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.

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)!

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.

GRANTOR ACCESS
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.

NON-RESIDENT GRANTOR
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.

CONCLUSION
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.

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.

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.

Choosing a Guardian

Next to deciding how to complete their living wills (pull the plug or keep me on food and water?), choosing guardians for their minor children is the most difficult decision my clients make when performing their estate planning. They look to me for advice and while I can provide a couple guiding suggestions, it's a very personal decision. Ultimately it's up to the client to weigh the perceived parenting abilities, philosophies, religious affiliations, etc. of their potential options to try and make the best decision possible. It's also very common to have two parents who each argue that their own siblings or parents are the better candidates. For these reasons it's critical to create a will, if for nothing else, to unequivocally nominate guardians and avoid fighting among families as to what you two would have wanted.

I came across a great article that will help make the difficult decision a little easier. It's definitely worth the click to read, but to paraphrase, the author states:

1. Stop looking for the perfect guardian. In all likelihood one does not exist, so instead choose someone who meets most of your criteria. Choosing someone is better than doing nothing at all and the selection can always be changed as your kids grow or your chosen guardian gives you reason to look elsewhere.

2. You can't expect the situation to just take care of itself simply because there are so many good options. Upon your death, without a guardian nominated, the fact that so many people are willing and able can lead to infighting amongst the self-proclaimed candidates and the real losers in that battle are the children. Being explicit about your choice prevents the chaos that could arise.

3. A handwritten note may not be enough and probably isn't binding. If you've already made the tough decision, take the extra step and make it official by formally completely your estate plan. At the very least, complete a holographic will that will be valid in probate court. A note is better than nothing, but a family court judge need only take it under advisement and may still choose another person who he finds more appealing in his determination.

4. The author suggests having an open discussion with your choice about your parenting style, post-death financial and living arrangements and other personal, important and relevant subjects. This allows your choice to make an honest decision about their willingness to be a guardian to your children, and will help you to decide if the fit is satisfactory.

While I think this is certainly a reasonable route to take, I generally advise differently if you have several good options. Instead, I would suggest choosing three individuals or couples and placing them in order of priority. In the event you pass away prior to your child reaching the age or majority, the first guardian on your list will have the opportunity to accept the nomination or decline, in which case the next person on the list will be able to step up. This provides you a safety net in the unlikely event the first person you chose declines, but it also avoids the weighty discussion you might have with your choice, as the author suggests. Moreover, a lot of the more difficult factors regarding money fall by the wayside if you have taken proper measures with a living trust to provide for your children and assist your guardian.

As the author emphasizes, do something! While many people believe estate planning is only for those who have a valuable estate to protect and distribute, naming guardians for your children is critical and necessary. Take a moment to consider how your family and friends would respond to the care of your children upon the death of you or you and your spouse. If you can envision any dispute or discord, then take the steps to resolve those problems before they can arise by drafting wills and a living trust.

Videotaping the signing of your will

A popular Hollywood depiction of estate planning is the gathering of the family together to watch a video of the wealthy decedent describing his desires for the distribution of his estate. In my career I've only seen that done once and you might be surprised to learn that, independent of a document corroborating the video, the video will is invalid. In fact, video recordings are rarely used in estate planning at all.

The most frequent use of a video camera in the estate planning process is for the purpose of creating video evidence of the mental capacity of a client during his or her signing. As I've mentioned before, testamentary capacity is a critical issue when signing your will and trust. If you lack the requisite mental capacity, then the will or trust could be adjudged invalid. Sometimes an attorney will take the extra precaution of videotaping the signing along with a short question an answer period to prove the testator and/or grantor meets the threshold of mental capacity. Makes sense, doesn't it? If you want to prove to future potential challengers of the validity of the document that the client was of sound mind when signing the document, the best way to do so would be actual visual evidence of the signing itself. Unfortunately, it's not that simple. (Is it ever?)

The first issue with this approach is when to videotape the signing. If the attorney chooses to videotape only certain signings, in those signings he chooses to videotape it raises the presumption that he might believe that there could be some doubt as to the capacity of that specific client. Why would the attorney only record that person's signing to the exclusion of others unless he wasn't himself sure about the client's mental state?

