Asset Protection Trust
What is an Asset Protection Trust?
An asset protection trust is one that holds cash, real and personal property, and other items of value and protects them from being seized by creditors. So, assets that are held inside the trust are not considered to be property of the trust beneficiaries. Thus, they are protected from being seized to pay their debts.
In the US, before such statutes were enacted in states like as Nevada, Delaware, Alaska, asset protection was provided through “spendthrift provisions.” The purpose of the spendthrift clauses is to prevent the beneficiary assigning his or her beneficial interest in the trust to others. It also prevents the beneficiary from using trust distributions as security for a debt. The big downside is that they do not provide protection for the ones who created the trust. So, if someone set up this type of trust where the creator of the trust was also a beneficiary, called a “self-settled trust,” it was usually set aside and did not protect trust assets from the settlor’s/beneficiary’s debts and obligations.
Trusts were used in England starting in about 1350. The US by-and-large adopted English law. So, trust law is well-established. People have been using trusts to protect assets for centuries. However, in the past, about the only way that assets inside the trust could be protected from creditors was for the one who created the trust (called the “Settlor”) was to relinquish control and future enjoyment from the trust and its assets. The “step-into-your-shoes” theory was used. If the Settlor could serve as trustee, could change the trust, could receive distributions, or receive any benefit from the trust, the creditors could step into his shoes and do the same. They could jump in and change the beneficiary to themselves and gobble up the trust assets.
So, certain jurisdictions such as the Cook Islands, Nevis and Belize changed the playing field by enacting laws that allow Settlors to enjoy the benefit of the assets held in the trust without the need to release all control and use of trust assets. The “offshore trust” legislation provided powerful tools to shield assets from creditors.
In spite of fairly long standing reputation for protection, safety and integrity, there are some individuals who do not feel comfortable placing assets offshore. We feel strongly that the offshore trust provides the strongest asset protection in the world. Still, there are different appetites and those who do not care to venture abroad with their finances. So, we offer a very favorable domestic option that has similar protection but keeps the assets and the container that holds them within our borders.
Therefore, to meet the desire for those who want protection from creditors and who want to keep the assets here, the State of Nevada drafted and established statutes allowing for self-settled spendthrift trusts that provide strong barriers against creditors. It is called the Nevada Asset Protection Trust (NAPT). It enables the Settlor to create a trust and fund it with his or her own assets. The Settlor can also be a beneficiary of the trust. So long as the legal requirements are met, the assets inside of the trust are safe from confiscation when the Settlor when the judge slams down the mallet that results in a judgment filed against him.
Nevada stands alone when compared to the asset protection provisions afforded similar statutes in other states. Nevada law cuts the time frame in which a creditor can make a claim against a NAPT. If the creditor does not bring forth the claim within a prescribed time period the claim is prohibited. If someone has a judgment against the Settlor at the time the Settlor put the assets into the NAPT, the creditor needs to begin challenging the transfer within the later of two years after the transfer or six months after the creditor finds out or reasonably should have have found out the transfer took place. Someone who was not a creditor when the Settlor transferred assets into the NAPT must take action to challenge the transfer within two years of the transfer. The clock starts ticking once the assets are transferred into the trust. Thus, when a new asset is transferred into the NAPT, the time will begin to run out on a creditor for a claim against that asset. Those other assets that had already been transferred before the time limit are, from that point forward, shielded from your enemies at law.
How long does the creditor have to make a claim against the trust once the assets are transferred into the trust in different states? If the assets are yours, the shorter timeframe the better. The chart below answers the question.
Statute of Limitations on Fraudulent Transfer for Asset Protection Trusts (The shorter the better.)
From Asset Transfer Date
From Date of Reasonable Discovery
|Alaska||4 years||1 years|
|Delaware||4 years||1 year|
|Nevada||2 years||6 months|
In Nevada, even if the statute of limitations does not prevent the claim, the creditor is still required to prove “fraudulent transfer,” which is also commonly known as “fraudulent conveyance.” Fraudulent conveyance is the movement of an asset with the intent to hinder, delay or defraud any creditor. It is important to note that fraudulent conveyance is a civil and not a criminal matter. Fraudulent conveyance is relatively challenging for a creditor to prove. It is especially challenging for them to prove when the NAPT was created and the assets were transferred before the claim arose. There are some “badges” of fraudulent intent, including insolvency (not having enough assets to cover debts), family or insider relationships, existence or threat of litigation. So, that is why it is important to set up an international trust if the treat at hand. Use an NAPT before a threat arises.
Plus, it is important to use additional asset protection structures as well. Put most assets inside the trust and keep some assets outside of the trust, such as in one or more LLCs. Have both a US and offshore trust. So, keep all assets in a variety of asset protection structures to keep a certain level of creditor protection with all of your resources.
