Avoiding State Taxes with the New IRS Designer Nevada Self-directed Trust

saving taxes, how to save taxes, tax planning,

Saving taxes with an IRS approved tax plan is called a private letter ruling.

The IRS has released its designer Nevada trust that avoids state income taxes.  

Nevada is well known for saving state income taxes and protecting assets.  However, until now, funding the trust required a taxable gift. Until now, you could not be a trust beneficiary if you wanted to save taxes.
Until now, you could not control the trustee.
Until now, you could not control the investments.

Until now, you could not control the distributions.

The IRS has new rules for what is known as the Nevada self-directed trust.  This trust was designed to allow your to avoid state income taxes on investment income and e-commerce business income. 

Frank’s story.  A successful aerospace parts manufacturer in Orange County, he was being hammered with taxes.  He is in a 13% California tax rate.  He also needed some asset protection.

Let’s face, aerospace parts have a high liability.  Frank’s attorney suggested that he set up a trust for himself, his wife and his children in Las Vegas.  Banks were charging less if trusts controlled by the clients.  This new law in Nevada, allowed the banks to have a lower trustee fee because the client was in charge and the banks had no trustee risks.

His attorney wisely requested the IRS for a tax ruling to guarantee the tax plan.  The IRS ruled that Frank could make his gifts to the Nevada trust and pay no gift taxes.  The trust was its own taxpayer which allowed Frank to avoid California income taxes on his investment income.  The IRS allowed Frank to be a beneficiary…so he could get the money back if he needs it.

Frank and his family directed all of the trust investments.  They, and only they, decided if and when the trust would make a distribution. Best of all the trustee fees were only $2,500 regardless of the value of the trust.

Frank transferred his $5,000,000 stock portfolio to his Nevada self-directed trust.  He kept the same broker in Newport Beach.  You see states can tax investment income only on its residence. The trust in Las Vegas resided in Nevada.

If you wish to brainstorm your tax planning ideas, then call me, Brian Dooley, CPA, at 949-939-3414 for a free one hour brainstorming consultation.   I have the IRS ruling (with my notes) below in blue print.

 Or, if you have 15 minutes listen to my radio podcast below.  The podcast talks about the private trust company… a tool for the very wealthy.  The new Nevada self-directed trust provides the same tax benefits.

Learn more about the IRS and private trust company on this link (includes a short video).

Third Party Communication: None

Date of Communication: Not Applicable
Person To Contact: * * *, ID No. * * *
Telephone Number: * * *

Index Number: 671.00-00, 2501.00-00, 2514.00-00
Release Date: 3/7/2014

Dear * * *:

This letter responds to a letter dated April 23, 2013, submitted on your behalf by your authorized representative, requesting rulings under §§ 671, 2501, and 2514 of the Internal Revenue Code.

FACTS

The facts submitted and representations made are as follows. On DateGrantor created an irrevocable trust (Trust) for the benefit of herself, her stepchildren (Beneficiary 1Beneficiary 2Beneficiary 3, and Beneficiary 4), and children (Beneficiary 5Beneficiary 6Beneficiary 7Beneficiary 8, and Beneficiary 9), and the issue of Grantor‘s children and stepchildren (hereinafter, collectively the “Beneficiaries“). A corporate trustee (Trustee) is the sole trustee of Trust.

During Grantor‘s lifetime, Trustee must distribute such amounts of net income and principal to Grantor and the Beneficiaries as directed by the Distribution Committee and/or Grantor, as follows:
(1) at any time, Trustee, under the direction of a majority of the Distribution Committee members, with the written consent of Grantor, shall distribute to Grantor or the Beneficiaries such amounts of the net income or principal as directed by the Distribution Committee (Grantor‘s Consent Power);
(2) at any time, Trustee, pursuant to the direction of all of the Distribution Committee members, other than Grantor, shall distribute to Grantor or the Beneficiaries such amounts of the net income or principal as directed by the Distribution Committee (Unanimous Member Power); and (3) at any time, Grantor, in a nonfiduciary capacity, may, but shall not be required to, distribute to any one or more of the Beneficiaries such amounts of the principal (including the whole thereof) as Grantor deems advisable to provide for the health, maintenance, support and education of the Beneficiaries (Grantor‘s Sole Power).

The Distribution Committee may direct that distributions be made equally or unequally and to or for the benefit of any one or more of the beneficiaries of Trust to the exclusion of others. Any net income not distributed by Trustee will be accumulated and added to principal.

The Distribution Committee is initially composed of GrantorGrantor‘s children (through appointed guardians acting on their behalf until their majority), and Grantor‘s stepchildren. Trust provides that at all times the Distribution Committee must include at least two members other than Grantor.

