John Bullis: Trust decanting to save income tax

The last legislative session provided for changes in the Nevada trust laws and the governor signed the bill June 10. The main goal was to change the basic estate planning trust so the ultimate beneficiaries pay less income tax.

A trust is decanted when the trustee distributes assets from the first or original trust to a new, different trust, with different terms. You can decant wine by pouring the wine from the old, original bottle to a new bottle, leaving behind any sediment in the old bottle.

Senate Bill 484 now lets irrevocable trusts have greater flexibility in several ways.

The old estate planning trust usually divided the couple’s assets into the irrevocable bypass (also known as credit shelter) trust and the survivor’s trust. The surviving spouse usually gets all the income from the irrevocable trust at least every year (or month). The amount left to the bypass trust was offset by the death tax exemption so no death tax was usually paid at the first death. Then, at the death of the survivor, only half of the total assets the couple owned was subject to death tax. The exemption of the survivor was available to reduce or avoid a death tax.

If everything was left to the surviving spouse, the old death tax exemption might not be enough to avoid death tax. But in 2012, Congress increased the death tax exemption to $5 million (indexed to inflation) for each person. Many couples don’t have more than $10 million plus of assets, so the possibility of paying a death tax is greatly reduced.

The problem is the assets in the irrevocable bypass trust are valued as of the date of the first death. That is the tax basis of the stocks, real estate, etc. that are in the irrevocable trust. If the survivor lives another 10 or 20 years, the appreciation of value of those assets can be significant. When that bypass trust is closed and distributed, an income tax must be paid on the appreciation.

The old plan was to save death taxes. Now, with decanting, the goal is to reduce the income taxes on inherited assets. That helps the beneficiaries avoid the income tax on the appreciation.

Decanting a trust is like a recharacterization of a ROTH IRA, it allows a “do-over” event.

There are several non tax reasons to consider decanting the trust. Talk with an experienced estate planning attorney to see if this is something to consider to help meet your goals.

Of course, there are various rules to be met but the greater flexibility allowed trusts in Nevada gives new ways to change how the trusts work. This is not for just Nevada trusts, but also will work for trusts begun in other states that move to Nevada.

Did you hear? “If you achieve just one major goal each year, you will have accomplished a great deal by the end of your life,” said Paula Wagner Apfelbach.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.