Thursday, October 14, 2010

What Makes Nevada Self-Settled Spendthrift Trusts So Special?

If you're reading this, you're probably already aware of the concept of a self-settled spendthrift trust. If not, it's simply an asset protection trust that enables the settlor to also be a beneficiary of the trust. Often the self-settled feature is not written into the trust at the outset due to its as yet unconfirmed acceptance by the courts.

Though the ability for the settlor to also be a beneficiary is unique to Nevada and a handful of other states, what makes Nevada a superior forum for spendthrift trusts is the statutory discretion given to the trustee.

In an asset protection trust, the settlor gives the trustee discretion to make distributions to the beneficiaries. While the settlor will provide a list of recommendations or suggestions, the trustee is not required to make these distributions. The benefit of this arrangement is that no beneficiary is unconditionally entitled to a distribution from the trust. That means if one of your beneficiaries is sued for money damages and loses, the resulting creditor cannot order payment from that beneficiaries’ interest in the trust. That beneficiary does not have any mandatory payouts due, so there's nothing for the creditor to acquire.

All states recognize some sort of spendthrift trust that limits the transferability of beneficiary interest, effectively keeping most creditors out. However, most states carve out certain exceptions in the form of “protected classes.” While a state will provide statutory support for their spendthrift trust, the state will also define certain groups that are not shielded from the assets of the trust. South Dakota protects personal injury claimants. Delaware leaves assets available for division in a divorce. Utah leaves trust assets open to a whole host of creditors.

By now, you can probably guess the answer to the title of this entry. What makes Nevada so special is that Nevada law does not leave trust assets open to any class of creditors. According to NRS 166.110 (1), discretionary power of the trustee is absolute. Nevada asset protection trust law is the best in the country and many commentators point to the lack of protected classes as the key reason.

While this is just one beneficial aspect of Nevada asset protection trust law, to many it is the most significant. While transfers still have to be timely and can’t be made with the purpose of defrauding creditors, Nevada residents (and out of state residents with a qualified Nevada trustee) who create a carefully-drafted Nevada asset protection trust enjoy a remarkable asset protection advantage thanks to absolute discretion granted to their trustees.

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