Sudden Wealth Podcast Episode: Domestic Asset Protection Trusts (DAPTs)

ROBERT: Hello, this is Robert Pagliarini, and today I’m speaking with Neil Schoenblum. He is a Senior Trust Officer with Provident Trust Group based in Nevada. Thanks for coming on, Neil. I appreciate it.

NEIL: Robert, it’s a real pleasure to be speaking with you today, especially since there’s so many exciting developments in the world of asset protection trusts.

ROBERT: Firstly, can you describe what a domestic asset protection trust is?

NEIL: A domestic asset protection trust, or as they’re often called, DAPTs or just APTs, allow the settlor, the trust creator, to be a discretionary beneficiary of the trust while also at the same time assuring protection of trust assets from claims of the settlor’s creditors.

ROBERT: Let’s get into a little bit more detail with regard to the DAPT and prior to having this available. You talked about a settlor or a grantor, and this is the person who creates the trust. A lot of listeners may have already a living trust. Of course, the difference between a living revocable trust and a domestic asset protection trust is, firstly, a living trust is revocable, which means you can change it, you can get rid of it, you can modify it however you want. So from an asset protection standpoint, that’s a trust that doesn’t offer much asset protection, correct?

NEIL: Right. Again, an APT has to be irrevocable. What we’re talking about here is the trust creator having interest and actually being a beneficiary and protecting his or her assets.

ROBERT: That’s exactly right. That’s what makes this particular trust so exciting. Let’s say for example I am worth $20 million and I’m nervous. I want to protect these assets; I’ve worked hard for them. Tell me about the DAPT. I create the domestic asset protection trust. I’m the grantor; I’ve created it. I re-title the assets so now they’re titled in the name of the domestic asset protection trust, and it’s irrevocable, which means I can’t change my mind after I’ve done this. Is that correct?

NEIL: Yes, that correct. Depends on how the trust instrument is drafted. There often is a limited right of amendment. But technically, yes, that’s irrevocable. But let’s also be clear that even if the trust is irrevocable, the settlor can still retain broad powers and broad control. Now, we have to make sure that distributions from the asset protection trust are not mandatory, that they’re discretionary.

As an example, let’s look at Nevada’s laws. Again, yes, the trust must be irrevocable, but the settlor under Nevada law can retain very broad powers. Nevada statute enables settlors to veto a distribution from the trust, to hold a special lifetime or testamentary power of appointment. Additionally, the settlor can serve as a co-trustee, let’s say an investment co-trustee, while also retaining the power to directed trust investments, remove and fire a trustee, and to execute other managerial powers.

Yeah, so technically the DAPT, or NAPT, Nevada Asset Protection Trust, is irrevocable, but the settlor still does retain certain powers and rights. Also, we see often the structure is yes, you have the trust creator, then you have to have a Nevada trustee to take advantage of Nevada’s laws. Same thing in other APT states.

But then you also usually have a trust protector, which is an important concept. Basically, it’s an individual that the creator trusts that basically floats above and watches over everything to make sure that everything’s being effectuated in the client’s best interests and desires. So again, there are certain powers that the trust settlor can retain, and also the settlor can rely on other trusted parties, such as the trust protector, to make sure that the settlor’s intents are effectuated.

ROBERT: Yeah, I’ve always thought of the trust protector as almost a guardian angel of the trust, to make sure things are being done correctly and no one’s taking advantage of the situation. Okay, let’s get back to my $20 million that I’ve now put into this trust. It’s in Nevada, and for this purpose, Provident Trust is the co-trustee, and I’m a co-trustee as well. I’m also the beneficiary, correct?

NEIL: That’s correct. It could be obviously you; additionally, it could be a spouse, it could be your descendants, your heirs. But yes, an asset protection trust, the concept is that you as the trust settlor creator are also a beneficiary.

ROBERT: If for whatever reason I get sued and the lawsuit is for $20 million, how does this particular trust protect me?

NEIL: To begin with, we have to look at the statute of limitations for the seasoning period under Nevada law. For Nevada – there’s currently 15 asset protection states, and each state, you have to look at two different classes of creditors. One is pre-existing; another is future.

Now, by way of example, these are the future creditors in Nevada, a Nevada bar suit with respect to transferred assets beginning two years – again, it’s a flat two years from the date of the transfer to the trust, while pre-existing creditors must commit to action to transfer with no later of two years from the date of transfer of the assets or six months after the creditor discovers, or reasonably should have discovered, the transfer.

