Avoiding probate, minimizing estate taxes, and ensuring a desired distribution of your estate are not the only components of estate planning with which one must be concerned. In today’s litigious environment, ever-increasing consumer debt, and aggressive collections efforts by creditors, a critical component of anyone’s estate plan is asset protection. Insulating the family’s wealth through the implementation of an appropriate asset protection strategy can protect your estate from creditor claims and expensive lawsuits. Some of the most frequently used asset protection tools are discussed below. Not all asset protection strategies will be effective in every situation. Nevada’s fraudulent conveyance statutes could apply under a particular set of circumstances, and those laws could invalidate conveyances of property which were made to hinder, delay or defraud current or future creditors.
A common misconception about revocable trusts is that the trust will protect your assets from your own creditors. Because revocable trusts are created by grantors who retain powers to amend, revoke, or alter the terms of their trusts at any time, the grantors are not afforded asset protection over their trust assets since they still retain complete dominion and control over those assets. However, revocable trusts can protect beneficiaries of the trust (other than the grantor) if the revocable trust contains a “spendthrift” provision. A spendthrift provision is a limitation of the beneficiaries’ rights to income and principal from the trust that prevents them from transferring, assigning or selling their interests to anyone, voluntarily or involuntarily. When using a spendthrift provision, the assets are not distributed outright and free of trust to the beneficiaries. Rather, the assets remain in trust after the death of the grantor and the beneficiaries then receive over their lifetimes income and principal by the trustee.
For married persons, there are additional options from which to choose when using a revocable trust. One method is to divide or apportion the couple’s community property into separate property for each spouse and then create two individual trusts for each spouse’s separate property. In most situations, the property placed into each spouse’s separate property trust would be protected from creditors of the other spouse. Separate property trusts are commonly used when one spouse engages in or is subject to an inordinately high risk of liability than the other spouse, such as a physician, business owner, or other professional.
There are many kinds of irrevocable trusts which simultaneously provide asset protection and accomplish a variety of estate planning goals. Irrevocable trusts, unlike revocable trusts, cannot be changed, amended, or modified after its creation. Additionally, unless the irrevocable trust is an offshore trust or Nevada Asset Protection Trust, courts will not recognize the asset protection features of the trust if the grantor is also the trustee and a beneficiary. The Nevada Asset Protection Trust and offshore trusts are discussed more fully below.
Asset Protection Trusts
Over the past couple decades, taxpayers have been able to successfully protect their assets from creditor’s claims by establishing irrevocable trusts in foreign jurisdictions (like Belize or the Cayman Islands) because these jurisdictions do not recognize judgments of U.S. courts. Creditors have great difficulty in obtaining control over these assets because often times it is cost prohibitive for the creditor to domesticate the U.S. judgment in the foreign jurisdiction. As a result, these creditors will often settle their claims for just a few pennies on the dollar. Offshore asset protection trusts, however, are very expensive to create and to administer. For these reasons, most people find it much more affordable and practical to take advantage of Nevada’s self-settled spendthrift trust, the Nevada Asset Protection Trust.
But for a few states, the law does not provide creditor protection to a trust grantor if the grantor transfers his or her own assets to himself or herself as a trustee with the power to distribute the principal and/or income back to themselves to satisfy claims or obligations. However, in 1999 the Nevada legislature adopted statutes permitting the use of self-settled spendthrift trusts that provide asset protection for grantors. Essentially, the grantor is able to be a beneficiary of his or her own irrevocable trust and receive asset protection. To create a Nevada Asset Protection Trust, only a few requirements must be satisfied: (1) at least one of the trustees must be a qualified Nevada trustee, such as an individual resident, or a bank or trust company located in Nevada; (2) the trust must be in writing; (3) the trust must be irrevocable; (4) the trust may not require distributions of any kind to the grantor; and (5) the trust must not have been created with an intent to hinder, delay or defraud known creditors of the grantor.
If the trust cannot require distributions of the trust assets to the grantor, how then does the grantor get assets out of the trust? The Nevada statutes permit the grantor to receive assets from the Nevada Asset Protection Trust as long as a trustee other than the grantor has the discretion to distribute the trust income or principal to the grantor. Thus, the grantor, assuming to be both a trustee and a beneficiary, may distribute assets from the trust to other beneficiaries, but may not distribute assets to himself or herself. Those distributions must be made by an independent trustee.
After the trust has been created and assets have been transferred into the trust, the assets are not yet 100% asset protected. The grantor’s creditors who exist at the time of the creation of the Nevada Asset Protection Trust must bring a cause of action against the trustee within two years after the date of transfer of the assets into the trust or within six months of discovering the transfer, or when they reasonably should have discovered the transfer. Any persons who become creditors after the creation of the trust must commence an action within two years after the date of a transfer of assets into the trust. If a creditor comes into being more than two years after property has been transferred into the Nevada Asset Protection Trust, that creditor will be forever barred from bringing a cause of action against the trustee to recover the property so transferred.
Will other states recognize the enforceability of the Nevada Asset Protection Trust? Since Nevada is only one of a few states that has adopted self-settled spendthrift trust laws and very little case law testing these statutes exists, the enforceability of the creditor protections outside of Nevada is unclear. Some legal scholars are confident that the constitutional provisions of the full faith and credit clause of the U.S. Constitution and the case law discussing the applicability of the clause support the enforceability of the Nevada Asset Protection Trust in other states. Of paramount importance are the enforceability provisions in Nevada. Nevada law provides that self-settled spendthrift trusts, whether created in or outside of Nevada, will be respected so long as: (1) all or part of the property transferred into the trust is located in Nevada; (2) the declared domicile of the trust’s grantor is in Nevada; or (3) all or part of the trust’s administration is performed in Nevada by a qualified Nevada trustee. In most cases, the Nevada Asset Protection Trust is created by a Nevada resident who has all of his or her property located in Nevada and has an active qualified Nevada trustee. Assets not located in Nevada, such as stocks, bonds, interests in real property, limited liability company interests, etc. can easily be moved to Nevada and transferred into the trust with some careful planning.
Though there is no one particular group that should consider implementing the Nevada Asset Protection Trust. The trust has-proven most beneficial for physicians, lawyers, dentists, contractors, insurance agents, accountants, real estate agents, business owners, and similar professionals who are exposed to a significant degree of professional liability. The trend is that more and more nonprofessionals are becoming ever-increasingly concerned about liability and the need to protect their assets for the future. Using the Nevada Asset Protection Trust is an excellent way to accomplish this goal.