Nevada Asset Protection Trusts: Protecting your Assets “On-Shore”

Would you like to place assets in Trust and have them protected from creditors? Now you may do so with a special Nevada Trust.

Most trusts have a common provision referred to as a “Spendthrift” clause. The Spendthrift clause essentially prevents a beneficiary’s creditor from reaching the beneficiary’s interest in a particular Trust. However, historically state law prevented the Spendthrift clause from applying to the grantor’s creditors. Consequently, the grantor of the Trust could not be a beneficiary of the Trust and have his or her trust assets protected from creditors.

Thus, the rise and popularity of Offshore Trusts has resulted. A couple of years ago, Alaska became the first state to allow a self-settled Spendthrift Trust. If a grantor met the requirements of the Alaska statute, he or she could set up a Trust of which the grantor was also a beneficiary, and also have the trust assets protected from his or her creditors.

In joining with Alaska, the 1999 Nevada Legislature passed revisions to Nevada’s Trust laws. Effective October, 1999, Nevada law allows for a self-settled Spendthrift Trust. In order for a grantor to receive the asset protection desired from one of these new Trusts, certain requirements must be met. If the requirements are met, assets transferred to the Spendthrift Trust will be protected from creditors. If someone becomes a creditor of the grantor after the transfer is made, an action must be filed within two years of the transfer. And if someone is a creditor at the time a transfer to the Trust is made, they have two years after the transfer to bring an action, or six months after the creditor discovered or should have discovered the transfer, whichever is later. Once the two year statute of limitations has run, all assets transferred to the Trust are protected.

The requirements for setting up a self- settled Spendthrift Trust essentially include the following:

(1) The Trust must be in writing and irrevocable;

(2) The Trust is a discretionary trust;(3) The Trust was not intended to hinder, delay or defraud known creditors. A discretionary trust is one in which the Trustee has discretion in distributing income and/or principle to the beneficiaries, and in particular to the grantor. Even though the grantor may be a Trustee, a Trustee other than the grantor must be the one who makes discretionary distribution decisions regarding distributions to the grantor.

Having another Trustee make discretionary distribution decisions may make the grantor uncomfortable. However, the statute allows the grantor the veto power over any distributions. The grantor may also have a testamentary special power of appointment, thereby directing to whom the Trust assets will ultimately be distributed at the grantor’s death.

At least one of the Trustees of the Spendthrift Trust must be either (1) a natural person who is a resident of Nevada, (2) a Trust company which maintains an office in Nevada, or (3) a bank that maintains an office in Nevada and possesses and exercises Trust powers. Consequently, the grantor may act as one of the Trustees along with a Co-Trustee. This would help give the grantor control over certain distributions and investment decisions. However, distribution decisions relating to the grantor must be made by the Co-Trustee.

There are a couple concerns regarding the new Spendthrift Trust which will ultimately be resolved in the Courts. One concern involves the application of Federal Law. Federal Bankruptcy Law may override the state statute. Another relates to judgments rendered in other states and domesticated in Nevada. Such questions are likely to be resolved in Alaska Courts and will provide some insight as to how Nevada’s law will be treated.

You may be interested in establishing a Nevada Asset Protection Trust for different reasons. You may simply wish to protect a certain amount of your assets from creditors. Or you may wish to use this Trust to hold title to your home if the equity in your home exceeds the $605,000 protected by a homestead declaration. Or you may have a life insurance policy which has a large cash value built up inside of the policy. Unlike retirement plans and IRA’s, Nevada has a virtually nonexistent protection of cash value in insurance policies. If the cash value in your life insurance policy is substantial, you may wish to transfer the policy to one of these Trusts to protect the cash value from creditors.

If a Nevada Asset Protection Trust is something that may help you meet certain asset protection goals, please contact our firm to further discuss how the Nevada Asset Protection Trust might be incorporated into your particular situation.