Nevada’s business industry is making plenty of headlines, thanks in part to large companies like Tesla’s Gigafactory and Switch moving just outside of Reno over the past two years. But they aren’t the only headline-grabbers. New startup companies settling in the Reno area also are drawing national attention. What’s attracting these businesses to the Biggest Little City in the World? Business friendly incentives and tax laws, such as no income tax or inventory taxes. What keeps them here — and for much longer than one generation of ownership — are the business transition benefits that Nevada has.
Nevada has a unique business environment that includes favorable trust, asset-protection, and income-tax laws that are beneficial to many small and family-owned businesses. This makes it both an attractive destination for new businesses and for legacy businesses where succession planning is a motivating factor.
While the thought of transitioning a business isn’t always top priority when a small business owner first decides to set up shop, it is something that should always be carefully considered. Whether the current goal is income-tax efficiency, asset protection, or transitioning to a second or third generation of the family, business owners should be aware of the protections and planning strategies available to them under Nevada law, including:
Irrevocable Trusts
An irrevocable trust, generally speaking, cannot be terminated or modified after it is funded. In other jurisdictions, once business owners transfer company interests into an irrevocable trust, they typically no longer benefit from ownership of the transferred assets or from the trust at all. However, Nevada trusts may be structured to benefit the individual(s) creating and transferring assets to the trust. Residents of Nevada, and non-residents who use a Nevada trustee, may avail themselves of the protections afforded by these self-settled trusts.
Credit Protection Laws
In addition to Nevada’s lack of state income tax, its creditor protection laws as applied to transfers to trusts currently make it one of the most attractive jurisdictions in the United States for asset protection planning. Nevada imposes only a two-year statute of limitations on most transfers made to trusts, and no affidavit is required by the transferor with regard to solvency after a transfer is made. Moreover, there are no exceptions to Nevada’s spendthrift statute for spouses, children, pre-existing or future creditors, or anyone at all, after the statute of limitations expires.
Income Tax
Non-resident business owners also look to Nevada for income-tax planning. For example, a Nevada incomplete gift non-grantor trust, or “NING” trust, generally provides both asset protection and income tax benefits to non-residents. Non-residents subject to high state income tax rates in their home state may transfer ownership in a closely held Nevada company to a NING trust. When properly structured, the trust can ensure that the income of the trust is taxed in Nevada and not in the transferor’s home state.
Legacy Trust Planning
Certain trusts are created to transfer business ownership to the next generation and beyond. Under the laws of many states, trusts must be abolished and trust assets distributed no later than 90 years after creation, or in other states, upon the death of a grandchild. In such states, trust assets are then forced back into the income tax base and taxable estates of trust beneficiaries and any asset protection provided by the trust is lost. These distributions are often also subject to the generation-skipping transfer tax at such time, currently at a 40 percent tax rate.
Contrast this with trusts administered in Nevada that may exist for 365 years. A small business may benefit the owner’s family over multiple generations under Nevada law.
An important thing for small business owners to remember is that a business succession plan takes time to develop. Business owners may want to discuss with their tax and legal advisors the unique planning opportunities available in Nevada, even if they don’t have plans to sell or transfer a business for many years to come. Having a plan in place can protect you — and your heirs — and can provide peace of mind while you continue to work and grow your business. And remember that when you initially establish your business, it’s important to carefully consider how the business may continue to benefit your family or otherwise transition, long after you are done with it.
Daniel G. Wani is the managing director of The Private Client Reserve of U.S. Bank for Nevada and Arizona. You can follow him on LinkedIn at www.linkedin.com/in/daniel-g-wani-b18b3a8.