However, this potential discovery extension for pre-existing creditors can effectively be limited, since under Nevada law, creditors deemed to have discovered a transfer, at the time a public record is made of the transfer, including without limitation, for instance, the recording of the conveyance of real property or the filing of the financing statement.

Let me also point out that the two year seasoning period is for each particular transfer into trust, and so it may not actually be from when the trust was created if the assets later on are also added. And one other point quickly, let me add that even during this two year seasoning period, before the assets officially become protected, Nevada statute still provides the creditor needs to prove by clear and convincing evidence the transfer of property to the NAPT looks fraudulent or that it violates a legal obligation owed to the creditor under contract or avowed court order – that is, legally enforceable by that creditor. This is a challenging burden of proof to the creditor.

But anyways, the first thing that we do is to look at the seasoning period in Nevada. Basically, it’s two years. If the client was sued before those two years, then as I said, you’ll have to rely on the clear and convincing evidence standard.

Then after the two years, sure, a protection is supposed to kick in. Before those two years, again, if there’s a challenge, the judge will look at what’s referred to as badges of fraud. The idea being that unless it’s a clear egregious, fraudulent transfer, the judge can’t get into the mind, often, of a debtor, of the settlor being pursued. So the judge will again look for what’s called badges of fraud.

There’s many different badges of fraud that we can get into. They generally range from anything that appears to be a way to hide assets, if the settlor created a trust right before a divorce, right before insolvency. So that’s the general nature of what we’re dealing with here. Again, just off the top of my head.

We’re looking at other actions, such as the settlor transferring all or substantially all of his or her assets to the DAPT. Let’s say before the transfer, the settlor had been sued already or threatened with lawsuit, or that the settlor wasn’t solvent shortly after the transfer in the trust. Again, we have to remember that that planning should not be done at the eleventh hour, such as right before a divorce, as I stated. DAPT planning should not involve any problems with transfers. It should be done before any storm clouds have gathered, and when the skies are completely clear.

ROBERT: Right, okay. So to summarize that, if I have my $20 million and I put it in a DAPT, assuming that I’m not currently going to get divorced or there’s not a pending lawsuit there, if the skies are clear, I put the assets in there. And then there is this two year seasoning period which says during those two years, if there is some sort of a lawsuit or judgment, that there still is a burden of proof to basically prove that there was some sort of fraud committed.

But after the two years, let’s say three years after I’ve put this $20 million in, what are the protections that are afforded me by having this domestic asset protection trust that will protect those assets?

NEIL: Looking at a lot of statutes, Chapter 166, which says very clearly that after this period, that the Nevada asset protection trust cannot be pierced or busted. At least to this point. Again, the Nevada statute was enacted in 1999, and I guess in nearly 15 years, there isn’t one reported case post hoc of after the seasoning period running, of a NAPT being busted or pierced.

So I guess you have to look very – points of statute that the state made a decision that they wanted to allow these types of trusts, and since 1999, Nevada’s lawmakers meet every other year, and essentially in every one of these sessions, they’ve improved or enhanced their asset protection laws, reflecting a desire, again, to be a state where these trusts are protected and allowed. Again, at least at this point, there isn’t a reported case in Nevada of this type of trust being pierced or busted.

ROBERT: That’s really what makes these trusts so interesting, exciting, and so popular, is that once you overcome that two year mark, these assets really, truly are protected. Now, there is one wrinkle to that that maybe you can talk about, and that is – in this example, I live in California. I’m a resident of California. I open this domestic asset protection trust in Nevada; you’re the co-trustee. I don’t reside in Nevada. Am I still afforded the same protection, even though I’m not a resident of Nevada, where these assets are?

NEIL: That’s a very timely question, which I’ll get to in a minute. Let me again say that California doesn’t allow asset protection trusts, but Nevada does, and people in California do take advantage of Nevada asset protection trusts. I’ve seen individuals that have setup Nevada asset protection trusts from California. But the issue does concern the non-recognition of foreign law and foreign judgment, notwithstanding the Full Faith and Credit Clause of the federal Constitution.