If at any time the Distribution Committee does not include at least two members other than the Grantor, then the vacancy on the Distribution Committee must be filled by the eldest of Grantor‘s adult issue other than any issue already serving as a member of the Distribution Committee, or, if none of Grantor‘s issue is  not already serving as a member of the Distribution Committee is an adult, then such vacancy shall be filled by the eldest of the adult issue of the Grantor‘s stepchildren.

If at any time the Distribution Committee does not include at least two members other than the Grantor, then the Distribution Committee shall be deemed not to exist. In any event, the Distribution Committee will cease to exist upon Grantor‘s death.

In addition, at any time or times prior to or upon the distribution date, the Distribution Committee may direct the Trustee to distribute to the trustee or trustees of any one or more qualified trusts (a trust defined to be created under a document other than the Trust Agreement) such amounts of the net income and/or principal of Trust (including the whole thereof) as the Distribution Committee determines.

Any such distribution shall be added to the principal of such qualified trust and disposed of in accordance with the terms of such qualified trust. No distribution or transfer may be made to a qualified trust unless made under the direction of the Distribution Committee.

Upon the Grantor‘s death, the Trustee shall distribute the balance held in trust to or for the benefit of any person or persons or entity or entities, other than the Grantor‘s estate, the Grantor‘s creditors, or the creditors of the Grantor‘s estate, as the Grantor appoints by will (Grantor‘s Testamentary Power).

The balance of the trust funds which the Grantor has not effectively appointed by will shall be distributed, per stirpes, to Spouse‘s then living issue in further trust. If none of Spouse‘s issue is then living, then the Trustee will divide the trust assets into two parts. The Trustee will distribute the first part as if the Grantor had died intestate, unmarried and survived by no issue.

The Trustee will distribute the second part to the individuals to whom and in the proportions that the property of Spouse would be distributed if Spouse had died intestate, unmarried and survived by no issue. To the extent there are no beneficiaries under one of those two categories, the entire amount will be distributed under the other category.

If, however, none of the individuals designated as distributees in either category are living, then the amounts will be distributed to charities designated by the Trustee.

You have requested the following rulings:

1. So long as the  Distribution Committee is serving, no portion of the items of income, deductions, and credits against tax of  Trust shall be included in computing under § 671 the taxable income, deductions, and credits of  Grantor or any member of the  Distribution Committee.

2. The contribution of property to Trust by Grantor is not a completed gift subject to federal gift tax.

3. Any distribution of property by the Distribution Committee from Trust to Grantor will not be a completed gift subject to federal gift tax by any member of the Distribution Committee.

4. Any distribution of property by the Distribution Committee from Trust to any beneficiary of Trust, other than Grantor, will not be a completed gift subject to federal gift tax, by any member of the Distribution Committee, other than Grantor.

LAW AND ANALYSIS

Ruling 1

Section 671 provides that where it is specified in subpart E of Part I of subchapter J that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter 1 in computing taxable income or credits against the tax of an individual.

Section 672(a) provides that, for purposes of subpart E, the term “adverse party” means any person having a substantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust. Additionally, § 672(b) provides that the term “nonadverse party” means any person who is not an adverse party.

Sections 673 through 677 specify the circumstances under which the grantor is treated as the owner of a portion of a trust.

Section 673(a) provides that the grantor shall be treated as the owner of any portion of a trust in which the grantor has a reversionary interest in either the corpus or the income therefrom, if, as of the inception of that portion of the trust, the value of such interest exceeds 5 percent of the value of such portion.

Section 674(a) provides that, in general, the grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of disposition, exercisable by the grantor or a nonadverse party, or both, without the approval or consent of any adverse party. Section 674(b) provides that § 674(a) shall not apply to the powers described in § 674(b), regardless of by whom held.

Section 674(b)(3) provides that § 674(a) shall not apply to a power exercisable only by will, other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse party, or both, without the approval or consent of any adverse party.

Section 674(b)(5) provides that § 674(a) shall not apply to a power to distribute corpus to or for a beneficiary, provided that the power is limited by a reasonably definite standard which is set forth in the trust instrument.

Under § 675 and applicable regulations, the grantor is treated as the owner of any portion of a trust if, under the terms of the trust agreement or circumstances attendant to its operation, administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust.

Section 676(a) provides that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provision of part I, subchapter J, chapter 1, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse party, or both.

Section 677(a) provides, in general, that the grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under § 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be (1) distributed to the grantor or the grantor’s spouse; (2) held or accumulated for future distribution to the grantor or the grantor’s spouse; or (3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor’s spouse.

Section 678(a) provides that a person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and, after the release or modification, retains such control as would, within the principles of §§ 671-677, inclusive, subject a grantor of a trust to treatment as the owner thereof.

Author note: below is the IRS guarantee to income savings.

