Nevada Asset Protection Trusts: How Self-Settled Spendthrift Trusts Work

For high-net-worth individuals and business owners looking to protect their assets from creditors, Nevada offers specific trust structures and statutory schemes that can provide strong protection. A self-settled spendthrift trust, commonly referred to as an asset protection trust, is one estate planning instrument that experienced attorneys can carefully implement to provide these protections.

Disclaimer:This article is for general informational purposes only and does not constitute legal advice, nor does it create an attorney-client relationship. Every trust situation is different. Please consult a qualified Nevada trust attorney before taking any action.

Explaining Nevada’s Spendthrift Trust Act

A spendthrift trust contains terms that create valid restraints on the voluntary and involuntary transfer of a beneficiary’s interest. Nevada is unique because it is one of only a few states that allows a settlor, or the creator of the trust, to also be a discretionary beneficiary while still protecting the trust assets from creditors.

Chapter 166 of the Nevada Revised Statutes outlines the provisions governing spendthrift trusts and is commonly referred to as the Spendthrift Trust Act of Nevada. While no specific language is required to create a spendthrift trust, the written trust agreement must satisfy several requirements.

1. The trust must be irrevocable.
2. The trust cannot have been created with the intent to hinder, delay, or defraud known creditors. Essentially, the settlor must be acting in good faith when creating this type of trust.
3. The trust must have a Nevada trustee. Although the settlor does not need to be a Nevada resident, a Nevada trustee must, at a minimum, maintain the trust records, prepare the trust’s income tax returns, and perform part of the trust administration in Nevada. Nevada-based trust companies are often named as trustees to help satisfy this requirement.
4. The settlor cannot hold the unrestricted power to make distributions to himself or herself. Any distribution to or for the benefit of the settlor must require the consent of another person.

Assets That Can Be Protected by an Asset Protection Trust

A variety of assets may be transferred into a Nevada spendthrift trust for protection. These assets can include:

• Cash and cash equivalents.
• Securities: Stocks, bonds, and brokerage accounts.
• Business interests: LLC and partnership interests can generally be transferred into the trust. Transfers of corporate stock may require careful analysis by an attorney because of potential tax restrictions and consequences.
• Real property: Real estate may be transferred directly to the trust or through the transfer of an interest in an LLC that owns the property. Nevada trusts may hold property located in other states, although transferring out-of-state property may have state-specific creditor consequences.
• Personal property: Personal possessions may be included, although the practical use of or access to certain types of personal property may be more limited when held through the trust.

A common asset protection trust structure includes one trustee who controls distributions and another trustee who controls investments. However, there are a number of legal variations to this structure. Importantly, the settlor cannot direct distributions from the trust to himself or herself without the consent of another person.

The Role of the Distribution Trustee

The distribution trustee generally decides when distributions should be made from the trust. This trustee is responsible for overseeing distributions made to or for the benefit of the settlor or any other named beneficiary.

Any distribution made to the settlor, or for the settlor’s benefit, must be overseen and approved by someone other than the settlor. Therefore, it is essential that the distribution trustee be a person or trust company that is willing and capable of understanding the trustee’s duties and can be trusted to perform those duties properly.

The Role of the Investment Trustee

Nevada is among only a few jurisdictions that allow the settlor of a trust to serve as an investment trustee. This can provide the settlor with significantly more control over the trust’s investments.

The settlor often retains a role in managing the trust’s investments, either as an investment advisor or as the investment trustee. The investment trustee is responsible for managing investment transactions conducted in the trust’s name.

Other Powers the Settlor May Retain

The settlor may also retain certain powers, including the ability to:

• Remove and replace trustees.
• Direct trust investments.
• Veto trust distributions.
• Retain certain general management-related powers.

Nevada’s Advantageous Approach to Creditor Claims

Notably, Nevada’s two-year statute of limitations for creditor claims against asset protection trusts is one of the shortest time periods in the country. This can provide greater creditor protection than the laws of some comparable states.

Creditors who have received notice of a transfer to an asset protection trust but fail to file a claim within the applicable two-year time limit may be barred from pursuing the trust assets.

Nevada Does Not Recognize “Super Creditor” Exceptions

Unlike many other states that allow asset protection trusts, Nevada does not provide statutory exceptions that automatically allow certain categories of creditors to access the trust’s assets.

Some other states expressly allow asset protection trusts to be reached to satisfy claims involving alimony, child support, IRS debt, state tax debt, and other obligations. Nevada’s asset protection trust statutes do not grant these types of creditors a specific statutory exception allowing them to pierce the trust to satisfy their claims.