Day after day, I find myself assisting wealthy families and struggling families cross the California border for the specific purpose of protecting and/or growing their assets. These clients choose to set up Trusts and LLCs in Nevada to take advantage of the favorable laws, lower taxes and asset protection opportunities the state has to offer. This is due to the fact that over the last few years Nevada has revised its trust and business codes to add features that provide for increased creditor protection. California does not offer the same. In fact, California is just the opposite. California is notorious for revising its laws in favor of creditors.

Estate Planning - Living in Nevada

I was born and raised in Las Vegas and attended UNR for my undergraduate studies. After spending 4 amazing years in the Reno/Tahoe area, I knew I would be coming back to live and work. Before I could accomplish that, however, I needed to go to law school. Thus, I moved to San Diego to work, live and earn my Jurist Doctorate. It was at this point in time that I started to really understand the differences between Nevada and California. Now that I am back in Reno living, owning a business and working with clients from Reno and Tahoe I have come to know these differences very well.

On the California side of Lake Tahoe, there are more single family homes available than on the Nevada side. These properties are listed at more affordable rates and are located closer in proximity to the lake. However, it is important to think about and consider other things before buying a home in California.

First, California has significantly higher property taxes. In California, property is assessed at 100% of the full cash value. In contrast, in Nevada, the assessed valuation for tax purposes is based on 35% of the fair market value of the property. Further, homeowners 62 and older who earn $28,677 or less are eligible for a rebate of up to $500 or up to 90% of taxes paid. California eliminated a similar program in 2009 due to budget issues.

Second, California has income tax. This is important for those individual who are reaching or have already reached retirement age. Although Social Security benefits are exempt, all other forms of retirement income in California are fully taxed with a top rate of 10.55%. Nevada, on the other hand, has constitutionally banned income tax. By choosing Nevada as a residence, retirees will not be taxed on their retirement income. Thus, that 10.55% they would have been paying to California can be used for their personal enjoyment.

Third, both California and Nevada laws provide a Homestead Act. A Homestead Act allows a homeowner to claim a piece of property as a homestead. This allows him/her to exempt or “save” a dollar amount in the property's equity from creditors. California laws allow homeowners to protect up to $75,000 in equity. Nevada allows homeowners to protect $550,000 in equity … over 7 times what California allows.

Finally, if a person is choosing to buy an investment property, neither Nevada nor California allows a homestead to be claimed on the property to protect the investment equity. However, both states do allow these investment properties to be placed in an LLC. The difference between the asset protection a Nevada LLC and a California LLC will offer an individual will be discussed below. Aside from those differences, if the investment property is located in California and it is generating an income, it will be subjected to California Franchise Tax and income tax. This franchise tax is flat fee of $800 per year plus a tax on the total income. Again, in Nevada income tax is constitutionally banned and Nevada does not have a Franchise Tax.

Clearly, in the battle between Nevada and California with regard to residency and investment properties, Nevada wins hands down.

Business Planning – Doing business in California

Aside from choosing where to live or where to invest in property, I speak with my clients in depth about where to form and conduct business. With unemployment rates at an all-time high, many people are choosing to open their own business. Nevada ranks as one of the best States to do business in while California ranks at almost the worst. Why? As discussed above, Nevada laws favor individuals and business owners which make it a business friendly state as opposed to California who favors creditors. The biggest example of this is found in the states business codes surrounding LLCs.

Nevada law allows an individual or group to form and LLC for any business purpose. Nevada Courts have determined that real estate investments and monetary investments both qualify as a business purpose. Once the LLC is formed, Nevada's indemnification statutes provide that a person is not liable on the debts or liabilities of the LLC if he/she "acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation". (NRS 78.752). California's indemnification statute, on the other hand, provides protection to individuals only when three elements have been met: 1) That the person is being sued because they represented the corporation; 2) That the person acted in good faith, and in the best interest of the corporation, and; 3) The person is successful on the basis of the lawsuit. (Ca. Corp Code 317(d))

There is a significant difference between the indemnification laws offered by Nevada and California. California requires that the actions of the individual must be "in the best interests of the corporation". Thus, the person can unintentionally act in a manner that is not in the best interests of the company and lose statutory indemnification and be held personally liable. Moreover, the statute requires that the person must prevail on the merits. This means the determination on liability of the officer/director is in the hands of judges and juries, instead of in the statutes like that of Nevada.

Further, Nevada provides a much stronger corporate veil. Robert B. Thompson, one of the nation's top scholars in corporations law, corporate finance and securities regulation wrote about California’s position on LLCs in his study, “Piercing the Corporate Veil: An Empirical Study” (76 Cornell L. Rev. 1036, 1052 (1991). He stated, "a perception [exists] that public policy in California favor[s] piercing the corporate veil." Thompson's study, proved California to be among the states with the largest number of reported veil piercing decisions. He provided evidence showing that California courts pierce the corporate veil at the highest rate - 45% of attempted veil piercing cases in California are successful. Nevada, on the other hand, provides a blanket protection of the LLC “corporate veil.” Under Nevada statute, a member of a Nevada LLC "is not a proper party to proceedings against the company". (NRS 86.381). Thus an individual forming a business in Nevada, regardless of where they choose to conduct business, will be protected. Nevada Courts, so far, have not held individual members or managers of an LLC personally liable for debts or obligations incurred by the LLC.

Conclusion

Clearly, the incentives of living, working and doing business in Nevada are expansive. From favorable asset protection laws to an unparalleled tax environment, Nevada is a place where many of my clients can find peace of mind and security. Nevada is also the place I am proud to call home.