Decanting a Trust Brian Simmons, CFP®, Senior Vice President, Trust Officer

About Premier Trust Advisor-Friendly Nevada Trustee Ladenburg Thalmann subsidiary Highland sister company 40+ Employees Administer over 3,000 Trusts Average Trust Size = $750,000 -$1 million Over $1 billion in assets under administration

Decanting

Irrevocable I can’t change my trust??? How could I have anticipated my children having drug and divorce problems?

Decanting de·cant (d -k nt ) tr.v. de·cant·ed, de·cant·ing, de·cants To pour off (wine, for example) without disturbing the sediment. To pour (a liquid) from one container into another.

Decanting a Trust Just as you can decant wine by pouring it from its original bottle into a new bottle, leaving the unwanted sediment in the original bottle, you can pour the assets from one trust into a new trust, leaving the unwanted terms in the original trust.

Common Reasons to Decant Extending the term of the trust Changing a support trust into a discretionary trust Correcting drafting error or ambiguous terms Changing the governing law of the trust Modifying powers of appointment Take out outright distributions No HEMS – Kloiber, Garretson, statutory exception creditors for HEMS (California) No clarification on who can be trustee; drug testing language Change state To grant power of appointment; give bene power to appoint assets at their death or give bene general POA to get step up in basis

Common Reasons to Decant Changing trustee provisions Combining trusts for greater efficiencies Separating trusts Creating a special needs trust Qualifying a trust to own S-Corp stock 6. No longer require institution that does not exist. Bifurcate trustee roles 7. If trust(s) do not have merger language 8. Get rid of pot trust 9. If trust does not already have special needs language 10. Partial decanting to new QSST or ESBT of S-Corp stock (QSST – has one bene and passes out all income) (ESBT – can have multiple benes and accumulate income but gets taxed at highest bracket).

Why Nevada? Top rated asset protection laws No Nevada state income tax on trust income If trustee is sited in Nevada Nevada Trusts can last for 365 years Top-tier decanting statute Nevada charging order only Affords greater creditor protection

Why Premier Trust? Founded in 2001 Largest Advisor-Friendly Trust Company in NV Trust Administration ONLY No Investment Management No Insurance Sales Access to NV Trust Friendly Laws Client Retains Team of Professionals No Account Minimum

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Asset Protection Trust Benefits Asset protection Plan for future generations Flexible Drawbacks Give up 100% right to access to funds Distribution Trustee Client cannot pledge assets as collateral or use for personal guarantee No income tax or estate/transfer tax savings Two year waiting period for protection Only if creditor can prove transfer was intended to hinder, delay or defraud that creditor Nevada – shorter than most other jurisdictions Additional notes In Nevada client can be Investment Advisor and direct investments Quick implementation Spendthrift provision Flexible – testamentary POA. Can keep testamentary POA because assets includable in estate. 16 jurisdictions allow these Bullet proof vest Hybrid DAPT Trust Protector with power to add grantor back as discretionary beneficiary if needed Define spouse – floating spouse LLCs as asset – charging order protection. Some protection during 2-year period No equitable remedy Force a settlement If a creditor, trust pays expenses for beneficiary but does not make outright distributions NRS 166

Nevada Incomplete Gift Non-Grantor (NING) Benefits Asset protection Potential state income tax savings Plan for future generations Drawbacks Grantor cannot be Investment Trustee Need Investment Trustee outside of state where grantor resides In a state that does not impose income tax on resident fiduciaries No estate/transfer tax savings Not all states will recognize trust as non-grantor (Example: New York) Power of Appointment or Distribution Committee made of adverse third parties Additional notes Should be set up in advance of a potential sale that will result in gain Should sell stock in company not assets Rich person’s Roth IRA – from state income tax perspective After tax dollars in Growth is tax deferred Client moves to a non-state income tax jurisdiction – growth comes out tax free Non-Grantor Distribution Committee comprised of adverse third parties IRC § 672(a) Incomplete Gift Testamentary non-general Power of Attorney CCA 201208026 – testamentary POA makes transfer incomplete with respect to remainder interest but not lead income interest Non-fiduciary intervivos special POA for HEMS Only Nevada and Alaska – do not subject assets to creditors Exception to grantor trust rules Nevada – no exception creditors

Intentionally Defective Grantor Trust (IDGT) Benefits Asset protection Estate tax savings Plan for multiple generations Up to 365 years in Nevada Drawbacks Client is typically not a beneficiary Client is typically not a trustee Typically use up client’s exemption No step-up in basis at death Additional notes Estate tax burn Can engage in installment sales without income tax consequences Grantor can swap assets with trust “Dynasty Trust” If client is trustee, assets may be includable in estate Typical a grantor trust. Income tax burn is essentially a “tax free” gift to trust. Sale for installment note is ignored for income tax purposes. Because of grantor trust status, it is as if grantor sold the asset to themselves. Leverage exemption. $5mm gift to trust can substantiate a $45mm sale. Grantor can swap low basis asset for high basis asset prior to death. Low basis asset back in the estate – gets step-up

Beneficiary Defective Inheritor’s Trust (BDIT) Benefits Asset Protection Potential estate/transfer tax savings Plan for future generations Drawbacks No income tax savings Business need to be cash flowing Complexity Valuation Guarantee Need a “figure head” grantor Willing to fund trust with initial seed money Additional notes Beneficiary can be Investment Advisor and direct investments Shoot down IRS arguments Client is their own family trustee except: Transactions between trust and a business that the client is involved in 3rd party trustee maintains discretion over transactions with business Also over life insurance to keep death benefit out of estate Arms length transaction – valuation, sale for full consideration Guarantee fee Opportunity shifting – doesn’t have to be an existing business. Client can set up and start a business in BDIT Bill Gates example

Decanting – The “Do-Over” Trust Benefits Modify an existing irrevocable trust Reasons to decant Drawbacks Paperwork Potenital beneficiary issues Additional notes Do not require beneficiaries to agree to the decanting Potential gift tax issue Process – Become trustee of old, trustee of new, change situs of old to Nevada, distribute assets from the old to the new Reasons to decant Extend term of trust – get rid of mandatory distributions Change a support trust to discretionary – Castleberry, Garretson, Pfannenstiehl Accelerate a future beneficiary’s interest Get rid of mandatory income distribution Indirectly add a beneficiary – Testamentary POA Correcting drafting errors or ambiguous terms Change the governing law Modify powers of appointment Changing trustee provisions Combining trusts Separating trusts Creating a special needs trust Qualifying trust to own S-corp stock Beneficiary consent NRS 163.556

State Income Tax Planning Is Client a Beneficiary? Comparison Type Of Trust Asset Protection Transfer Tax Planning State Income Tax Planning Is Client a Beneficiary? APT Yes No Maybe NING Yes+Others IDGT BDIT