Perhaps, the attorney solves that issue by simply videotaping every signing. Now no one client is treated differently than another. However, in the same way instant replay of a football play isn't always conclusive, the videotaping of an individual may lead different viewers to different conclusions when the absence of the video would leaving nothing to interpret. Or worse, a testator who was perfectly capable of signing her documents could have their validity challenged based on a subjective flaw that an angry disinherited heir and his attorney discover after the fact. Moreover, that challenge could be buffetted by the complaint that not enough of the signing was recorded and that only a favorable clip was preserved by the attorney.

I have never recorded a document signing for a client and for the reasons above, I don't plan to. Attorneys use built in safeguards to assess not only the capacity of the client for him or herself, but also within the documents to avoid challenges based on lack of capacity. I've had to refuse preparation of documents for clients in the past when I determined they would not meet the threshold. It's also why I counsel individuals and families to be proactive about getting their planning done before such a problem can arise.

Charging orders against the interest of single member LLCs

To extend the discussion of charging orders and LLCs a bit, how does a charging order apply to single member LLCs (SMLLC)? As mentioned before, a charging order places a lien against the distributions of a debtor-business owner. The result is the other owners are not held hostage by a unwanted third party creditor who has foreclosed on their partner's interest. The business can keep running, distributions may or may not be distributed to the debtor-owner, and eventually the matter is resolved. But what about the very small businesses, the ones with a single owner? Will a court really grant a creditor a charging order when there is only one business owner to whom distributions will be made? Part of the logic behind charging orders was to avoid punishing the non debtor-owners for the debtor-owner's debts. But where there is only a single owner, there are no non debtor-owners to worry about disrupting. If a charging order is not applicable, what is the result?

The Florida Supreme Court in Olmstead v. Federal Trade Commission decided to liquidate the interest of the single member. Their logic pitted a few Florida statutes against each other to reach their result, but the decision startled asset protection and business law attorneys across the country. Nevada leapt to action this year passing SB 405 which, in part, provides specifically that the charging order is the creditor's exclusive remedy to satisfy a judgment against a debtor-owner's interest, even for SMLLCs (NRS 86.401). The statute doesn't quibble, stating in part:

No other remedy, including, without limitation, foreclosure on the member’s interest ... is available to the judgment creditor attempting to satisfy the judgment out of the judgment debtor’s interest in the limited-liability company, and no other remedy may be ordered by a court.

Practically speaking, a lien against a SMLLC distributions will really tie up cash for the debtor-owner, but it is comforting that a creditor won't be able to seize the company completely. Of course, depending on the circumstances, it's also advisable to simply add an additional member, even at a very small percentage, to avoid such a lockdown of profits.

Dialing back the enthusiasm for charging orders a bit

One of the most desirable asset protection features for any state business entity law is charging order protection. The states that offer it as an exclusive remedy provide that, should a judgment be issued against an individual owner of a business, the creditor's only recourse (aside from piercing the corporate veil) is the acquisition of a charging order, preventing the creditor from foreclosing on the business owner's interest. The charging order requires any distributions to that owner be diverted instead to the creditor. This is good news for both the debtor and non-debtor business owners. The debtor wants to keep his share of the business and the non-debtors do not want their business disrupted by an unknown third party. Further good news is that, to avoid paying the creditors, assuming special allocation measures are available to the owners, the debtor-owner's distributions may be cut off, presumably forcing the creditor to negotiate payment for a smaller sum since there won't be any proceeds be coming in.

Here in Nevada, a charging order as the exclusive remedy is not only available for LLCs and limited partnerships, but to closely-held corporations as well. A boon for local business owners.

A charging order is great, but as discussed in this July Forbes article, some advisers take it a bit too far. The suggestion has been that since the creditor is entitled to distributions, he is also entitled to the accompanying tax liability. Therefore, the owners would issue the creditor the debtor-owner's K-1, forcing the creditor to pay taxes on the business's income despite never receiving distributions. Certainly that would provide even greater leverage to the debtor for a smaller settlement ... if it were true. As the author points out, in reality a charging order holder essentially applies a lien against the debtor's share. As distributions are made, the lien is paid down until it is satisfied. Since the creditor doesn't actually hold the debtor's share, but only a lien against it, the creditor is not responsible for the K-1.