So ordinarily, a DAPT instrument or trust agreement will have a clause that provides the application of DAPTs – let’s say Nevada state law. However, the concern is that a non-DAPT foreign court, such as California, or located in one of the 35 non-DAPT states, might buy the argument of a creditor that protection of local creditors is a strong public policy, refuse to enforce the DAPT state law designated in the trust agreement, apply its own laws instead, and insert judgment to the creditor.

While this is possible, the public policy argument is far less compelling these days, as more and more we’re seeing states adopt self-settled asset protection laws. There have been two very recently; Virginia became effective in July of 2012, and Ohio became effective as of March 2013. Indeed, again, since 1997, 15 out of 50 states, which is 30%, have enacted DAPT laws. This number continues to grow.

Also, as organizations such as the respected American Bar Association, they have subcommittees on asset protection planning. The “strong” public policy basis for not giving full faith and credit to a DAPT law loses its justification. moreover, a court can’t award a judgment to a creditor unless it has jurisdiction, e.g. in rem jurisdiction, which is over trust assets, or a personal jurisdiction over a trustee.

So if trust assets are outside of the foreign state and the trustee does not have sufficient minimum contacts with a non-DAPT state, the court will lack the jurisdiction to enter a judgment favorable to creditors.

On the other hand, again, let me emphasize this jurisdictional aspect is why a real property located in a non-DAPT state is a tricky, problematic DAPT asset. So even if the non-DAPT court does find an alternative basis for exercising jurisdiction and applies its own law, the story is far from over. If assets let’s say have resided in a DAPT state such as Nevada, or in a state that applies the law of the state of trust administration or the law of designated in the trust agreement, full faith and credit may not require given effect to the judgment of a non-DAPT foreign court on account of the particular facts of the case.

However, should a DAPT court need to give full faith and credit, the DAPT jurisdiction still can establish its own procedures from forcing judgment, which would include the proper time period, the seasoning period, under DAPT laws.

ROBERT: Yeah, lots of great information, Neil. I just want to make sure that I can summarize it and that the listeners understand, as well as that I understand. Just going back to my example, I’m a California resident; I create a domestic asset protection trust in Nevada. Now, I get sued two or three years later. There is protection, even though I’m not a resident of Nevada. There seems to be quite a bit of protection afforded me, even though I’m in California.

What type of assets are best placed into a DAPT?

NEIL: The idea is that you want to preferably have assets that you can move to Nevada, that you can have sited in some sort of Nevada account, because Nevada by its laws very clearly allows domestic asset protection trusts. So you want to have – the issue is that real property can’t be moved. It’s stuck in California, which makes it vulnerable.

ROBERT: Right. There are 15 states that have these domestic asset protection laws, and I believe that Nevada is the only one that doesn’t have any exception creditors.

NEIL: Previously, that was the case. There’s been a recent revision. Now Utah also doesn’t allow any exception creditors, so the two states are Nevada and Utah. But again, until very recently, Nevada was the one state, and Utah has some other provisions that don’t make it, at least as of now, one of the “top” asset protection states.

ROBERT: And these exception creditors are, after the seasoning period – and each state will have a slightly different range as far as the number of months or years that is the seasoning period – but even after that point, in some states they say “No one can pierce this except for maybe a spouse in a divorce, or except XYZ creditors.” So in Nevada, it’s saying nobody. Nobody can pierce this after the seasoning period.

NEIL: Yes, that’s correct. Different commentators look at different factors. At least from our clients’ perspective, we’ve seen this no exception creditors factor to be critical, as you mentioned. All of the APT or DAPT states besides Nevada, now Utah, include provisions in their statutes – it’s very clear – that enable certain excepted creditors to pierce or to bust the trust, notwithstanding the fact that the applicable seasoning period or statute of limitations has already expired.

Now, these exception creditor provisions, they vary, but generally they take the form of carve-outs for property settlements of divorcing or separating spouses, for alimony, for child support, or for pre-existing creditors. So as you correctly said, in these other DAPT states, the settlor will continue to remain vulnerable to the claims of an excepted creditor after the limitation period has come and gone.

From our clients’ perspective, that makes them very nervous that let’s say a bunch of other states decide Nevada has a four year seasoning period; the client’s concern is that “Wait a second, I put these assets in a trust, I made it through the four year period, yet I’m still potentially – I’m on the hook for these excepted creditors?”

