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Protecting Your Trust Property

February 9, 2016

trust propertyNevada has allowed the use of self-settled spendthrift trusts since 1999.  These trusts can provide great protection for trust property against the creditor's of beneficiaries.  Basically, you are allowed to be the direct beneficiary of your own irrevocable trust, while still protecting your trust property from creditors. Under Nevada law, you must have an independent trustee who has the authority to distribute the trust income or principal to you.  Then, as a co-trustee, you may have the power to distribute trust property to other beneficiaries, such as your descendants or other loved ones.

How asset protection works

Even with an Asset Protection Trust, creditors may be able to pursue your trust property for two years after the property is transferred to the trust.  That means that the protection does not begin immediately.  Creditors also have six months from the time they discover the transfer, or should have reasonably discovered the transfer.  A creditor that does not exist until after the trust is created, also has two years to file a claim.  Once the two year period has ended, your trust property is protected against future claims.

Are only the assets in Nevada protected?

According to Nevada law, a self-settled spendthrift trust will be recognized regardless of whether it was created in another state, as long as one of these factors is met:

  • all or part of the trust property is located in Nevada
  • you live in Nevada
  • all or part of the administration of the trust occurs in Nevada by a qualified Nevada trustee.

Other assets, such as stocks, bonds, interests in real property, that are not located in Nevada can easily be moved to Nevada so they can be transferred into your trust.

Who needs a Nevada Asset Protection Trust?

Certainly anyone can create an Asset Protection Trust and benefit from the safeguards it provides for trust property.  However, these specific types of trusts are particularly suitable for those who are exposed to substantial professional liability, such as doctors.  Regardless, if you are concerned about liability of any type and need to protect your assets, an Asset Protection Trust can be a great way to accomplish this goal.

How is a traditional Third-Party Spendthrift Trust different?

If you make a gift of property directly to your child, for example, there are certain inherent risks as to that property. If the gift is cash, the child may spend it immediately, or if it is real property, your child may take out a mortgage on it.  Creditors could obtain liens on the property, or a spouse could come along and obtain a half interest in the property.  If you want to mitigate any or all of these risks, you should consider a traditional third-party spendthrift trust.  The child would be the third-party beneficiary.  Based on the terms of the trust, you can provide certain limitations and protections.

What is a First-Party Spendthrift Trust?

Even in light of the many benefits, some people are still hesitant to relinquish complete ownership of property to an irrevocable trust.  If you name yourself as a trustee of a spendthrift trust, you limit the protection against creditors.  The solution to this dilemma is a self-settled, first-party spendthrift trust.  As long as you comply with all of the statutory requirements, you can name yourself as the beneficiary, while enjoying the same creditor protection as third-party beneficiaries of the trust.  If this is your goal, consider the Nevada Domestic Asset Protection Trust.

The five primary requirements for a Nevada Asset Protection Trust

There are basically five requirements that must be met in creating a Domestic Asset Protection Trust in Nevada.  First, at least one trustee must be either a natural person who resides or is domiciled in Nevada, or a bank or trust company that maintains an office in Nevada.  The trust must also be in writing and irrevocable.  The trust cannot include a provision that requires any part of the income or principal of the trust be distributed to the settlor, that is the person creating the trust.  Finally, the trust must not be intended to hinder, delay or defraud known creditors.

What authority do you retain as the settlor?

The statute gives the settlor certain authority that does not affect creditor protection, which can be very useful.  For example, the settlor has the power to veto trust distributions.  Also, the settlor retains the ability to use real or personal trust property.  The settlor may also retain the power to direct the investment of trust assets.  Just as an individual with no known creditors is allowed to give away her property (and thereby protect it from future creditors), you can instead transfer that property to a Nevada Domestic Asset Protection Trust.
If you have questions regarding trust property, or any other estate planning needs, please contact Anderson, Dorn & Rader, Ltd., either online or by calling us at (775) 823-9455.

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