It's a common claim I've heard dozens of times and believed myself at one time. Unfortunately, as terrific as charging order protection is for business owners, the benefits only extend so far.

Establish asset protection when you don't need it

The down economy has significantly reduced the average American's discretionary income.  The effect is the consumer re-prioritizing where they spend their money.  Unfortunately, that has resulted in consumers sacrificing wiser, long-term beneficial expenditures in favor of short-term relief.  There are countless examples of this principle at work.  Choosing to forgo routine car maintenance will result in expensive repairs down the road.  Letting your expensive health insurance policy lapse to save money in the short term may result in incurring significant medical bills later.  Avoiding regular dental checkups can necessitate the suffering and cost of a root canal.

Another example of this is failing to draft and implement an asset protection plan before a claim against your assets arises.  When drafted and used correctly, the only real threat to assets inside of an asset protection trust are fraudulent transfer claims.  These are claims made by a creditor that assets were transferred to the trust to "hinder, delay, or defraud creditors."  Such claims will fail if the grantor can show that the transfers were made before a claim existed or the grantor had reason to know of a claim yet to arise.  That means that transfers to an asset protection trust need to be made while the waters are calm if the plan is to be completely effective.  this concept is sometimes referred to as 'seasoning' the trust.  The longer the time period between transfers to a trust and a claim against you, the more secure the trust assets will be.

If you think that one day such a claim might arise, then establish an asset protection plan now.  Funding an asset protection trust after events leading to litigation have already occurred will still provide you leverage in negotiations with  creditors.  However, you can't effectively transfer assets to a spendthrift trust unless the timing of those transfers is proper.  While avoiding the legal fees of creating an asset protection plan may boost your bank account a bit in the short term, if a judgment is found against you down the road, you'll be kicking yourself for not engaging in planning sooner.

The Cost of Probate

Of the many reasons you want to avoid probate, one of the biggest is the cost. I've written on avoiding probate in the past, but haven't addressed cost directly. Probate is the process by which the court oversees the distribution of your property to your heirs. Your heirs will have to visit the probate court if you have died without proper planning. There are several forms of probate in Nevada depending on the value of the estate. Most probates are of the summary (between $100K and $200K) and regular administration (greater than $200K) variety. Probate attorneys charge by the hour to work on these matters and their fees range from $250 to $400 per hour and above. From the initial petition to the final discharge, the process on average can take anywhere from 8 to 12 billable hours. That's if the process goes smoothly, however. If there's disputes among the family about the administrator, who is entitled to what, or any conflicts with creditors, then the time and expense will only grow.

In the end you're looking at a cost from about $2500 to $5000. Now of course, YOU are not looking at that cost, you're long gone. And that is the attitude I receive occasionally when it comes to engaging in the proper planning to avoid probate. The truth is, though, the cost of probate will come from the estate itself. Did you really leave behind cash, maybe putting aside a little bit extra your heirs, only to see it further depleted to pay a probate attorney? Additionally, you are leaving behind what is sure to be a headache to your heirs and preventing them from enjoying the assets you've left behind for at least a few months.

Probate can be avoided by planning your estate during your life. Moreover, estate planning will cost a fraction of what probate costs. In addition, planning your estate will not only avoid probate, but allow you to be prepared if you are ever incapacitated during your life, keep your estate private, and allow you to make post-death decisions regarding how your assets will be distributed.

I do both probate and estate planning and while I'm more than happy to be serve as your estate's probate attorney, I'd much rather see you for your will and trust.

Special Power of Appointment Trusts

Unlike basic estate planning, asset protection is constantly evolving. Nevada spendthrift trust law remains the best in the country with the State Legislature frequently making tweaks and adjustments to keep it that way.

However, a new type of asset protection trust has become popular recently and one of its advantages is that it functions just as well in any jurisdiction. It's known as the Special Power of Appointment Trust (aka "SPA Trust"). It uses the power of appointment, a well-established estate planning tool, to allow the trustee of an irrevocable trust, in his full discretion, to appoint assets back to the grantor without sacrificing creditor protection.