ROBERT: You mentioned something earlier about in a divorce, again, Nevada, their exception creditors, they have none. How do these trusts work in a marriage to protect assets? Do they need to be set up before the marriage? Can they be set up during the marriage? Talk a little bit about that.

NEIL: We have actually seen asset protection trusts or DAPTs become part of the premarital planning, where clients are using these DAPTs either as part of their premarital planning along with the prenup or in lieu of the prenup, because – again, I’m not judging and saying it’s right or wrong, but obviously prenups can often lead to conflict and be uncomfortable, and so often a client is now, in lieu of the prenup, using an asset protection trust way before – again, we’re not in any way counseling, trying to defraud a spouse. The client would do planning when the skies are completely clear, before marriage. Anyway, you still have that two year seasoning period.

So an asset protection trust can be used in addition to prenup or can be used in lieu of a prenup. You’re basically stashing away, putting away a certain amount of your assets to be protected after a certain number of years. Again, I think I alluded to DAPT planning should certainly not be done right before a divorce. And again, I would even counsel that it shouldn’t be done during a marriage. It should be looked at as premarital planning.

Also, it gets tricky – you have to look at what state you’re dealing with, and whether or not the community property is safe, which is California or Nevada. In those cases, again, it’s a little bit trickier because you have to have a separate – a way to handle that is to have a transmutation agreement, where the community property rights need to be transmuted into separate property before and at the same time with the DAPT planning.

ROBERT: But if this were done before the marriage, then that wouldn’t be an issue.

NEIL: That’s correct. But still, again, we’re seeing it done way in advance of marriage. This is part of your overall estate planning.

ROBERT: Right, so if you’re going to get married, instead of a prenup, or maybe in addition to, you could set up this trust, transfer assets into it. How does that work with the seasoning period? For example, if I’m getting married in 6 months, maybe I create this trust, put assets in it; I then get married, and a year into the marriage, we decide to get divorced. Because the seasoning period hasn’t fully been expired to the two years, does my soon-to-be ex-spouse then have some sort of claim to these assets?

NEIL: Again, obviously, we have to look at what state we’re dealing with. Are there community property rights?

ROBERT: Let’s look at California.

NEIL: California, again, is a community property state, so we have to take into consideration whether or not there were any separate additional steps done, whether it be a transmutation agreement, how the property was divided. Nevada’s statute is very clear regarding the two year period. Before then, yes, in theory, the assets could be vulnerable to some sort of – you still have to prove, again, that the standard was met in terms of the clear and convincing.

But generally speaking, yes, if you’re going this route using DAPTs for premarital planning, it should be done way in advance, because some of these questions can get complicated. Especially if you’re dealing with a non-DAPT state that’s a community property state.

ROBERT: Okay. We’ve obviously talked about the asset protection provisions in using a DAPT. Tell me about how they function, not in regard to protecting assets, but just on a day-to-day basis. I’ve taken my $20 million, I’ve put it in this trust. If I want to go on a trip, can I take money out? If I want to buy a new home, can I do that? How much flexibility and control do I have over this?

NEIL: A domestic asset protection trust should be viewed more as a savings account, meaning you’re not living out of it. As I had stated, the settlor can’t receive mandatory distributions. They have to be discretionary. So the usual setup is that you’ll have the settlor as a beneficiary; likely you’ll have the settlor’s spouse, the settlor’s descendants also as beneficiaries. Then often you’ll have the independent Nevada trustee in charge of the administrative, back office, day-to-day functions, including managing the distributions.

The trust company most likely has a trust committee, so somebody, whether it be the settlor, whether it be another one of the beneficiaries, will make an official formal request for a distribution. The trust company’s committee will meet, will look at the particular need, and also, while the distributions can’t be mandatory, also have to look at the actual trust agreement language to see the actual standard for distribution. Is there some sort of relevant beneficiaries? Is there some sort of HEMS standard, which is the Health Education Maintenance Support standard. Is it fully discretionary to the trust company or trustee to make distributions? So you have to look at both of those.

Nevada statute requires that the Nevada trustee – and it doesn’t have to be an official trust company; it could be a Nevada bank, it could be a Nevada individual. But you have to have some sort of Nevada trustee – the Nevada trustee must have powers that include maintaining records and preparing income taxes. And also, all or part of the administration of the trust must be performed in Nevada.

