Protecting Your Assets: Part 2 in a Series

In my last blog on this topic, we discussed asset protection. One of the chief tools in this regard was the Family Limited Partnership. In this article, we will discuss Asset Protection Trusts. Several jurisdictions offer this method of shielding assets from creditors.

A Nevada Asset Protection Trust (NAPT) is a powerful legal tool designed to protect assets from creditors while providing several unique benefits. Here are the key details of a Nevada Asset Protection Trust:

Structure and Requirements

NAPTs are irrevocable trusts that allow the grantor to be a beneficiary while still protecting assets from creditors. To establish a valid NAPT:

At least one trustee must be a Nevada resident or a Nevada trust company

The trust must be irrevocable

Trust income or principal cannot be required to be distributed to the grantor

An independent trustee must control distributions

Key Benefits

Nevada's trust laws offer several advantages:

Short Statute of Limitations: Assets are protected from creditors after just 2 years, compared to 3-4 years in most other states

No State Taxes: Nevada doesn't tax trust income, though federal taxes still apply

No Exception Creditors: Unlike most states, Nevada doesn't recognize exception creditors, including ex-spouses

Flexibility: Nevada allows for directed trusts and has flexible rules for modifying irrevocable trusts

Asset Protection Mechanism

When assets are transferred to a NAPT, the grantor legally relinquishes ownership. After the statute of limitations expires, creditors generally cannot access these assets. However, fraudulent transfers can be reversed by courts, so it's crucial to establish the trust before any creditor issues arise.

Additional Features

Spendthrift Provision: Prevents beneficiaries and creditors from directly accessing trust assets

Directed Trusts: Allows appointment of financial advisors to manage trust funds

Long Duration: Trusts can last up to 365 years, bypassing certain transfer taxes

Considerations

While NAPTs offer strong protection, they should be used as part of a comprehensive asset protection strategy. It's advisable to combine them with other tools like Nevada LLCs for enhanced protection. Additionally, assets located outside Nevada may not receive the same level of protection, particularly real property. In the case of real property, before creditors appear at your doorstep, you should transfer title into a limited liability company's name. You then transfer title to the membership interests in the LLC to a NAPT, perhaps with a Nevada LLC being the holding company that manages the NAPT.

Under these circumstances, a plaintiff-oriented court may want to set aside the transfer of the real estate into the name of an LLC, under a theory that it was a violation of the Uniform Fraudulent Transfer Act, but if the transfer took place prior to the appearance---or likely appearance---of any creditors, then the court would be hard pressed to set aside the transfer. The same principle holds true with respect to business interests. Many professionals---CPAs, doctors, attorneys---also conduct business as "professional corporations" or partnerships. In those cases, it may be useful to transfer title to the ownership of the business into a Nevada LLC with title to the LLC then included in the NAPT. Then, an employment agreement may be created to hire the CPA, doctor, or attorney in the original state. In asset protection, there is no "one-size-fits-all" strategy. Indeed, several methods may have to be employed to protect one's assets. In the next visit to this topic, we will discuss offshore trusts: their pros, their cons, and the ways of operating them. Needless to say, the advice of a knowledgeable attorney licensed to practice in the relevant state(s) should be sought if legal advice is needed. #assetprotectiontrusts #Nevada #highrisk #offshoretrusts