Estate Planning News Recent developments as of 10/01/99

Table of Contents

• Nevada Asset Protection Trusts - "Self-settled spendthrfit trusts".[10/01/99]
• Federal Tax Reduction? - Current federal legislation. [9/23/99]
• Asset Protection Trusts - The Anderson case [7/31/99]
• Clinton Strikes Again - repeating past proposals [2/99]
• FAIR TAX PROPOSAL - Replace all federal taxes with a federal sales tax [Now!]
• Links to other pages in this web site

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Nevada Asset Protection Trusts

Under Nevada law, a spendthrift trust prevents voluntary and involuntary transfers that are contrary to the terms of the trust. As originally written, Nevada law permitted a settlor to protect a trust against a beneficiary's imprudence by preventing the beneficiary from demanding distributions or selling or pledging his or her interest in the trust. It also prevented anyone from attaching, garnishing, or otherwise forcing a transfer of trust assets. Nevada law, if read literally, precludes anyone other than the beneficiary from intercepting any distribution to or for a beneficiary. NRS 166.120(2) reads as follows:

"Payments by the trustee to the beneficiary shall be made only to and into the proper hands of the beneficiary and not by way of acceleration or anticipation, nor to any assignee of the beneficiary, nor to or upon any order, written or oral, given by the beneficiary, whether such assignment or order be the voluntary contractual act of the beneficiary or be made pursuant to or by virtue of any legal process in judgment, execution, attachment, garnishment, bankruptcy or otherwise, or whether it be in connection with any contract, tort or duty."

In 1999, the Nevada legislature amended the "Spendthrift Trust Act of Nevada" to permit the settlor of a trust to be a beneficiary of the trust under certain conditions. The key statutory requirements of a "self-settled spendthrift trust" are these:

1. There is a connection to Nevada. One of the following must be true:

   1. Some or all of trust assets or income are in Nevada; or

   2. The settlor is a Nevada resident; or

   3. At least one trustee:

      1. has powers that include maintaining records and preparing income tax returns for the trust, and all or part of the administration of the trust is performed in this state; and

      2. is an individual who is a Nevada resident or is a bank or trust company that maintains an office in this state for the transaction of business and possesses and exercises trust powers.

2. The trust is irrevocable, although the settlor may have a special power of appointment.

3. The trust is not intended to hinder, delay or defraud known creditors.

4. Distributions to the settlor are not mandatory and made only in the discretion of a person other than the settlor.

5. The trust is subject to Nevada's statutory rule against perpetuities.

A person who becomes a creditor of the settlor after a transfer of property to a self-settled spendthrift trust must challenge that transfer within two years of the transfer. A person who was a creditor of the settlor at the time of a transfer of property to the trust must challenge the transfer either (A) within two years of the transfer or (B) within six months of becoming aware of the transfer, whichever is longer.

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Federal Tax Reduction? Clinton Says "NO!"

• On September 23, 1999, President Clinton vetoed H.R. 2488, which would have gradually eliminated the federal transfer taxes (gift, estate, and generation-skipping transfer taxes). That bill would have:

  1. Repealed federal gift, estate, and generation-skipping transfer taxes in 2009 and prior to then it would have:

     1. Reduced the gift and estate tax rates gradually each year, and the maximum rate will not exceed 50% after 2002,

     2. Phased in an increased "unified exemption" of up to $1,000,000 for U.S. citizens and resident aliens.

     3. Eliminated the 5% surtax on estates over $10 million.

     4. Permitted the retroactive re-allocation of the GST exemption if it was previously allocated to a trust for a skip person and that skip person becomes a non-skip person under the generation-move-up rule.

     5. Permitted late allocations of the GST exemption (under procedures to be promulgated in Treasury regulations) where there has been substantial compliance.

     6. Permitted the severance of a trust into a GSTT-exempt trust and a GSTT-nonexempt trust on a fractional basis even where the trust instrument does not mandate or permit it.

  2. Provided a broad-based income tax cut.

  3. Reduced the "marriage penalty" which causes a married couple to pay more taxes than two single individuals.

  4. Reduced capital gain tax rates for individuals and corporations.

  5. Provided educational incentives.

  6. Provided health care incentives, including some related to long-term health care, individuals not covered by employer-provided plans, in-home care for the elderly, and prescription medicines.

  7. Provided small business incentives.

  8. Strengthened pension plan benefits.

It is hoped that a significant part of H.R. 2488 will be enacted, but it is unlikely to involve a complete repeal of the federal transfer taxes.

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Asset Protection Trusts

• A case referred to as the "Anderson Case" is a Ninth Circuit Court Court of Appeals case in which the Court held the Andersons in contempt of Court for not repatriating assets from an offshore trust despite their allegations that they were legally prevented from doing so.

  1. For the full text of the case, go to the ACTEC web pages, and click on the "What's New" button and then click on the SPECIAL: Asset Protection Trusts - The Anderson Case link.

  2. For a brief summary of the case and what when wrong, go to the Asset Protection News.

• This case is unique because it involved the Federal Trade Commission and the federal courts. For most lawsuits, the state courts will be involved. While the state court laws relating to fraudulent transfers will provide some protection to transfers that are "old and cold", this case represents the first appellate court ruling upholding a lower court's decision to hold the settlor (a trust's creator) of an offshore trust in contempt of court in spite of the foreign trustee's refusal to return offshore assets to the settlor. This is a landmark case, and its full impact will not be known for years.

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Clinton Strikes Again

Earlier this year, Clinton resurrected some proposals that were not adopted in 1998 for consideration in 1999.

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FAIR TAX Proposal

Americans for Fair Taxation

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Links within rushforth.org