THE MYTHS AND REALITIES OF NEVADA SELF-SETTLED ASSET PROTECTION TRUSTS

BY ELIZABETH BRICKFIELD, ESQ., VAR LORDAHL, ESQ. AND MATTHEW POLICASTRO, ESQ.

For more than a decade, certain states have permitted individuals to create self-settled asset protection trusts without the need to rely on an off-shore locale’s trust laws. Recognition of these domestic asset protection trusts (DAPTs), was first added to Nevada law in 1999. Nonetheless, the function and effect of a Nevada DAPT remains a mystery to many Nevada legal practitioners. This article will lay the basic groundwork for how a Nevada DAPT differs from a traditional third-party spendthrift trust, the protections it offers the and current issues affecting its enforceability.

“NRS 166.170 provides, in What is a Traditional Third-Party child’s creditor, has any access to the Spendthrift Trust? property. Another method is the use pertinent part, that an action of a traditional third-party spendthrift Individuals who make an outright with respect to a transfer of trust, under which the child (or other gift of property to their children or other ) is a third-party, subject to the property to a Nevada DAPT recipients run a number of risks. If the gift protections and limitations of the trust. A is money, the child may spend it; if the is only valid if commenced common structure of such arrangements gift is property, the child may encumber within two years after the involves a settlor transferring property to it. A creditor of the child may levy upon an irrevocable trust, wherein the settlor transfer is made, or six months the property, or a soon-to-be-former also acts as ; the settlor’s children after the person discovers, spouse may obtain a one-half interest in (or any other third parties) are listed as the property under certain circumstances. or reasonably should have beneficiaries. One way to mitigate these risks is discovered, the transfer.” The beneficiaries may receive to simply not make the gift at all – in distributions at the absolute discretion this scenario, neither the child, nor the of the trustee, or often the trustee has

10 Nevada Lawyer January 2015 the ability to make distributions of The Nevada Self-Settled Any transfers to a Nevada DAPT income and principal to the beneficiaries Domestic Asset Protection Trust are still subject to Nevada’s full range of solely for the beneficiaries’ “health, fraudulent transfer laws under NRS Chapter In 1999, in the wake of other states education, maintenance and support” (a 112. Such actions, however, are constrained passing such laws, the Nevada Legislature HEMS provision). Generally, a creditor by a special two-year statute of limitations. amended NRS Chapter 166 to permit of a beneficiary may obtain only the Specifically, NRS 166.170 provides, in self-settled, first-party spendthrift trusts, same rights to the trust property as that pertinent part, that an action with respect to commonly referred to as Nevada DAPTs. beneficiary possesses. A beneficiary a transfer of property to a Nevada DAPT is As long as strictly comply with under such a trust has no enforceable only valid if commenced within two years statutory requirements, they can name right to demand distributions. Therefore, after the transfer is made, or six months themselves as discretionary or HEMS the beneficiaries’ creditors are similarly after the person discovers, or reasonably beneficiaries of their own trusts and enjoy unable to force distributions from the trust. should have discovered, the transfer. the same creditor protection as third-party Such a trust will also contain a spendthrift Nevada’s two-year statute of limitations beneficiaries of the trust. provision, which further limits the ability is one of the shortest in the country, and Any attorney endeavoring to create a of a beneficiary to encumber his or her combined with its other positive features, Nevada DAPT should take great pains to beneficial interest. many practitioners believe a Nevada DAPT follow all the requirements of NRS Chapter Therefore, third-party spendthrift trusts to be the best in the nation. 166. Subject to various other conditions, offer a middle ground between making an In short, Nevada’s DAPT laws extend there are five main requirements when outright gift or not making a gift at all. The the same creditor protection third-party forming a Nevada DAPT: beneficiaries get the benefit of enjoying the beneficiaries have always enjoyed, to the property, subject to some level of trustee 1. At least one trustee must be a settlor of the trust, while still prohibiting control, but the creditors of the beneficiaries natural person who resides or is the creation of DAPTs to fraudulently are unable to reach the property in the trust. domiciled in Nevada, or a bank or thwart creditors. Just as an individual with This basic arrangement has persevered in trust company that maintains an no known creditors is free to give away American legal doctrine for centuries. office in Nevada;1 his property (and thereby protect it from 2. The trust must be in writing;2 future, unknown creditors), an individual What is a First-Party 3. The trust must be irrevocable;3 may instead contribute that property to a Spendthrift DAPT? 4. The trust must not require that any Nevada DAPT. part of the income or principal The preceding paragraphs focused of the trust be distributed to the exclusively on protecting a third-party Are There Any Pitfalls or Concerns settlor;4 and beneficiary’s interest in a trust from Associated With Nevada DAPTs? 5. The trust must not be intended to creditors; however, despite the benefits, Given the relative recentness of hinder, delay or defraud known settlors are often loath to relinquish domestic DAPT laws, there are a number creditors.5 complete ownership and usage of their of legal vagaries and pitfalls associated property to an irrevocable trust. with their usage. First, in the case of In addition to the above, NRS Chapter Nonetheless, at , settlors bankruptcy, Bankruptcy Code 548(e)(1) 166 also permits the settlor to retain naming themselves as beneficiaries of a provides the bankruptcy trustee with a various useful powers without affecting the spendthrift trust do not enjoy the above 10-year look-back period, during which creditor protection it affords. Such powers creditor protections — such self-settled property fraudulently transferred to a include, in part: first-party spendthrift trusts were not DAPT may be unwound. Though the recognized by courts as valid devices 1. The power of the settlor to veto case law is sparse, a recent bankruptcy against a settlor’s creditors. In the past, trust distributions;6 court decision confirmed that, in cases in order to obtain such protections U.S. 2. A retained special power of of transfers to a DAPT with obvious citizens often looked to offshore locales appointment by the settlor (either subjective fraudulent intent, a bankruptcy to create spendthrift trusts that would of these first two powers deem the trustee may reach such property.9 protect themselves and their beneficiaries transfer to the trust incomplete for Additionally, while a Nevada court from creditors. federal gift tax purposes);7 and resolving a dispute over Nevada property 3. The power of the settlor to use real or personal property owned by the trust.8 continued on page 12