Based solely on the facts submitted and representations made, we conclude that an examination of Trust reveals none of the circumstances that would cause Grantor to be treated as the owner of any portion of Trust under §§ 673, 674, 676, or 677(a).

Because none of the other Distribution Committee members has a power exercisable solely by him or herself to vest Trust income or corpus in him or herself, none shall be treated as the owner of any portion of Trust under § 678(a).

We further conclude that an examination of Trust reveals none of the circumstances that would cause administrative controls to be considered exercisable primarily for the benefit of Grantor under § 675. Thus, the circumstances attendant on the operation of Trust will determine whether Grantor will be treated as the owner of any portion of Trust under § 675.

This is a question of fact, the determination of which must be deferred until the federal income tax returns of the parties involved have been examined by the office with responsibility for such examination.  Author Note:  This means your income is shifted to a tax haven state, Nevada.

Rulings 2 and 3

Section 2501(a)(1) provides that a tax is imposed for each calendar year on the transfer of property by gift during such calendar year by any individual, resident or nonresident. Section 2511(a) provides that the tax imposed by § 2501 applies whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete as to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition, whether for the donor’s own benefit or for the benefit of another.

But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power, the terms of the power must be examined and its scope determined.

Section 25.2511-2(b) also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee, and the donor retains a testamentary power to appoint the remainder among the donor’s descendants.

The regulation concludes that no portion of the transfer is a completed gift. However, if the donor had not retained a testamentary power of appointment, but instead provided that the remainder should go to X or his heirs, the entire transfer would be a completed gift.

Section 25.2511-2(c) provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself. A gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed or ascertainable standard.

Section 25.2511-2(e) provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom.

Section 25.2511-2(f) provides that the relinquishment or termination of a power to change the beneficiaries of transferred property, occurring otherwise than by the death of the donor, is regarded as the event which completes the gift and causes the gift tax to apply.

Section 25.2511-2(g) provides that if a donor transfers property to himself as trustee (or to himself and some other person, not possessing a substantial adverse interest, as trustees), and retains no beneficial interest in the trust property and no power over it except fiduciary powers, the exercise or nonexercise of which is limited by a fixed or ascertainable standard, to change the beneficiaries of the transferred property, the donor has made a completed gift and the entire value of the transferred property is subject to the gift tax.

Section 25.2511-2(e) does not define “substantial adverse interest.” Section 25.2514-3(b)(2) provides, in part, that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power. Section 25.2514-3(b)(2) also provides that a coholder of a power is considered as having an adverse interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate.

In Estate of Sanford v. Commissioner, 308 U.S. 39 (1939), the taxpayer created a trust for the benefit of named beneficiaries and reserved the power to revoke the trust in whole or in part and to designate new beneficiaries other than himself. Six years later, in 1919, the taxpayer relinquished the power to revoke the trust but retained the right to change the beneficiaries. In 1924, the taxpayer relinquished the right to change the beneficiaries.

The Court stated that the taxpayer’s gift is not complete, for purposes of the gift tax, when the donor has reserved the power to determine those others who would ultimately receive the property.

Accordingly, the Court held that the taxpayer’s gift was complete in 1924 when he relinquished his right to change the beneficiaries of the trust. A grantor’s retention of a power to change the beneficial interests in a trust causes the transfer to the trust to be incomplete for gift tax purposes, even though the power may be defeated by the actions of third parties.Goldstein v. Commissioner, 37 T.C. 897 (1962). See also Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

In this case, Grantor retained the Grantor‘s Consent Power over the income and principal of Trust. Under § 25.2511-2(e), a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom.

The Distribution Committee members are not takers in default for purposes of § 25.2514-3(b)(2). They are merely coholders of the power. The Distribution Committee ceases to exist upon the death of Grantor. Under § 25.2514-3(b)(2), a holder of a power is only considered as having an adverse interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate. In this case, the Distribution Committee ceases to exist upon Grantor‘s death.

Author note: this is the key for the gift tax planning.  Accordingly, the Distribution Committee members do not have interests adverse to Grantor under § 25.2514-3(b)(2) and for purposes of § 25.2511-2(e). Therefore, Grantor is considered as possessing the power to distribute income and principal to any beneficiary himself because he retained the Grantor‘s Consent Power. The retention of this power causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.

Grantor also retained the Grantor‘s Sole Power over the principal of Trust. Under§ 25.2511-2(c), a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries. In this case, Grantor‘s Sole Power gives Grantor the power to change the interests of the beneficiaries.

Accordingly, the retention of the Grantor‘s Sole Power causes the transfer of property to Trust to be wholly incomplete for federal gift tax purposes.