This irrevocable spendthrift trust functions as most any other with an independent trustee endowed with discretionary powers of distribution to named beneficiaries. However, it does not require a "self-settled trust" situs like Nevada, Alaska, Delaware, etc., where local trust law allows the grantor to also be a beneficiary. Instead the grantor bestows a special power of appointment upon the trustee, who in turn, may choose to use that power of appointment to appoint assets back to the grantor. The technique does not jeopardize the asset protection of the trust thanks to the inherent prevention within this type of power of appointment that prohibits the "donee" of the power, in this case the trustee, from appointing assets to himself or his creditors. The "permissible appointee," here, the grantor, may receive assets without being a beneficiary, which in a majority of states, would eliminate any protection from creditors that trust is written to provide.

Noted asset protection attorney Lee McCullough, III has brought this tool to the attention of asset protection attorneys, including myself. You can read more about it at his website, or in the article published in the January issue of Estate Planning Magazine.

If you're interested in asset protection and/or what a SPA trust can do for you, call my office.

Protecting your money from yourself

A person is a spendthrift when they spend money recklessly or wastefully. A spendthrift trust is an irrevocable trust established on behalf of a beneficiary that gives full control to an independent trustee who will, in his sole discretion, determine when the beneficiary will receive distributions. It's done this way to protect a spendthrift beneficiary from recklessly or wastefully using the trust assets.

Two reasons why it's so desirable are 1) it provides protection of the trust assets from creditors of the trust creator (the grantor) because the assets are no longer in the grantor's possession. A creditor of a person can't reach what that person doesn't own. And 2) the beneficiary is prevented from spending the trust assets set aside for the beneficiary's benefit without the approval of the trustee. Unless the trustee actually makes a distribution, the beneficiary doesn't have a claim on the trust property.

This type of trust is most commonly used all over the country by parents who want asset protection and want to ensure their children use the trust assets wisely, taking advantage of the two benefits listed above. A unique use in Nevada, and another handful of states that allow self-settled spendthrift trusts, is for the grantor to place assets in the trust to protect them from himself or herself.

Nevada allows the grantor of the trust, the person who contributed the trust assets, to also be a beneficiary and trustee. I've had a couple cases recently where my client knew that if he had the cash, he would spend it unwisely. In both cases these clients had a lot to lose. They each wanted the safeguard of asset protection and the limitation of access to the cash in the trust. In both cases, I named the client as grantor and beneficiary. In one case we appointed a committee of family members as co-trustees and in the other, a bank as trustee. In both, we designed the trust with specific guidelines regarding the payment of living expenses, medical expenses, education and other related needs. We also set up an allowance, again on a discretionary basis, to be distributed to the grantor-beneficiary. The result was a limitation on the availability of funds to the literal spendthrift.

It's difficult to find an institution whether it be a bank or a life insurer or otherwise, who will create a product that doesn't provide access to deposited funds. Most likely they will discourage withdrawals from accounts like CDs or permanent life insurance policies with cash penalties, but access is still available. This is the best solution I'm aware of that will provide full asset protection and limitation of distributions to the original owner of the funds. Of course, it can't happen without the cooperation of the grantor, but when it works, the benefit is immense.

Funding a Revocable Trust

Signing your revocable family trust feels like a significant accomplishment. You've thought for years about getting it done and when you finally have your estate planning binder in hand, you feel a sense of satisfaction. However, the trust document won't do you any good unless you actually fund the trust.

I always tell my client to think of the trust as a box. I can help you construct the box, but unless you put your assets into it, it can't provide any of the benefits for which you created it. Funding the trust requires changing title and ownership of your assets from yourself to the name of the trust. Recording a new deed for your home, going into the bank to complete change of ownership forms, and changing the beneficiary designation on life insurance policies are the most common.

Part of the estate plan I prepare for you includes a table of assets. It's a grid displaying all of your property and how each should be titled. It helps you keep track of everything you own to ensure that all assets that should be in the trust make it into the trust. I will also assist you with these transfers, including preparing Nevada deeds and providing letters of instruction for title transfers of your other assets.

While actually drafting and signing the trust may the biggest task, funding the trust is the most important.

LLCs vs. S-Corporations

Last year I wrote a post about the benefits of using an LLC with an S-election as a business owner to limit employment taxes. The question I received in response was, why not just use a corporation instead?