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THE MYTHS AND REALITIES OF NEVADA SELF-SETTLED ASSET transferred to a Nevada DAPT One unpublished California Court would be bound by NRS Chapter of Appeals decision upheld a trial PROTECTION 166, it is unclear whether or not court’s determination that a transfer courts in other states would have to a Nevada DAPT constituted a to follow Nevada law. For example, fraudulent conveyance under both TRUSTS if a dispute arose over a piece of California’s and Nevada’s Uniform California real estate transferred to Fraudulent Transfer Act, even where “Placing assets (even a Nevada DAPT, such a suit would no creditor claims existed at the time likely arise in a California court. of transfer, and no creditor claims were out-of-state assets), into Historically, California has a strong “reasonably foreseeable.”10 a Nevada DAPT often public-policy objection to self-settled Finally, some practitioners believe provides strong negotiating DAPTs; for this reason a California that where (for example) a judgment leverage against out-of- court may decline to enforce Nevada’s is entered in California against certain law. These concerns are also present property held in a Nevada DAPT, a state creditors, who are also in a federal court setting, wherein Nevada court would be required to often stymied by the lack of the federal court must select which carry out the judgment under the Full available legal precedent.” state’s laws apply — and public policy Faith and Credit Clause of the United concerns often sway such a decision. States Constitution. CW_NL_hp_bw_Layout 1 12/2/14 2:38 PM Page 1

12 Nevada Lawyer January 2015 ELIZABETH BRICKFIELD “While a Nevada court resolving a dispute over Nevada is a member in the Las property transferred to a Nevada DAPT would be bound by Vegas office of Dickinson Wright PLLC, whose NRS Chapter 166, it is unclear whether or not courts in other practice includes , states would have to follow Nevada law.” guardianship, trust and estate administration and litigation, family law and . Brickfield obtained her J.D. from Until some additional substantive, Brooklyn Law School and her LL.M. in taxation from New York University. relevant case law is generated in this 1. NRS 166.015(2). area, every practitioner will have his or 2. Id. 3. NRS 166.040(1)(b). her own view as to the effectiveness of a VAR LORDAHL is of counsel 4. Id. to the Las Vegas office of Nevada DAPT in a multi-state, choice-of- 5. Id. Dickinson Wright PLLC, law setting. At the very least, it appears, 6. NRS 166.040(2)(a). whose practice includes from the current case law, that the fewer 7. NRS 166.040(2)(b). estate planning, taxation, contacts between a Nevada DAPT and 8. NRS 166.040(2)(h). nonprofit and probate law. 9. Waldron v. Huber (In re Huber), 2013 Lordahl obtained his J.D. from the other jurisdictions, the better. Nonetheless, WL 2154218 (Bk.W.D.Wa., Slip University of Illinois and his LL.M. in taxation placing assets (even out-of-state assets), Copy, May 17, 2013). into a Nevada DAPT often provides 10. Kilker v. Stillman, 2012 Cal. App. from New York University. strong negotiating leverage against out-of- Unpub. LEXIS 8542 at *6-7. state creditors, who are also often stymied MATTHEW POLICASTRO by the lack of available legal precedent. is a member in the Las Thus, so long as the settlor did not Vegas office of Dickinson Wright PLLC, whose fraudulently transfer property into the practice includes estate trust, the Nevada DAPT attempts to planning, taxation, extend to the settlor the same protections nonprofit and probate law. that have traditionally been afforded only Policastro obtained his J.D. from to third-party beneficiaries. Syracuse University and his LL.M. in taxation from Georgetown University.

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