Monday, April 7, 2014

Homestead Protection in Nevada

As in every other state, the public policy of the State of Nevada is to avoid leaving its citizens homeless and penniless because of a negative result in a lawsuit.  So the state legislature, codified under NRS 21, has provided a list of assets that cannot be taken from you by a creditor (a person or entity who has obtained a judgment against you).  Relative to the rest of the country, Nevada is generous when it comes to these "exempt assets."  The state is especially benevolent in protecting your house.

NRS 21.090(l) provides that your homestead is exempt from execution to satisfy a judgment.  NRS 115 governs how to make the homestead declaration effective.  Simply desiring it to be true isn't enough.

To qualify, title must be in your name (or the name of your revocable living trust, provided you are its beneficiary), and you must reside on the property. 

You can certainly pay one of the many homestead recording services who will stuff your mailbox in the first few weeks after your purchase or title change on your property.  They charge $25 to $50 plus the county recording fee ($18 in Clark County).  But you can also do it yourself.  The county provides the form to do so here and also offers a nice overview on what's involved here.  You'll need your property's parcel number (you should be able to find that on a property tax notice or by pulling up the recorded deed on your property here).  Then check off your filing status, the type of property you are declaring as your homestead, and the name on title.  You'll also need the legal description of your property which you'll find on your most recent deed.  From there you'll sign before a notary and mail it to or visit the recorder's office for recording.

I include preparation and recording at no charge (aside from the recording fee) for my estate planning clients.

A few more notes about homestead declarations:
  • Per NRS 115.020(5), moving an already "homesteaded" property into your revocable trust, so long as you are its beneficiary, will not require you to re-file.  However, if the beneficial owner changes, re-filing is necessary to secure the protection.
  • The exemption protects you up to $550,000 in equity, not just fair market value.
  • Obviously, claiming homestead protection will not protect you from your bank's mortgage or home equity line of credit (NRS 115.010(3)), among a few other specific creditors.
  • A creditor can still place a lien against your property, but has no power to force its sale.  However, if the property's equity is greater than $550,000, then a judicial partition/forced sale is possible.
  • OJ Simpson famously took advantage of Florida's unlimited homestead protection.  It allowed him to move there, dump a ton of cash in a sprawling and expensive estate, and have it all protected from civil judgments that were eventually entered against him.
In short, taking an hour or so to follow through on filing a homestead declaration is worth your time.  It's a relatively simple process, inexpensive, and along with your homeowner's insurance policy, the first line of defense in asset protection.

Monday, September 30, 2013

Breaking Bad Introduces Irrevocable Trusts to the World

There are three audiences for this blog post.  I’ll have some Breaking Bad fans that pick apart every minute detail and want to learn more about the irrevocable trusts mentioned in the show’s series finale.  There’s the potential client investigating irrevocable trusts and finding some interesting, if obscure, pop culture reference.  And then there’s going to be a few asset protections dorks like me, thrilled at the mention of one of our bedrock tools being featured on the highest profile primetime television episode in years. 

Until now, there weren’t many of group one who mingled with group two.  However, tonight’s series finale gave us yet another twist that utilized irrevocable trusts to resolve at least two loose ends. 

To catch non-viewers up to speed, the most relevant details here are that Walter White is the dying father of two children, both minors.  He’s sitting on a mountain of cash (literally) and very forcefully requires that two former colleagues place the funds into an irrevocable trust to be made available to the eldest child on his 18th birthday, less than a year hence.  If you’re a non-viewer and still interested in learning more about irrevocable trusts, I suggest reading my other blog entries on the topic since further discussion will be riddled with unfamiliar names and subjects, only further blurring already hazy subject matter.

So what is an irrevocable trust?  Very simply, it’s an entity respected by state and federal law, that exists separately from the person who places assets into it.  Think of a business entity like an LLC or corporation.  What makes it more unique is that the person for whose benefit it is created cannot lose the trust property to a creditor.  Any creditor, if the circumstances are right.  That is critical in this case because Walt is afraid that this money could be taken by the federal government after seeing what happened to Mike and his granddaughter. 

