lower cost of transferring wealth by way of gifting it, you might later regret having paid those gift taxes, if the estate tax is subsequently repealed. 

Charitable Giving

There are many very effective estate planning and wealth transfer planning strategies that incorporate a charitable element.

We have many years of experience in helping clients successfully implement effective gifting strategies.  We will be pleased to discuss charitable lead and remainder trusts with you as well as grantor retained income trusts, irrevocable life insurance trusts, irrevocable trusts for gifting to minors, qualified person residence trusts, and the like. 

The Estate Tax and the Generation Skipping Transfer Tax (GSTT)

The current transfer tax system is based on the concept that the government will impose a tax on transfers of wealth between each generational level.  Stated differently, the government views a transfer of wealth from a parent to a child, as an opportunity to impose either the gift tax, if the transfer was made during the parent’s life, or an estate tax if the transfer happened at the parent’s death.  If a parent transfers wealth to a grandchild, the government views that as a missed opportunity to tax the transfer under the estate or gift tax.  To remedy that lost opportunity, there is a taxing system called the generation skipping transfer tax.  The GSTT is basically a flat tax imposed in addition to and on top of the estate or gift tax, at the highest marginal estate or gift tax rate (currently 40%).

Most generation skipping transfer tax planning is done through the use of irrevocable trusts. 

There are many important concepts that come into play when generation skipping is a part of the plan.  Not the least of these concepts is the fact that the generation skipping transfer tax can apply differently depending on whether the transfer is directly from the parent to the grandchild or if the transfer doesn’t actually happen until a trust for the benefit of the grandchild terminates at some time in the distant future.  This is similar in application and effect to the difference illustrated above in the way the gift tax is applied only to the amount of the gift (tax exclusive), and the estate tax is applied to the amount transferred and the tax (tax inclusive).   In the generation skipping transfer tax context, the differences in the amount of the tax being paid can be totally unexpected and very big.  It is critically important in planning where the generation skipping transfer tax is involved, that a proper and effective allocation of the GSTT exemption is provided for.

You also have an exemption against the generation skipping transfer tax, currently $5,490,000.00. If you intend to leave wealth to people who are in a generational level that is more than one level below yours, you need to plan very carefully to optimize those transfers.  We can offer suggestions as to how your objective might best be met and we can implement sophisticated strategies to help you achieve your goals.