On November 8th, Massachusetts voters amended the Massachusetts Constitution to include “The Millionaire Tax,” increasing the state income tax by 4% on annual taxable income exceeding $1 million, effective January 1, 2023. The Massachusetts Constitution already states a flat income tax rate of 5% for all MA residents. As a result, high net-worth individuals will have more than doubled their previous tax liabilities.
Nevada’s tax benefits are no secret to the wealthy in the U.S. and internationally.
It is no secret that Nevada carries no income tax. And Nevada is not alone… A handful of states also do not impose an annual income tax on residents.
So, why Nevada?
Nevada does not tax trusts. Period.
Massachusetts carries a graduating estate tax rate ranging from 0.8% to 16% for estates valued above $40k. Thus, it is safe to assume that MA residents impacted by the new Millionaire Tax will also carry a significant tax liability if their assets are sitused in Massachusetts. MA Estates valued above $10.04mm will have to pay the 16% MA estate tax on top of what is owed Federally.
Not only does Nevada not tax estates, but Nevada also has dynastic provisions for trusts, creating generational tax savings (up to 365 years).
In 2023, the Federal Annual Gift Tax Exemption is $17k, and the Lifetime Gift Tax Exemption is $12.9mm. Exemptions double for spouses. Nevada carries no state gift tax.
Rather than relocating to a low-tax state or trying to shift income between tax years, Nevada trust strategies can provide considerable income and estate tax benefits.
Nevada leads the United States in asset protection, tax optimization, flexibility, and privacy, motivating attorneys and financial advisors across the globe to consider Nevada as an industry-leading trust jurisdiction for Domestic and International Families.
A directed trust names independent advisors to direct the corporate trustee, removing such duties and decisions from the corporate trustee. Investment advisors, distribution advisors, and trust protectors are typically named as directed trustees. In many circumstances, the grantor can continue to control the investment decisions of the Nevada trust.
Advisors may be institutions separate from the corporate trustee and may be established in a different state or country than the corporate trustee. In many instances, family members also carry directed trustee duties such as distribution trustee and trust protector.
Nevada’s most popular trust solution is the Nevada Asset Protection Trust. Click here to learn more about NAPTs.
Let’s say a MA client gifts assets under the $12.9mm exemption to a Non-Grantor NAPT. All income and gains would be recognized in Nevada, which does not have a state income tax or a gift tax. The non-grantor element also removes the income from the grantor’s taxable estate.
This can be very effective for business owners looking to sell their businesses in the near future. Because of Nevada’s directed trust statutes, the client can choose to resume control of the assets or appoint their existing financial advisor to do so. All income produced in the trust would be free of state income tax (still subject to Federal taxation). And, after the shortest seasoning period in the U.S. of just two years, the assets in the trust also gain Nevada asset protection and would be protected from creditors. Clients can name themselves or others as beneficiaries of the trust.
A NING is a powerful state income tax savings tool, especially for clients in high-income tax states such as Massachusetts.
A client transfers assets as incomplete gifts to a NING. If the transferred assets’ values are greater than the Federal gift tax exemption, the incomplete gift avoids utilizing their Federal gift tax exemption. Additionally, as a Nevada non-grantor trust, the client is also insulated from state income taxes.
NINGs are ideal for those that have utilized (or expect to) their entire gift tax exemption. Click here to learn more about NINGs.
While fictitious, the application below is based on a real case.
Michael is an entrepreneur amassing a small fortune with his data analytics company. Valued at $50mm, the company is currently above the lifetime gift tax exemption, and the company continues to appreciate rapidly. Michael expects the company to be acquired in the next few years.
Michael is concerned about his company’s liability exposure in California, as California is a creditor-friendly state. Michael is also worried that he is nearing his lifetime gift tax exemption of $11.7mm, knowing that he will owe 13.3% of the sale to California upon selling his company.
Michael gifts the asset (his company) as an incomplete gift into a NING. Therefore, Michael owes no gift tax on an incomplete gift since the gift is incomplete.
The company sells for $100mm (zero basis asset) two years later. There is no state income tax on the gain, saving him $6.2mm in California state income taxes. However, the $100mm is still subject to Federal estate taxes upon Michael’s passing.
Nevada trusts are an excellent tool for clients concerned about state income taxes, estate taxes, or asset protection. Clients should contact their estate planning attorneys to discuss how Nevada trust planning can help them reach their estate planning objectives.
At Crawford Trust, we understand that every family is different and carries individual needs. Our experienced trust officers are happy to reach out and learn more about how we may help you.