Walt is justified in placing his faith in an irrevocable trust because every state in the country has what are known as spendthrift trust laws on the books.  Spendthrift trust statutes prevent a creditor from having any right to remove a trust asset from a beneficiary, and likewise, withhold from a beneficiary the freedom to give it to them.  That means that no matter what Flynn (forget ever hearing him referred to as Walter Jr. again!) does or more importantly, what the Feds try to do, he can’t lose the money to an outside party.  It will remain in the bank unless an independent trustee distributes trust funds to Flynn, the beneficiary, or purchases something for his benefit, like tuition or a place to live.  Moreover, Flynn will likely have the option to control those trust funds directly, potentially even on his 18th birthday, and the trust will still provide that very same protection.

We saw Walt desperate to deliver some cash to his kids, but his wife and son continually rejected him.  At least with this method, Walt has some hope that the money will be preserved so that if Flynn ever changes his mind, its available.  In the mean time, Walt expects that the government (if they ever even become aware of its existence) won’t be able to touch it.  The end result is that Walt’s goal of taking care of his family financially is met, and his desire to make things miserable for his former Grey Matter co-founders is satisfied.

The plan is not perfect.  While the Schwartz’s had no choice but to agree to cooperate, I don’t know how enthusiastic they will be with their chosen attorney to provide all the flexibility the trust should include.  I also don’t see how they can possibly fund the trust via a bank account without raising red flags, even if they go offshore with it.  But assuming they get good counsel to help them navigate those issues, we, as fans, can take solace in Flynn having some nice financial options for Skyler, Holly and himself in the future.

Now, if you really want to dig deeper (as any Breaking Bad fan does), there are a lot more issues beneath the surface that only trust geeks would care to analyze.  Who is the grantor here:  Walter, or Gretchen and Elliot Schwartz?  What of the State’s existing creditors, whether federal or local?   Surely they were existing creditors at the time of the transfer.  Upon discovery of the transfer, will their lookback period claim succeed in unwinding the transfer?   Even if the funds make it in an account, to what lengths will the State go to freeze the assets and how successful might they be, regardless of the principles protecting the assets?  Holly isn’t mentioned as a beneficiary, but Walt expects Flynn will provide for the family, so is she named as a beneficiary or will Flynn provide for her via a personal gift post-distribution?  Can he possibly remain inside of a HEMS standard distribution and still take care of his sister and mother? Is New Mexico the best situs to govern the trust?  Not a question, but that's going to be a steep annual income tax bill unless the remaining White's are spending down hard.  Which trust company, if any, just fell into some massive trustee fees and do they sacrifice disclosure amid the sticky and vague origin and existence of the funds? 

This post attempts to serve as no more than an introduction to the topic than the brief mention in tonight’s episode did to introduce the subject at all.  No doubt there will be many posts to come from trust commentators and analysts who will answer the questions above and many more.  It falls right in line with one of the brilliant elements of the story: the deeper you dig, the more you find.  Hopefully this provides just a bit of contextual insight to yet another of Walt’s brilliant decisions.  For me, this one stood out as one of the most brilliant of all (self-serving or not)!

Wednesday, January 25, 2012

SPA Trust vs. NAPT

When it comes to asset protection trusts, the discussion with my clients almost always comes down to whether or the Nevada Asset Protection Trust (NAPT) or the Special Power of Appointment Trust (SPA Trust) is a better fit. Of course, it's always determined on a case by case basis and I will emphatically direct you to my disclaimer at the bottom of the blog before reading further, but there are certainly a couple common factors to consider when deciding.

Both trusts are spendthrift trusts designed to prevent creditors from reaching trust assets and endow the trustee with absolute discretion over distribution decisions. Where they differ is the self-settled aspect. The "Nevada" of the NAPT refers to the provision in NRS 166 that allows a grantor (aka settlor or trustor) to also be a beneficiary. Nevada and a few other states offer this nuance which was inspired by offshore trusts that do the same. By using a domestic trust, the grantor avoids the stigma of placing assets outside the U.S. and does not have to file notice forms with the IRS.

The SPA Trust is not self-settled, instead relying on the power of appointment to appoint assets back to the grantor, should the need arise.

The NAPT offers greater access for the grantor because he is treated the same as any beneficiary. The trustee may make distributions at any time to the grantor, giving the grantor the ability to protect trust assets, but still be able to enjoy the income or principal at any time. The power of appointment used by the SPA Trust is not used the same way. Instead it's generally a single use tool to receive some or all of the trust assets without being a beneficiary of the trust.

