USA NEVADA: An Introduction to Private Wealth Law

As one of the leading United States jurisdictions in private wealth management, Nevada continues to attract 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 has the third highest population growth rate since 2010 (16.1%) according to US News & World Report. According to a report on GDP growth by the US Bureau of Economic Analysis, Nevada’s GDP grew by 10.9% during the first three months of 2021, the largest increase of any state. The population and GDP growth rates continue 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 (notably in gold, copper and lithium), agriculture, and aerospace. Nevada has the largest industrial park in the US, known as the Tahoe-Reno Industrial Center, which is home to Tesla’s Gigafactory 1 and is expected to be a leader in developing lithium recovery, blockchain and nanotechnology. Las Vegas is home to the Raiders National Football League Team, Golden Knights National Hockey League Team, Las Vegas Aces Women’s National Basketball Team, National Finals Rodeo, F-1 Las Vegas Grand Prix, and various athletic contests and special events.

According to the Forbes Billionaires List, Nevada boasts 17 of the world’s 2,600+ billionaires, which ranks in the twentieth percentile among US states. To capitalise on this plethora of private wealth management opportunities, Nevada has seen 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 2023 and into the future, UHNW clients face numerous challenges including the unforeseeable impacts of the COVID pandemic; the dramatic changes in US politics which impact income and transfer tax laws; shifting demographics; rising interest rates, inflation and finances; and US and global economic 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. According to the TIAA Institute, only 11% of millennials displayed a “relatively high” level of financial literacy and 28% of the group conveyed a “very low” literacy rate in finances. Estimates also show Gex-Xers struggle with spending and saving habits.

A 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 a 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 which may be subject to reduction by 2025 coupled with an instalment sale of assets 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.

Benefits of a long-term discretionary trust include:

• family governance, succession, value transmission and education which promote functional family units;

• planned trustee selection and succession;

• providing investment management using long-term endowment focus;

• ability to hold concentrated, illiquid, and non-marketable securities without diversification;

• diversifying into private equity, alternative asset classes, and real estate while limiting fiduciary risk;

• using investment trust advisers, distribution trust advisers and trust protectors of the family’s selection;

• asset protection from creditors, ex-spouses, improvidence, and third-party manipulation through no contest clauses, spendthrift provisions and discretionary distributions which encourage asset retention for beneficial use versus outright distribution;

• segregation and maintenance of separate property;

• incentive clauses to encourage productive drug free lifestyles;

• privacy and confidentiality including record sealing, record redaction 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 lifetime powers of appointment, strategic and tactical 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 and certain trust outcomes;

• minimizing and avoiding 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, 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, spousal lifetime access trust, grantor retained annuity trust, charitable lead and remainder trust, charitable trust, defective grantor trust, private foundation, and family limited partnership or limited liability company. Nevada has 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. 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 and creditors 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 advisers 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 has developed the use of both regulated and unregulated 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 of a particular set of assets and situations. It is likely that clients will weigh advantages and disadvantages of long-term irrevocable discretionary trusts and bet that long-term discretionary trust planning will be the winning hand.