By Steven J. Oshins, Esq., AEP (Distinguished)
A “Dynasty Trust” is an irrevocable trust that continues for as long as the applicable state law allows. For as long as it continues, the trust assets can be protected from estate taxes and, depending upon the choice of situs and how the trust is drafted, can also be protected from divorcing spouses and other creditors.
The jurisdictional competition for Dynasty Trust supremacy is alive and well. In this cut-throat industry where billions of dollars are being passed through Dynasty Trusts, the stage is now set for the Dynasty Trust Situs Battle Royale.
Battle Royale Rules
A Battle Royale involves a number of competitors who are tossed over the ropes and out of the ring one at a time until there is only “one man standing”. There are no rules here except that a Dynasty Trust situs is tossed over the ropes by having a weakness in its trust laws that illustrates that it doesn’t deserve to be crowned Dynasty Trust Situs Battle Royale Champion.
The Competitors
Alaska, Delaware, Nevada, and South Dakota are the competitors in this Battle Royale since these are the four trust jurisdictions that are generally considered to be the best.
How to Win
The Dynasty Trust Situs Battle Royale Champion will be the situs that excels in each of the following areas: (1) Long trust term; (2) No state income tax on trusts; (3) Third-Party spendthrift trust protection from divorce and alimony; (4) Protective Domestic Asset Protection Trust statute; and (5) Flexible Trust Decanting statute.
Round 1: Long Trust Term
Each of these states allows a Dynasty Trust to continue for a long, long time. The longer the Dynasty Trust continues, the longer its assets can avoid estate taxes and the longer other Dynasty Trust advantages can be obtained. Following are the differences:
- Alaska: Perpetual, but 1,000 years if you exercise a power of appointment
- Delaware: Perpetual for personal property / 110 years for real estate
- Nevada: 365 years
- South Dakota: Perpetual
Analysis: No big advantage to any state here.
Round 2: No State Income Tax on Trusts
In order to be the top Dynasty Trust situs, a state must not have a state fiduciary income tax. None of these four states has much of a problem here, although Delaware taxes a trust under certain situations where there is a Delaware resident beneficiary. Following are the differences:
- Alaska: No state income tax
- Delaware: State income tax under certain situations if one or more DE resident beneficiary
- Nevada: No state income tax
- South Dakota: No state income tax
Analysis: No big advantage to any state here.
Round 3: Third-Party Spendthrift Trust Protection from Divorce and Alimony
It is important to note that the drafting attorney can design a Dynasty Trust around this problem. However, the truth of the matter is that very few do. Therefore, this is where the Battle Royale gets interesting. Who gets thrown over the ropes in this round? Let’s take a look at the differences.
- Alaska: Protected
- Delaware: Garretson v. Garretson (Del. 1973) says support beneficiary can access trust; Matter of Daniel Kloiber Dynasty Trust (Unpublished, Del. 2014) Mrs. Kloiber made a Garretson v. Garretson argument to help induce a huge settlement in a divorce
- Nevada: Protected
- South Dakota: Protected
Analysis: Delaware is at a huge disadvantage here. The other three states just threw Delaware over the ropes! Goodbye, Delaware. Thanks for playing!
Round 4: Protective Domestic Asset Protection Trust Statute
- Alaska: 4-year statute of limitations period; Divorcing spouses are exception creditors; Need a new Affidavit of Solvency for every transfer to the trust
- Delaware: 4-year statute of limitations period; Divorcing spouses, alimony, child support and pre-existing tort creditors are exception creditors; Don’t need a new Affidavit of Solvency for every transfer to the trust
- Nevada: 2-year statute of limitations period; No exception creditors; Don’t need a new Affidavit of Solvency for every transfer to the trust
- South Dakota: 2-year statute of limitations period; Divorcing spouses, alimony and child support creditors are exception creditors, but only if indebted at time of transfer to the trust; Don’t need a new Affidavit of Solvency for every transfer to the trust
Analysis: Nevada has an advantage here. South Dakota isn’t too far behind given that its exception creditors only apply under limited circumstances. Alaska has a huge disadvantage because of the Affidavit requirement. How many clients will actually follow through and remember to sign a new Affidavit each time they make a new transfer? Delaware is also at a huge disadvantage because it has so many classes of exception creditors. Delaware was already thrown over the ropes in Round 3, but it appears that they stepped back in the ring and got thrown out once again! Alaska is on its way over the ropes after being ganged up on by Nevada and South Dakota, but Alaska is tough and hanging on for dear life!!!
Round 5: Flexible Trust Decanting Statute
In order to be the top Dynasty Trust situs, a state must have a flexible trust decanting statute. A trust is decanted by the distribution trustee who distributes trust assets into a new trust in order to fix problems or to enhance the creditor protection, taxation or to take advantage of any other opportunity that is deficient in the current trust. Following are some key differences among these states’ decanting statutes:
- Alaska: Must give notice to beneficiaries; Can’t remove mandatory income interest or accelerate remainder beneficiaries’ interests
- Delaware: No notice required; Can remove mandatory income interest, but cannot accelerate remainder beneficiaries’ interests
- Nevada: No notice required; Can remove mandatory income interest and can accelerate remainder beneficiaries’ interests
- South Dakota: No notice required; Can remove mandatory income interest and can accelerate remainder beneficiaries’ interests
Analysis: Delaware was already been disqualified. Nevada and South Dakota have a huge advantage over Alaska since no notice is required under Nevada or South Dakota law in order to decant a trust. Our clients like privacy. And Nevada and South Dakota have other flexibilities that are noted above to remove mandatory income interests and to accelerate remainder beneficiaries’ interests which are helpful for creditor and divorce protection purposes and to save state income taxes and to be able to sprinkle taxable income to beneficiaries who are in lower state and federal income tax brackets. Therefore, Alaska has now been thrown over the ropes and is out of the Battle Royale.
The Winner(s) are…
Nevada and South Dakota are so close in nearly every respect that it would be an injustice for either of these two leading Dynasty Trust situses to be thrown over the ropes. Therefore, there’s a tie for first!
Congratulations to Nevada and South Dakota, the reigning, defending, undisputed Dynasty Trust Situs Battle Royale Champions!!!
ABOUT THE AUTHOR
Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at soshins@oshins.com or at his firm’s website, www.oshins.com.