A Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift (NICDS) Trust is designed to provide significant asset protection and estate planning benefits.
Trusts have been around since the Rockefellers. But they are not the exclusive domain of the ultra-wealthy, as most people believe. They are shielded with jargon and legal speak, making them seem complicated and esoteric. In short, they are the most powerful personal, business, and non-profit financial instruments ever created!
Often you will see examples of trusts that use one or maybe a couple of the key features that are part of a Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift (NICDS) trust, but the truth is that only a NICDS trust provides the comprehensive and powerful combination of all these elements. Truly a first of its kind.
For you, dear reader, we lift the veil today!
What’s in a name?
Let’s break down everything in the name of the most powerful trust instrument you can own:
- “Non-Grantor” means that the trust is not created by the grantor and is not taxed as part of their estate, meaning it is a separate tax-paying entity.
- “Irrevocable” means that once the trust is established, the grantor cannot change the terms or access the assets transferred into it.
- “Complex” refers to the intricate nature of this type of trust, which typically involves multiple levels of sub-trusts and different investment strategies.
- “Discretionary” means that the trustee has complete discretion over how and when distributions are made to the beneficiaries.
- “Spendthrift” means that the assets held in the trust are protected from creditors, lawsuits, and other claims, including those made by the beneficiaries themselves.
The purpose of a Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust is to protect assets from potential creditors and lawsuits while providing for the long-term financial needs of the beneficiaries.
The trustee has the power to manage the trust assets and make distributions to the beneficiaries according to the terms of the trust, which may include restrictions on how the assets can be used.
This type of trust is typically used by high-net-worth individuals who want to protect their assets from potential lawsuits, creditors, and divorce settlements. What most people don’t know is that this is no longer an instrument that is exclusive to only the ultra-wealthy. It can also be used to provide for the long-term care of family members with special needs or to ensure that assets are managed and distributed in a responsible and tax-efficient manner.
To establish a Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust, it is important to work with an experienced attorney who specializes in estate planning and asset protection. The attorney can help to draft a legally binding trust document that meets the specific needs of the grantor and their beneficiaries, while also complying with all applicable tax laws and regulations.
One Very Important Part of the US Tax Code is Section 643
(and it’s kind of a big deal when it comes to tax mitigation!)
Among its many benefits, it allows the trust holder to mitigate taxes including capital gains in perpetuity. If you had over $250,000 in capital gains last year and paid taxes on them, you can see just how valuable a trust would have been to you!
“Taxation follows ownership, and a trust system can provide you control without ownership. This will allow you to eliminate capital gains efficiently without looking for the latest loophole or deferring the taxes. A properly set up complex trust allows you to avoid capital gains tax and also eliminates probate and inheritance taxes at the same time, while also increasing your tax efficiency overall.” Forbes
Section 643 of the US Tax Code establishes the rules and requirements for the taxation of trusts and their beneficiaries. This section outlines how trusts are taxed, how distributions are treated, and the reporting requirements for both trustees and beneficiaries.
One of the key benefits of Section 643 is that it allows trusts to mitigate taxes in perpetuity for up to 21 years after the last beneficiary dies.
Side Notes: My trust comes with ever-updating service that allows for updates as tax law changes, along with a renewal process that is quick and easy every 21 years. Without having to create a whole new trust document and then “decant” the old trust into the new trust. An expensive and longer process most current trust holders must endure every time they need to change something.
This means that a lot of trustees have trust documents in the back of their filing cabinet that they ~think~ are up to date, but in reality they are woefully out of date. And they have no choice but to create a new trust and decant from their old one.
Another benefit of Section 643 is that it allows trusts to distribute income to beneficiaries, which can be used to offset the taxes owed by the trust. This is important because trusts are required to distribute all of their income each year or face additional taxes. By distributing income to beneficiaries, trusts can reduce their tax liability and ensure that their assets are being used to benefit the beneficiaries.
Additionally, Section 643 allows trusts to distribute both income and principal to beneficiaries. This can be especially beneficial for trusts that are established to provide for the long-term financial needs of beneficiaries, such as trusts for minor children or individuals with disabilities. By allowing trusts to distribute principal, beneficiaries can access funds for larger expenses, such as college tuition or medical bills.
