Monday, October 18, 2010

Another way Nevada makes it difficult to attack a Nevada asset protection trust

One of the most common strategies used by creditors to reach trust assets is applying the technique of veil piercing. Usually this involves proving the trust is merely the alter ego of the settlor. The creditor will argue that the settlor of the trust did not respect the trust as a distinct and separate entity, showing that the settlor, instead, used the trust as his or her personal piggy bank. Creditors use the same strategy to reach the business assets of a defendant sued individually by showing the defendant commingled personal and business funds or used the business to unjustifiably purchase personal use property.
While a business owner guilty of this type of irresponsibility may not have a leg to stand on, Nevada protects trust settlors who make similar mistakes. NRS 163.418 has effectively removed from consideration much of the evidence a creditor might use to attempt to establish a case of alter ego liability to attempt to pierce the trust veil. Under this statute, a creditor attempting to build an alter ego case cannot rely solely on the fact that a settlor has himself made distributions from the trust. Neither can they rely on proof that the settlor directed the trustee to hold, sell or transfer property from the trust. In other words, evidence that a settlor who foolishly writes a check from the trust account to pay his own credit card bill, will not on its own be available as evidence against him. Of course, such a practice should never be routine and the wall of separation between a settlor and his trust should always be respected, but it is comforting that it is unlikely Nevada would expose trust assets for occasional mistakes made by the settlor.

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