Many people today have legitimate concerns about preserving and protecting their hard-earned assets from malicious or frivolous lawsuits, creditors and the like. For any reason, or for no reason at all, you may at some point find yourself involved in a lawsuit that could result in a judgment against you, requiring the payment of substantial sums of money. Doctors, dentists, engineers, lawyers, architects, contractors and other types of professionals as well as business owners face a higher than average risk of liability exposure by virtue of their professional or business activities. Then again, others harbor fears of being the target of legal action merely as a result of engaging in everyday activities, such as driving a car, operating a boat, inviting guests into the home, and so on.
The Nevada Asset Protection Trust (“NAPT”)
The NAPT is designed to place a protective shield around your assets, insulating them from future lawsuits, judgments and creditors. The NAPT is an irrevocable trust into which you place selected assets of your estate that you wish to protect. The NAPT allows you to be a beneficiary (along with other family members, if you wish) and to receive distributions of money or property from the trust, while still protecting the trust assets, as long as the following requirements are met:
At least one of the trustees of the trust lives or is located in Nevada.
The Nevada trustee maintains trust records, prepares trust tax returns, and carries on part or all of the administration of the trust in Nevada.
The trust is irrevocable.
The trust agreement cannot require the trustee to make distributions to the creator of the trust (i.e., the trustee only has discretion to make such distributions).
The trust is not established to hinder, defraud or delay the trust creator’s known creditors.
Nevada law further provides generally that, for a period of two (2) years following the date of transfer of any assets into the NAPT, those assets will remain exposed to potential creditors and judgments. Once the two-year window closes, however, the assets are protected from future attachment by third party creditors.
The NAPT has several flexible features that make it very user-friendly. First, although the settlor (creator) of the trust cannot unilaterally control the timing or amount of distributions out to himself, he can direct the trustee to make distributions to other beneficiaries. Moreover, he has a veto power to prevent any proposed distributions from being made to any of the other beneficiaries. Second, the settlor can serve as an “Investment Trustee”, retaining sole control over the management and investment of the trust’s assets. Third, the settlor can be given the power to remove and replace the trustee(s) of the trust. Lastly, even though the trust is irrevocable, if the settlor desires to change how and to whom the trust will be distributed upon his or her death, he can do so through what is referred to as a “power of appointment”.
NAPTs have a relatively short history compared to many other types of trusts. Because of this, there are few, if any, court decisions (i.e., “case law”) indicating the extent to which Nevada law would apply to protect the assets in the trust under certain circumstances. Despite the absence of case law, however, the Nevada statutes are clear on the affirmative creditor protection afforded by a properly structured and managed NAPT.
When undertaking asset protection planning, timing is crucial. The best time to establish a NAPT is before the risk of a suit or claim, or other creditor issues, arise. If a NAPT is set up with the intent to shield assets from an existing creditor or even a potential claim based on an incident that has occurred, a court may be able to unwind or undo any transfers of assets to the NAPT and make them available to one’s creditors. Moreover, under federal law, if a person intends to file for bankruptcy, any transfers of assets by him/her into a NAPT within 10 years prior to the bankruptcy filing may be invalidated and ignored by the bankruptcy trustee, leaving those assets exposed to the bankruptcy estate’s creditors.
When timely planned and carefully structured, a NAPT can provide significant creditor protection for one’s assets and property. And although NAPTs have not been tested in the court, the decision to do nothing will guarantee exposure of assets to future liabilities, while establishing and funding a NAPT with those assets takes maximum advantage of existing Nevada laws regarding asset protection. Including a NAPT as a primary component of an overall asset protection strategy is a smart move for anyone concerned about preserving and protecting their assets.