A grantor can appoint a professional, Nevada resident trustee to the trust to qualify the trust to be governed by Nevada law. That has its own inherent benefits, but is mandatory for the NAPT if the grantor is not a Nevada resident. Even when all of the trust assets are located in Nevada, I still recommend a resident trustee for a non-resident grantor. The risk for non-resident grantors, though, is the possibility that a non self-settled trust jurisdiction could apply their own trust law in a suit against the trust, extinguishing the asset protection provided to the grantor-beneficiary. Though I haven't seen it happen, in theory it could. Nevada residents are protected from this event, but non-residents with self-settled trusts can't be sure.

As already discussed, since the grantor is not a beneficiary of a SPA Trust, such a concern is moot.

Also important to the decision is how business entities will be used to support the strategy, the availability of a trustworthy distribution trustee to the grantor, and more. There is no right answer for every circumstance so it is important to discuss these matter with an experienced asset protection attorney who will intelligently guide you through the process. Most important to the entire process is timing. As always, transfers to an irrevocable trust should be done when the waters are calm to ensure the most effective arrangement.

Monday, January 16, 2012

Do I need to retitle ALL of my bank accounts into the name of my trust?

As has been mentioned before, funding a trust is the hand to the glove of trust instrument preparation. Just because you have your revocable trust instrument drafted and executed doesn't guarantee your beneficiaries will not have to probate your estate. You have to actually change title of your assets into the name of the trust to complete the process. It's a critical step and a subject I emphasize and review the process of during each document signing with my clients.

But the question often arises, do I need to transfer ALL of my liquid accounts into the trust? No, so long as you are aware of the consequences. Take a bank account, for instance. You have a couple options. Do nothing and upon the death of the account owners the bank will require a court order appointing the rightful beneficiary to those funds. Depending on the balance of that account and/or the size of the probate estate, the could require a significant amount of expense and time to access those funds.

The next best option is to name a "Payable on Death" (aka POD) beneficiary. Now the account is not a probate asset because, by operation of contract, the funds will pass to the named beneficiary upon presentation to the bank of a death certificate and some signed forms. However, should the owner not die, but merely be incapacitated, the account will be frozen since the owner is unable to access the funds him or herself. Were the account owned by the trust and appropriate language was found in the trust instrument, then the successor trustee could access those funds to pay bills or other needs in the stead of the principal. In addition, should the named beneficiary be financially irresponsible or already subject to execution of a civil judgment, those funds could disappear quickly. Finally, should the undocumented intent of the POD designation be that the beneficiary is to distribute those funds among others, that beneficiary could be stuck with the gift tax bill along with the responsibility of dealing with unhappy potential heirs.

The best way to alleviate the above problems and many more is to retitle all accounts into the name of the trust. Now, of course there are certainly circumstances that call for doing something different, but such a decision should only be made after considering all the ramifications of doing so. In fact, I have advised just such a course of action for a client recently. If I am retained to advise and draft your estate plan, I will walk you through the proper course of action for all of your assets. Call my office to set an appointment.

Wednesday, December 14, 2011

The Importance of a Living Will

I've addresses this issue before (here and here), but it certainly deserves repeating. Forbes recently published a terrific article emphasizing the importance of completing a living will (aka advance health care directive) and what happened to one family without one. To summarize, the deceased suffered a brain aneurysm and soon fell into an irreversible coma. He was essentially brain dead, save minimal brain activity. The family, still suffering from the shock of this event, was then confronted by the hospital who desired to take him off life support and let him die. The family was unsure what he would have wanted and fought to keep him around at least a few days longer to allow them and other out of state family to say their goodbyes. The hospital disagreed and a standoff ensued.

Not much later the minimal brain activity he had left eventually ceased. However, without advance direction from their deceased father, the family was left with significantly greater expense and stress than necessary.

As part of any estate plan I draft, I include a living will. This gives my clients the opportunity to think through and decide what is to be done if they are to fall into an incurable and irreversible condition that, without life sustaining treatment, will shortly result in their death. It is not an enjoyable conversation, but an important decision that will relieve their families from many of the difficulties suffered by the family discussed in the article.

If all you need is the living will by itself, the Nevada Department of Health and Human Services has provided a form along with pages of useful information here.