Again, you could have other parties involved. For instance, we commonly see a structure where you have co-trustees. Maybe the settlor will be the investment co-trustee, and the Nevada independent trust company will be the co-administrative independent Nevada trustee. Also, you could have a trust protector lurking above.

Additionally, in terms of day-to-day roles, Nevada is one of the asset protection states that modified its statutes to allow what is called directed trusts. Many other states allow these provisions, too, but under the directed trust model – again, I think it was 2009 Nevada amended the clause to provide for directed trusts. They give the settlor the best of both worlds. Under this model, some traditional roles of the trustee can now be vested in an investment trust advisor and/or a distribution trust advisor.

So these parties – the distribution trust advisor wouldn’t apply in the case of an asset protection trust. We’re only talking about here an investment trust advisor, where the investment trust advisor would give binding directions to the independent Nevada trustee. Accordingly, settlors can now rely on their own preferred trusted investment advisor to retain control over trust investments while allowing the independent Nevada trustee to focus on the trust administration.

Another advantage of the directed trust model is that, because of the separation of roles and the reduced role now of the independent Nevada trustee, the trustee fees are usually lower, because they’re not touching or handling the investment side. I don’t know if I completely addressed what you were getting at, but…

ROBERT: Yeah, you bring up fees, and that’s actually an area that I wanted to talk about. But right before I get to that, at what asset level would you say setting this up makes sense? If someone has a million dollars, is it worth it at that point? Two million, $500,000? Where do you generally see the minimum asset size to set these up?

NEIL: Let me also confirm that the settlor will not be transferring all of his or her asset to the APT. Even the settlor should not be contributing a significant portion, a majority of assets, or else it’ll appear as though it’s a badge of fraud.

So generally speaking, I think that the starting point which makes a lot of sense is a million dollars. Now, let me also say that I’ve seen or heard about or generally come across APTs or DAPTs with less. I have seen them in the range of $300,000, $400,000, $500,000. But I think that it is a case by case matter. But I think that generally, the kind of sweet spot beginning is one million dollars. A lot of times, we’re seeing them in the range of three to five mil. But let’s also be clear that we’ve seen them in multi, multi, multimillion dollar cases.

ROBERT: And like you said, you wouldn’t want 100% of your assets in this trust.

NEIL: You wouldn’t even want a majority of assets in the trust, or else it could be viewed as alter ego or viewed as a fraud, that you’re trying to hide everything. It’s not a live-out trust. Basically you’re putting these assets away, allowing them to season in case of any future losses.

ROBERT: What happens when I, the grantor, the person who created this trust, passes away?

NEIL: These trusts, as we discussed, are already irrevocable. What would happen is you have to look at the terms, the language of the trust agreement. Most of the trusts that we see are what’s called dynastic trusts or dynasty trusts. A lot of the asset protection trust states have modified or eliminated the traditional rule against perpetuities, which set forth previously how long a trust could last for. For instance, Nevada has modified its rule against perpetuities to allow a trust to last for 365 years. Usually, we’ve seen a lot of practitioners or attorneys, again, draft these asset protection trusts to last for that period.

By doing so, what you’re setting up is, again, if done properly initially and also administered properly, is essentially you’re getting asset protection for generations to come, and also potentially tax savings, because dynastic trusts are used for transfer tax savings. So again, if done properly, you’re getting both elements.

So the fact that the settlor passes away, again, you have to look at the terms of the trust agreement, but generally speaking, the trust, the way we’re seeing it drafted, should continue to provide asset protection for the other beneficiaries listed in a trust. Because again, usually they’re being drafted under Nevada law for 365 years.

ROBERT: Okay. Going back to let’s say that million dollar account, with the fees just generally speaking, what you’ve seen out there, what would it be to act as a co-trustee, not investing those assets, but just on the administrative side?

NEIL: I would say that based on what I’ve seen or heard, there’s usually two fees. There’s usually a one-time initial setup fee to review the trust documents, to set up an account at the trust company. It’s a one-time initial setup fee, usually in the range of $250 to $400.

And then the second fee is an annual trustee fee, and I would say, again, based on what I’ve seen and heard, for Nevada asset protection trusts, for a directed trustee, you’re looking at in the range of probably $1,900 to maybe $3,000. Depends on the particular trust company. It probably depends case by case, depending on the height of the role, what the responsibilities are. But again, I can’t speak for the trust companies.