Section 643 requires trustees to provide annual statements to beneficiaries, which detail the income and expenses of the trust. This provides transparency and accountability for both trustees and beneficiaries, ensuring that the trust is being managed responsibly and ethically.
643 provides tax benefits for trusts that are established for charitable purposes. Charitable trusts are subject to different tax rules than other types of trusts and may be eligible for tax deductions and other benefits. By using Section 643 to establish a charitable trust, individuals can support their favorite causes while also reducing their tax liability.
Section 643 of the US Tax Code provides several benefits for trusts and their beneficiaries, including the ability to take advantage of the same tax brackets as individual taxpayers, the ability to distribute income and principal to beneficiaries, and the requirement for trustees to provide annual statements to beneficiaries. By working with an experienced estate planning attorney, individuals can take advantage of these benefits and establish trusts that provide for the long-term financial needs of their beneficiaries while minimizing taxes and maximizing asset protection.
A Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust is a sophisticated estate planning tool that offers significant asset protection and tax benefits to high-net-worth individuals. It can help to protect assets from potential lawsuits, creditors, and other claims, while also providing for the long-term financial needs of the beneficiaries. However, due to its complexity and legal requirements, it is important to work with an experienced trust firm to establish this type of trust.
Common Misconceptions About NICDS Trusts
When it comes to estate planning and asset protection, Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift (NICDS) trusts can be a powerful tool. However, there are many misconceptions about these trusts that can lead to confusion and misinformation.
Here are some common misconceptions about NICDS trusts and how you should view them instead:
Misconception #1: NICDS trusts are only for the wealthy
One of the biggest misconceptions about NICDS trusts is that they are only for the wealthy. While NICDS trusts can be used to protect significant assets, they can also be used for more modest estates. In fact, NICDS trusts can be a useful tool for anyone who wants to protect their assets and ensure that their wishes are carried out after they pass away.
Misconception #2: NICDS trusts are too complex and expensive
Another common misconception is that NICDS trusts are overly complex and expensive. While it is true that these trusts can be complex and require the assistance of a qualified attorney or financial advisor, the benefits can outweigh the costs. Additionally, there are many different types of NICDS trusts available, so it is possible to find one that fits your needs and budget.
Misconception #3: NICDS trusts are only for tax planning
While NICDS trusts can offer significant tax benefits, they are not only for tax planning. These trusts can also be used for asset protection, estate planning, and more. By carefully selecting the right type of NICDS trust and customizing it to your needs, you can achieve a wide range of financial and legal goals.
Misconception #4: NICDS trusts are a way to avoid paying taxes
While NICDS trusts can offer tax benefits, they are not a way to avoid paying taxes altogether. In fact, the IRS closely scrutinizes these trusts to ensure that they are being used properly. By working with a qualified financial advisor, you can ensure that your NICDS trust is structured in a way that is legal and ethical.
Misconception #5: NICDS trusts are not flexible
Some people believe that once a NICDS trust is created, it cannot be changed. However, this is not true. While these trusts are designed to be irrevocable, there are still ways to make changes if needed. For example, it is possible to include provisions that allow for the modification of the trust in certain circumstances. A good NICDS trust will offer the ability to go with the flow of new tax laws or anything that should arise warranting an edit or addition to your trust instrument.
By helping you understand these trusts and dispelling common misconceptions, I hope to help you make an informed decision about whether a NICDS trust is right for you. Remember, working with a qualified attorney or financial advisor is crucial in creating and managing a NICDS trust.
Disclaimer: I operate 2 NICDS trusts. I know how to use them, but I couldn’t write one to save my life. That’s because I am not a lawyer nor a financial advisor. The purpose of the content on this site is to give you a firsthand account of what it’s like to operate from a NICDS trust. Everything I write here is from that perspective and does not constitute professional legal or financial advice. Which is why I constantly remind readers that you should consult those professionals to set up one of these fantastic tax and asset protection instruments.