A solid asset protection strategy is essential for any wealthy individual looking to protect what they have worked so hard to earn. Domestic asset protection trusts are popular tools for asset protection. The best domestic jurisdiction for settling an asset protection trust is Nevada. However, there is no one-size-fits-all solution to asset protections. We discuss the pros and cons of settling a domestic asset protection trust below.
Understanding Domestic Asset Protection Trusts
Domestic asset protection trusts are irrevocable trusts. These types of trusts, often referred to as DAPT, allow the settlor of the trust to act as a beneficiary. As a result, individuals may use domestic asset protection trusts to protect their own assets. They may also use them to protect assets that they want to gift to beneficiaries. There are currently 17 states in the United States which provide for the settling of domestic asset protection trusts.
Domestic asset protection trusts assign the trustee control over the distribution of assets made to the settlor. The settlor may act as a co-trustee in some jurisdictions. As a result, the settlor can control distributions of assets made to the beneficiaries. In order to retain the asset protection, the trustee must control the distributions made to the settlor. This works to protect settlors and beneficiaries by shielding the assets held within the trust. Settlors and beneficiaries cannot control distributions made to themselves. Creditor/debtor statutes often follow the “step into your shoes” theory. That is, if debtors could directly make distributions to themselves the creditors could gain access. That is, the creditors could step into their does and make distributions themselves as well. Thus, with reliance on a third-party trustee, creditors cannot readily access the assets of the settlor or beneficiary that the trust holds.
Statute of Limitations
There is a statute of limitations on how long is necessary between the date of transfer and the date that the protection begins to take effect. The statute of limitations varies from state to state. Additionally, the statute of limitations is different for pre-existing creditors versus creditors who are not pre-existing. Generally, the statute of limitations is designed to protect pre-existing creditors. Before the statute of limitations expires, a creditor could win a claim of fraudulent transfer of assets. Fraudulent transfer of assets occurs, for example, when the settlor of a trust knowingly transfers assets with the specific intent to delay or defraud a creditor. In a domestic asset protection trust jurisdiction, a successful claim of fraudulent transfer in a US court can nullify the protection afforded by a DAPT.
All the states except Nevada allow for exception creditors. Exception creditors are creditors who have the ability to pierce through the protection afforded by an asset protection specialist. For example, a number of states provide an exception for divorcing spouses. Many states apply this exception to alimony claims as well. Additionally, a number of states have a statute that makes a child support creditor an exception creditor. Many states have an exception creditor statute for preexisting tort creditors on their books. Some of the states have other types of exception creditors. As mentioned previously, Nevada is the only state that does not have exception creditors that can pierce through the DAPT. This is the main advantage that Nevada has and why we think it is among the best domestic asset protection trust states.
Asset Protection in Nevada
We commonly refer to Nevada asset protection trusts as Nevada spendthrift trusts. The Nevada Spendthrift Trust Act governs these types of trusts. These trusts are allowed to be self-settled. As a result, settlors can use the trusts to protect their own assets. The laws of many other states only protect assets which the trust will distribute to other beneficiaries. However, it would not protect assets that the trust could distribute to the settlor, whether or not the settlor was also a trust beneficiary.
In Nevada, any individual may create a legally valid trust where they are both the settlor and the beneficiary of the trust. Nevada has some of the best domestic asset protection trust laws, which also allows the settlor to act as one of two or more co-trustees responsible for the administration of the trust. The settlor is able to maintain more control over the assets which the trust holds by acting as one of the trustees. It is essential, however, that the trust appoint another co-trustee. It is the action of giving control over distribution of assets to the settlor that provides the asset protection. Since the settlor of the trust cannot control the distribution of assets to themselves, courts cannot readily force them to give trust assets to a creditor.
Nevada asset protection trusts protect assets for beneficiaries in a similar way. Drafted properly, the trust beneficiary is not allowed to assign his or her interest in the trust. If the beneficiary was able to do so, courts could use that ability in order to force his or her hand to assign such interest to legal opponents. The best domestic asset protection trusts provided in Nevada are irrevocable spendthrift trusts. The co-trustee will rightly disregard any orders, including those that the settlor gives, which go against the Nevada Spendthrift Act. The co-trustee must also refuse to make distributions if they can reasonably assume that the a creditor would seize the assets. The effect of this is that the beneficiary’s creditors are unable to seize the assets held within the trust.
A Degree of Control
One of the most important benefits of a Nevada asset protection trust is the ability to maintain a degree of power over trust assets. The inability to make distributions to themselves in the main limitation of a settlor’s power. However, relinquishing the power is essential. This is because doing so allows the trust to protect the assets. If the settlor had full power, a judge could use that power to force the settlors hand to turn assets over to creditors. In that case, judge, not the settlor, would have the actual control. So, ironically, giving up distribution rights actually puts the settlor in the driver’s seat with all of his or her trust assets intact.