In the past the Settlor had to give up all control of and benefit from the trust in order to protect the assets therein. So, where is the enticement to set up a traditional trust if you could never enjoy the fruits of your labor? That is a big plus offered by the NAPT. With the NAPT, the Settlor can still retain a degree of control and can enjoy the benefit of the assets held inside of the trust.
While we are on the subject of old versus new trust law, former asset protection trusts were almost entirely irrevocable, unchangeable, and once they were established they were set in stone. Someone with a child who went down the wrong path, disowned his parents, or rebelled could not be removed from the trust. Even if the Settlor fell into financial ruin and the trust was chock full of cash, the Settlor was not able to shut down the trust or take back assets. If the Settlor changed his mind, he was stuck. The NAPT statutes, however, allow the Settlor to change the beneficiaries and how the assets are distributed without defeating the asset protection. Thus, the Settlor retains the “power of appointment” so he can change who gets the money and property held in the trust.
Here is a big one. The Settlor (you, for example) can serve as one of the trustees. This would defeat the asset protection of most trusts. Not with the NAPT. The Settlor’s powers as trustee are kept within certain limitations so as not to defeat the asset protection. Under old trust law, the only trustees were arms-length individuals who made distributions, performed accounting for the trust, managed trust assets, etc. Now, Nevada Asset Protection Trust law does not allow the Settlor to be the only trustee or to make direct distributions to himself or else the asset protection would be defeated. (If the settlor could do so, the person suing could step into his shoes and distribute to himself.) But with an NAPT the settlor can serve as one of the trustees with the power to invest or manage the trust assets. A separate arms-length trustee could be responsible for making distributions and doing bookkeeping. This arrangement obeys Nevada statutes and maintains the powerful asset protection inherent in the NAPT. At the same time, it lets the Settlor manage and invest trust assets such as real estate, stock market investments, gold, and other. Plus, since Nevada state law requires that at least one trustee reside in Nevada, if an out-of-state resident establishes an NAPT, the two-trustee arrangement, with the Nevada resident being one trustee and the Settlor (client) being the other, it still meets the needs of the law.
As stated previously, a unique characteristic of the NAPT is that the Settlor can also receive the benefits of the trust (can be a beneficiary of the trust). The trustee cannot be required to make distributions to the Settlor. If he could, the courts could, in turn, require him to make distributions to the Settlor’s creditors. However, if a trustee is uncooperative, he can be replaced. So, the Settlor can have a great deal of control, power and enjoyment, within certain legal limits, and still keep assets safe and sound.
It gets even better. Because the Settlor does keep certain powers and controls, the trust is considered to be a “grantor trust” for tax purposes. What this means is that there is no tax at the trust level. The income and deductions flow through to the Settlor’s tax returns. So, there is no extra tax and the Settlor retains the deductions. Additionally, since the transfers into the trust are not considered gifts, there are no gift taxes. When the Settlor dies, the subsequent beneficiaries, such as the Settlor’s children, can enjoy the income stream produced by the trust. So, there are tremendous estate planning benefits that pass on to children and/or other loved ones. Plus there can be additional provisions, such as the A/B trust provisions, that can be placed into the trust to minimize estate taxes.
As we have discussed, Nevada is not the only state with modern self-settled asset protection trust laws that are comparable to the NAPT. Alaska and Delaware, and even Rhode Island, South Dakota, Wyoming and Utah have changed their statutes and joined the fray. Nevada stands above the rest because of the short statute of limitations for creditors to stake claims on the assets of the trust. In Nevada, as we have said, a creditor must file a claim within two years after the asset was transferred into the trust or six months after he has discovered or reasonably should have discovered the transfer. In Alaska and Delaware it is 4 years and 2 years; Rhode Island and Wyoming 4 and 1. It is better for the Settlor if the time period is shorter because it shortens the time for someone to challenge the transfer into the trust. Once the time is expired, the creditor is out of luck and cannot seize formerly transferred trust assets.
In conclusion, a NAPT is a powerful asset protection weapon to defeat your legal enemies and protect your hard-earned resources. The NAPT can be used by physicians, CEOs, directors, officers, business owners, real estate agents and others who are faced a lurking lawsuit threat. It is essential that the trust is established, worded and administered properly and professionally in order for it to provide the protection that is available. It is a beneficial financial domestic tool to shield assets from lawsuits. Whereas, the offshore asset protection trust provides a stronger shield because the trust and the trustee are not under the control of the local courts, it provides an alternative for those who prefer a US-based solution. For it to provide protection, it needs to be established before legal claims are here or on the horizon. Is the NAPT right for you? Get ahold of a knowledgeable asset protection planning professional to analyze your circumstances and determine if it is the proper solution for you.
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