But what we see is usually an asset protection trust, unlike other types of trust, usually has a flat fee. Now, if you have some other type of non-asset protection trust, usually trust companies have a fee based on assets and trusts. They’ll give you maybe a tiered structure basis point.

ROBERT: That’s right.

NEIL: On assets and trusts. Let’s say maybe the first million, let’s say 55, next million 45, the next three, 35 basis points; anything over five mil, negotiable. But those type of trusts were where an independent trustee is more involved. For an asset protection trust, I’m not saying the trustee isn’t involved, but it’s very clear the responsibilities, and the statute basically prescribes the role of the Nevada trustee.

Let’s be clear that usually somebody, especially out of state, is looking to Nevada trust companies because Nevada’s laws say you have to have a Nevada trustee. You’re basically paying to get that advantage. So in the case of a Nevada asset protection trust as opposed to other types of trust, you’re not usually – again, I can’t speak for other trust companies – but you’re not usually looking at – the size of assets being placed in the trust is not really a basis point. The calculation is more, usually what I’ve seen is a flat fee in the range of maybe $1,900 annually to $3,000.

Let me also quickly cover another point. I did mention obviously that people outside of Nevada or out of state are often basically paying to take advantage of that state’s laws, but let’s also be clear that somebody in the state, somebody in Nevada, can also set up an asset protection trust. In that case, obviously, some of the risks that we’ve discussed, such as full faith and credit, aren’t there, because obviously the Nevada judge –

ROBERT: They’re a resident, sure. Based on what you’ve seen, what is maybe a range of fees to actually create the asset protection trust?

NEIL: In this case, I really have seen a wide range. As you can probably guess, it depends on what your interest, what level of products and how detailed your interest. I’ve heard about some NAPTs drafted for probably, at a lower level, probably $3,000 to $4,000. But I’ve seen NAPTs generally that cost let’s say in the range of $10,000 to $12,000.

I’m not saying one’s better than the other. I can say that a lot of times, the ones in the higher range are 60, 70 page documents that are very detailed and will anticipate any issue. It really depends on – I’m not saying one works better than the other; I’m just saying that I’ve seen a real range, anywhere from let’s say $3,000 to $12,000, depending on the type of trust, the level you need.

ROBERT: Thank you so much, Neil. I really appreciate your knowledge in this area. You clearly have amassed a great deal of experience as your role as a senior trust officer. Do you want to talk briefly a little bit about Provident Trust, what you do there, the clients you serve?

NEIL: Sure. Can I address one recent development as well with domestic asset protection trusts? Is that okay?

ROBERT: Sure, please.

NEIL: I just bring it up because it’s one of the hottest developments now, not just with Nevada, but nationwide with asset protection.

ROBERT: This is the NING Trust, right?

NEIL: Yes, it’s the NING Trust. What is this thing called a NING? A NING is a Nevada Incomplete Non-Grantor Trust. In two separate recent instances, the IRS, by Private Letter Rulings, which literally aren’t binding, but still we can look at them, the IRS in two separate instances has blessed the Nevada Incomplete Non-Grantor Trust, or NING.

What a NING is, it’s a Nevada asset protection trust set up by individuals and states with high income tax rates, such as California or New Jersey, or until very recently, New York, before New York changed its laws to disallow these trusts. But the main trust has a different structure than the usual DAPT, and it includes, for instance, a power of appointment committee, and its intention is to not be a grantor trust for income tax purposes. Accordingly, it can be used to avoid income tax imposed by the settlor’s state of residence.

Additionally, there is an incomplete transfer for federal income tax purposes, so the NING can be used solely for income tax purposes. Before the IRS approved the NING Trust, it had gone almost six years without issuing a Private Letter Ruling in incomplete non-grantor trusts. But after the IRS blessed the NING in its Private Letter Rulings, a few other states changed or revised their asset protection laws to allow the NING IRS blueprint to be followed in their state.

Again, NING Trusts may appeal to residents in high income tax states such as California, with its top rate of 13.3%. For those individuals that have significant investment income or a substantial one-time gain, it’s likely to be realized.

In terms of seeing and visualizing it, for instance, let’s say that a business interest is going to be sold for $5 million, and the seller settlor has no basis in it. If the settlor’s resident state imposes a 10% tax, to keep it simple, then there’ll be a tax of $500,000. But if a NING is set up properly, this tax could potentially be avoided, and meanwhile the double benefit is that the settlor would also, if done correctly, be afforded the advantage of Nevada’s asset protection trust law.