One can use a Nevada domestic asset protection trust to protect assets of any value. Individuals settling asset protection trusts in Nevada do not have to be Nevada residents. If the settlor is a non-resident, at least one of the co-trustees must be a Nevada resident. Additionally, the administration must take place all or in part in Nevada.
Nevada asset protection trusts may be to protect a number of different types of assets. Trusts in Nevada may protect personal property, cash, stocks, bonds, jewelry, family heirlooms, securities, and more. Assets held in a Nevada asset protection trust may be located anywhere in the world. Settlors may use Nevada asset protection trusts be used to protect real estate. However, it is important to note that real estate is subject to the law of the jurisdiction where it resides As a result, Nevada asset protection trusts may not effectively protect real estate located outside of Nevada.
Short Statute of Limitations
Nevada has a very short statute of limitations on claims of fraudulent transfer. Fraudulent transfer occurs when one transfers assets with the intent to defraud or delay creditors. The statute of limitations on fraudulent transfer in Nevada is two years; or six months from the date the creditor could have or should have known of the transfer into the trust. That is, if one publishes such transfer is a small local newspaper somewhere in Nevada, the “could have known” statute kicks in. Other states offering less than the best domestic asset protection trusts have significantly longer statutes of limitations.
Nevada asset protection trusts may also be beneficial for tax planning. Irrevocable spendthrift trusts in Nevada are tax neutral. Tax neutral trusts are not taxed directly. These trusts are instead grantor trusts. The tax liability in a grantor trust is transferred from the trust to its settlor or grantor. One may construct a trust in Nevada so that it treats transfers of assets as completed gifts. As a result, the trust will be excluded from the settlor’s estate. One may also establish the trust as a separate taxpayer, so that the trust pays its own income tax.
Nevada asset protection trusts offer some of the strongest asset protection available in the United States. However, they are not bulletproof. It is important to remember that a Nevada asset protection trust is still subject to the judgments of United States courts. Nevada has no state income tax on individuals, businesses, or trusts. Nevada also has no state transfer or inheritance taxes. If you live in a state that does impose such taxes, you will likely be subject to them whether you have your assets in a Nevada trust or not.
When Domestic Trusts Don’t Work
That being said, here is the problem. Even the best domestic asset protection trusts don’t always work. The reason is that judges in non-asset protection trust states tend to rule according to local legislation. “Great, you have this trust,” the judge says. “But in [California, New York, Texas, Florida or others state] we do not have asset protection trust laws. I order the trustee to turn over the assets now.” Keep in mind that a judge in California (or other state) has jurisdiction to order a trustee in any other state to relinquish trust assets.
So, what is the solution? The solution is to set up a trust in a jurisdiction where a your local judge does not have jurisdiction. Set up the trust offshore in a country that does not recognize US judgments. There are a handful of extremely good ones: Cook Islands, Nevis and Belize to name a few.
Nevada vs Offshore Asset Protection Trusts
There is no doubt that offshore asset protection trusts are preferable to even the best domestic asset protection trusts. Offshore trusts work in ways that are very similar to the domestic asset protection trusts available under Nevada law. The main advantage of an offshore structure over a Nevada asset protection structure involves fraudulent transfer claims, as we will discuss. Moreover, unlike Nevada, offshore trust can protect assets no matter where you live.
As previously mentioned, creditors in the State of Nevada have the ability to make a fraudulent transfer claim for up to two years after the date of the transfer. The burden of proof for fraudulent transfer in Nevada is clear and convincing evidence. Many offshore jurisdictions require a much higher burden of proof than what is required in Nevada. Some offshore jurisdictions, including the Cook Islands, Nevis, and Belize, have a burden of proof which is beyond a reasonable doubt. A fraudulent transfer claim in these jurisdictions must meet the same standard of proof necessary for a capital murder case.
Plus, if a U.S. judge demands the return of the funds, the offshore trustee can say, “No, not going to.” U.S. courts do not have jurisdiction in the Cook Islands. U.S. court orders fall on deaf ears.
The majority of favorable offshore jurisdictions also do not recognize foreign judgements. A creditor must have their case adjudicated in the jurisdiction where the trust is held in order to make a claim of fraudulent transfer. The time and cost associated with this alone may be enough to discourage a creditor from pursuing claims against assets held in an offshore jurisdiction. Even if they do pursue a claim in the local courts, the burden of proof is extremely high on behalf of the creditor. Case in point, we know of no case where a client has lost money to a judgment creditor that they have placed in a Cook Islands trust that we have established. For this reason, offshore asset protection trusts are preferable to the best domestic asset protection trusts.