OVERVIEW OF PRIVATE WEALTH MARKET IN NEVADA
As one of the leading United States jurisdictions in private wealth management, Nevada continues to attract discerning ultra high net worth (UHNW) individuals and families from other states and other countries. Nevada is frequently named one of the top four leading jurisdictions for trust situs due to its innovative statutory approach to sophisticated trust administration; strong asset protection history; highly favourable state tax climate with notably no personal income tax, estate tax or inheritance tax; innovative business organisations law; supportive and efficient regulatory environment; and superior family and private family trust company laws.
With a population of over three million residents principally residing in Las Vegas and Reno/Tahoe, Nevada is ranked second in population growth and fourth in GDP growth in 2019 according to US News & World Report, which has continued a consistent trend since the Great Recession. Although gaming and tourism remain the strongest industries, Nevada has diversified into logistics/e-commerce, advanced manufacturing, financial services, renewable energy, mining, agriculture, and aerospace. Nevada is home to the largest industrial park in the United States, known as the Tahoe-Reno Industrial Center, which is the home of Tesla’s Gigafactory 1 and will soon become a leading centre for developing blockchain and nanotechnology in the world. Las Vegas is now home to the Raiders National Football League Team who will be playing in the brand new 72,000 seat Allegiant Stadium just off the famous Las Vegas Strip.
CNBC recently reported that, according to GOBankingRates, Nevada was the one of the four best suited for the super rich based on property tax rates, income tax rates and average of the top one percent and related crime rate and quality of schools. According to Forbes 2020 Billionaires List, Nevada boasts 11 of the world’s billionaires which ranks it tenth among states in the United States.
To capitalise on this plethora of private wealth management opportunities, Nevada has recently seen several notable national trust companies open branches or form affiliates in Nevada including Northern Trust, Wilmington Trust, Charles Schwab and Sequent (formerly part of Rothschild & Co).
In 2020 and into the future, UHNW clients face numerous challenges including the unforeseeable impacts of the COVID pandemic; the potential dramatic change in United States politics which will impact income and transfer tax laws; shifting demographics and finances; and general uncertainty. With Baby Boomers transferring more than USD30 trillion in wealth to younger generations over the next twenty years, UHNW families are forced to understand and deal with the implication of these challenges on the formation, preservation, diversification and succession of their wealth. Forbes reported that according to a 2018 study by TIAA Institute, only 11% of millennials displayed a “relatively high” level of financial literacy, with another 28% of the group conveying a “very low” literacy rate in finances. Gen-Xers fare little better, with industry estimates showing struggles with spending and saving habits among large swaths of this generation.
One cornerstone to successful planning in this uncertain environment is to locate and administer UHNW wealth in long term discretionary spendthrift trusts in stable trust and tax friendly jurisdictions like Nevada with lengthy rule against perpetuities period under the supervision of highly competent corporate fiduciaries and private family trust companies. Nevada’s rule against perpetuities for the maximum duration of trusts is 365 years. Full utilisation of a parent or couple’s generation skipping transfer tax exemption in 2020 of either USD11.58 million or USD23.16 million coupled with an instalment sale of assets at historically low interest rates to a long term discretionary trust treated as a grantor trust for US tax purposes can cause one of the best potential multigenerational transfers of wealth attainable in today’s tax and risk climate. Among the many timely benefits of a long term discretionary trust are:
• Family governance, succession, value transmission and education
• Thought out trustee selection and succession
• Provide investment management using long term endowment focus
• Ability to hold concentrated, illiquid, and non-marketable securities without diversification
• Diversify into private equity, alternative asset classes, and real estate while limiting fiduciary risk
• Use investment trust advisors, distribution trust advisors and trust protectors of the family’s selection
• Asset protection from creditors, ex-spouses, improvidence, and third party manipulation through spendthrift provisions and discretionary distributions which encourage asset retention for beneficial use versus outright distribution
• Segregation and maintenance of separate property
• No contest clauses
• Incentive clauses to encourage productive drug free lifestyles
• Privacy and confidentiality including record sealing and blocker entities
• Retention of trust information from beneficiaries until the appropriate time
• Incapacity, minor and special needs planning
• Preservation of legacy assets and businesses and consolidation of voting interests in public and closely-held businesses
• Ability to adapt the trust to changing circumstances through testamentary and life time powers of appointment, decanting, distribution, judicial and non-judicial modification, merger, division, and re-situs to address change in tax and trust laws
• Ability to move trusts to more beneficial situs for certain assets or certain trust outcomes
• Avoid state and local income taxes
• Ability to substitute assets of equivalent value while the trust is a grantor trust for tax purposes
• Lifetime utilisation of generation skipping exemption and unified credit
In administering discretionary long term trusts, both types of professional fiduciaries need to be well equipped and versed in the planning, administration and interplay of many specialised trust and entity structures used in comprehensive wealth transfer planning such as the asset protection trust, the spousal lifetime access trust, the grantor retained annuity trust, the charitable lead and remainder trust, the charitable trust, the defective grantor trust, the private foundation, the family limited partnership or limited liability company. Nevada has very progressive laws which maximise the benefits of those trusts and entity structures including the ability to decant trusts when circumstances require the trust relationship to be modified.
Much of UHNW wealth creation and wealth compounding occurs through the fortunate early concentration of wealth in certain asset classes that started as a family business, which is the epitome of private equity, and careful, timely planning when liquidity events arise. As that concentrated UHNW wealth matures, the need for thoughtful diversification becomes paramount to preserve and grow wealth for generations of beneficiaries and to support charitable endeavours to improve the world communities. Taxes, costs of administering wealth and distributions must be reasonably minimised to achieve the compounding of UHNW wealth. Trusts should be situated and administered in states like Nevada, which has no state income tax and lower administration costs, so wealth can grow and the impact of taxes on beneficiaries is minimised.
There are multiple situations where corporate fiduciaries may not want to take on the risks of concentrated positions, illiquid assets, restricted securities and real estate to achieve diversification and wealth compounding. Fortunately, private family trust companies and investment trust advisors can play a valuable role in administering those risky asset classes while investment managers and corporate fiduciaries oversee the marketable portions of the UHNW family’s portfolio. Nevada, among a handful of jurisdictions, has developed the use of family private trust companies to play an integral role in wealth succession and adopted a directed trust statute which allows the fiduciary investment risk to be shifted from and among corporate fiduciaries and individuals best able to manage the risk.
Odds are that clients will weigh the advantages and disadvantages of long term irrevocable discretionary trusts and place their bet that long term discretionary trust planning will be the winning hand.
Contribution Co-Authored by Robert E. Armstrong and Scott A. Swain, Partners at Nevada Law Firm, McDonald Carano