I just brought it up because we’re seeing a lot of interest in NING Trusts, which are a variation or a type of a Nevada asset protection trust.

ROBERT: I’m not surprised you’re seeing a lot of interest in these, because again, just to summarize, it’s truly remarkable that the IRS wrote these Private Letter Rulings. But basically what you’re saying is, you have an asset – maybe it’s low basis, you’re selling it, you’re going to have to pay a considerable amount of capital gains tax. You don’t want to do that.

So you transfer ownership of this asset into this NING, and you’ve transferred it, but for estate and gift tax purposes, it’s not considered a gift, so you don’t have to pay any gift tax, so that’s nice. But on the income side, they view it as you don’t own it, and because you don’t own it, then you don’t have to pay capital gains tax on it. Is that really how these things work?

NEIL: Yes, that’s correct. You have to be careful when you’re dealing with a one-time transaction, because in theory it could be argued that if you immediately turn around, it could be viewed as a step transaction or a sham. But yeah, if done properly, that’s what’s being blessed. And again, an alternative could be if you just have a steady portfolio of investment income – it doesn’t have to be a one-time sale. It could be, again, a portfolio of investment income that’s accumulating and accumulating and accumulating.

ROBERT: Because traditionally, with a grantor test, the IRS looks through the trust and taxes the grantor, the person who created it. In this case, it’s not a grantor trust; even though I created it, they’re viewing it as it’s not mine, so then you tax the trust itself. And lo and behold, in Nevada, there’s no state income tax on trust income. It’s quite an amazing development, actually, and I’m sure you’re going to be bombarded with requests for this.

I guess the only wrinkle in this case is, you mentioned earlier, New York basically does not allow these. Do you think other states are going to follow suit? I mean, why wouldn’t they?

NEIL: Yeah, we don’t know what’s going to happen. New York is just one example, but certainly we’ll have to play it out. Again, these are very recent developments in the past year or two, where in two separate cases, the IRS has blessed non-Nevada residents creating these NINGs in Nevada, Nevada trust, and it’s been blessed. We have the Private Letter Rulings, which aren’t binding – but again, it’s a very detailed setup or blueprint that you have to follow to make sure that it’s non-grantor trust.

The setup that’s being done on those blessed is you have what’s called a distribution or power of appointment committee, which consists of actual beneficiaries, but has adverse interest to the settlor. For instance, in one of the PLRs that was blessed, you had the settlor, who was a beneficiary; then you had his children, and they were all on this distribution or power of appointment committee. Again, with the point being that you have to have adverse interest vis a vis distributions.

So the distribution committee or the power of appointment committee is making these distribution decisions and giving directions to the Nevada trustee. There’s also certain powers that are provided for, so it can be a complicated structure, but yes, the IRS has blessed a very similar blueprint now in two different PRLs in the past year or so.

ROBERT: That’s very exciting. Tell me a little bit about Provident Trust.

NEIL: Provident Trust, again, is located in Las Vegas, Nevada. Especially for asset protection purposes, just one office in Nevada, which we believe is helpful. Currently under custody, we have around $4 billion.

We’ve grown quickly, but at the same time, we still have, we believe, hopefully, a boutique feel. Let’s say for every trust, we always have the same two or three persons assigned a particular trust. So if you’re calling in at one time and if you call in a second time, you’re going to be speaking with the same person, which we feel is an advantage, as opposed to maybe some other companies where you never speak to the same person twice.

We obviously offer trustee services. We’re always a directed trust company, meaning that we never actually provide the investment services ,we don’t manage the money, but we think this is a perfect niche, because a lot of our business clientele actually comes from investment advisors to the settlor, because the investment advisors know that we’re not going to step on their toes. We know that we’re interest, and our specialty is the back office, traditional trust administration. As long as the trust agreement allows for and the client wants, we let the investment advisors focus on what they do best, which is the investment side, we do the back office administrative side.

ROBERT: Of course, Neil, for full disclosure, I know you, of course, because I have clients who use Provident Trust. We’ve been extremely happy, and that’s why I wanted to get you on the line here to share your experience and wisdom in this really developing area. So thank you so much for your time; I appreciate it, and keep up the good work.