Further, Grantor retained Grantor‘s Testamentary Power to appoint the property in Trust to any person or persons or entity or entities, other than Grantor‘s estate, Grantor‘s creditors, or the creditors of Grantor‘s estate. Under § 25.2511-2(b) the retention of a testamentary power to appoint the remainder of a trust is considered a retention of dominion and control over the remainder.

Accordingly, the retention of this power causes the transfer of property to Trust to be incomplete with respect to the remainder in Trust for federal gift tax purposes.

Finally, the Distribution Committee possesses the Unanimous Member Power over income and principal. This power is not a condition precedent to Grantor‘s powers. Grantor‘s powers over the income and principal are presently exercisable and not subject to a condition precedent.

Grantor retains dominion and control over the income and principal of Trust until the Distribution Committee members exercise their Unanimous Member Power. Accordingly, this power does not cause the transfer of property to be complete for federal gift tax purposes See Goldstein v. Commissioner, 37 T.C. 897 (1962); Estate of Goelet v. Commissioner, 51 T.C. 352 (1968).

Author note: below is the IRS tax guarantee of gift tax planning and estate tax savings.

Accordingly, based on the facts submitted and the representations made, we conclude that the contribution of property to Trust by Grantor is not a completed gift subject to federal gift tax. Any distribution from Trust to Grantor is merely a return of Grantor‘s property.

Therefore, we conclude that any distribution of property by the Distribution Committee from Trust to Grantor will not be a completed gift subject to federal gift tax, by any member of the Distribution Committee. Further, upon Grantor‘s death, the fair market value of the property inTrust is includible in Grantor‘s gross estate for federal estate tax purposes.

Ruling 4

Section 2514(b) provides that the exercise or release of a general power of appointment created after October 21, 1942, shall be deemed a transfer of property by the individual possessing such power.

Section 2514(c) provides that the term “general power of appointment” means a power which is exercisable in favor of the individual possessing the power (possessor), the possessor’s estate, the possessor’s creditors, or the creditors of the individual’s estate.

Section 25.2514-1(c)(1) provides, in part, that a power of appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors, or the possessor’s estate or the creditors of the estate.

Section 2514(c)(3)(A) provides that, in the case of a power of appointment created after October 21, 1942, if the power is exercisable by the possessor only in conjunction with the creator of the power, such power is not deemed a general power of appointment.

Section 2514(c)(3)(B) provides that, in the case of a power of appointment created after October 21, 1942, if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject to the power, which is adverse to the exercise of the power in favor of the possessor, such power shall not be deemed a general power of appointment.

For purposes of § 2514(c)(3)(b), a person who, after the death of the possessor, may be possessed of a power of appointment (with respect to the property subject to the possessor’s power) which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor’s power.

Section 25.2514-3(b)(2) provides, in part, that a coholder of a power has no adverse interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power. However, a coholder of a power is considered as having an adverse interest where he may possess the power after the possessor’s death and may exercise it at that time in favor of himself, his estate, his creditors, or the creditors of his estate.

Thus, for example, if X, Y, and Z held a power jointly to appoint among a group of persons which includes themselves and if on the death of X the power will pass to Y and Z jointly, then Y and Z are considered to have interests adverse to the exercise of the power in favor of X. Similarly, if on Y’s death the power will pass to Z, Z is considered to have an interest adverse to the exercise of the power in favor of Y.

The powers held by the Distribution Committee members under the Grantor‘s Consent Power are powers that are exercisable only in conjunction with the creator, Grantor. Accordingly, under § 2514(c)(3)(A), the Distribution Committee members do not possess general powers of appointment by possessing this power. Further, the powers held by the Distribution Committee members under the Unanimous Member Powers are not general powers of appointment.

As in the example in § 25.2514-3(b)(2), the Distribution Committee members have substantial adverse interests in the property subject to this power. Accordingly, any distribution made from Trustto a beneficiary, other than Grantor, under the exercise of these powers, the Grantor‘s Consent Power and the Unanimous Member Powers, are not gifts by the Distribution Committee members. Instead, such distributions are gifts by Grantor.

Based upon the facts submitted and representations made, we conclude that any distribution of property by theDistribution Committee from Trust to any beneficiary of Trust, other than Grantor, will not be a completed gift subject to federal gift tax, by any member of the Distribution Committee. Further, we conclude that any distribution of property from Trust to a beneficiary, other than Grantor, will be a completed gift by Grantor.

Except as specifically ruled herein, we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the Code. Specifically, we express no opinion on the trust provisions permitting Trustee to distribute income or principal to trustees of other qualified trusts (decanting).

In accordance with the Power of Attorney on file with this office, copies of this letter are being sent to your authorized representatives.

The rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party. While this office has not verified any of the material submitted in support of the request for rulings, it is subject to verification on examination.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

          Sincerely,

James A. Quinn
Senior Counsel, Branch 3
Office of the Associate Chief  Counsel