An LLC is a state-created entity. The IRS doesn't recognize it as a specific taxable class and requires you to elect how it should be taxed or the IRS will give it default tax treatment based on the number of owners. I explained the benefits of choosing to be taxed as an S-corp in the post referenced above. So what's wrong with just creating an S-corp from the start? That depends on what you're looking for.

If you want simple maintenance, the LLC is the way to go. Maintenance, in this context, refers to keeping the formalities necessary to maintain corporate status. Losing corporate status means losing the veil between you as an individual and you as a business owner. That translates to personal assets and business assets being vulnerable in a lawsuit against either the individual or the business. Corporate formalities include naming a board of directors, performing meetings of the directors and officers and maintaining meeting minutes. You will also need a stock ledger and stock certificates. An LLC requires none of these.

An LLC is also more flexible. In single member LLCs this is less important, but for partnerships, the operating agreement is much more malleable than the bylaws of a corporation. An LLC allows for adjustable distributions between owners whereas the corporation must distribute in amounts proportional to stock ownership. That means that if Adam contributes 10% of the capital and Bill contributes 90%, Bill must receive 90% of the profits, even if Adam does 90% of the work going forward. An LLC operating agreement can adjust this.

An S-corporation has its advantages too. Its easier to transfer stock to new owners than it is to transfer LLC ownership interest. The requirement of annual meetings can be beneficial by forcing the owners to discuss business beyond the day to day operation. This site provides a nice comparison matrix of the three types of entities discussed here. A C-corporation is extremely advantageous for a whole host of reasons that are beyond the scope of this blog post. Suffice to say, I very rarely recommend C-corps for small business owners

To conclude, I want to emphasize the importance of a competent CPA to advise your business. When I create a simple LLC for a client, I explain that the LLC is a pass-through entity, meaning that all LLC income is reflected directly on the individual's tax return. On the other hand, LLCs with S-elections and corporations come with a lot more explanation and encouragement to retain a CPA. The tax treatment is unique, the formalities are more involved and rules are more complex. A good CPA will attend to all of this, plus help take advantage of many additional corporate benefits not addressed here.

Most Americans don't have a Will

Are you the type that feels validated when you aren't doing something you know you should and you discover you're actually part of the majority? Like failing to floss daily or not exercising enough? If so, this short article from CNBC.com will probably be a good read for you. To summarize, most Americans do not have wills. Read my website or attend one of my seminars and you'll hear a dozen reasons why you should, but what the article highlights is just how awful people believe drafting a will to be. According to the article quoting a survey, one out of three respondents would rather do their taxes, get a root canal, or give up sex for a month instead of creating or updating a will!

Estate planning is only as difficult and complicated as you want it to be. Meeting with an estate planning attorney will lift the burden and ease the confusion of drafting a will and trust. I've explained in a prior post the steps a typical client follows in meeting with me. The process is smooth and I've never had a client disappointed with the outcome. So join the superior minority who have taken action and created their wills. I'm confident you'll be surprised at how stress-free the task really is.

Piercing the corporate veil

Piercing the corporate veil (PCV) is the technique a creditor will use to attempt to reach the personal assets of a business owner whose business interest is on the wrong side of a judgment. In the context of small business owners, its a single member business or partnership that can't satisfy a debt or judgment incurred by the business with business assets. In such an occasion, assuming the debt or judgment is valid, the creditor is stopped when all business assets are liquidated. That is the benefit of the corporate (of LLC) form. It is a completely separate entity from the individual owner. However, if the creditor can prove the owner(s) abused the corporate form, the creditor may succeed in piercing the corporate veil and reaching the individual's personal assets to satisfy the debt. It's a worst case scenario for a business owner, but it can be avoided if specific formalities are followed, the entity is adequately capitalized and the entity is formed, funded, and carried on for a legitimate purpose.

First, don't get lazy. If you don't respect the division between yourself and your business, you can't expect a creditor to either. If you run a corporation, maintain annual meeting minutes, keep an accurate stock ledger, file your annual reports with the Secretary of State and pay your fees. An LLC requires less, but it's recommended to maintain similar administrative habits. Even more critical is keeping business bank accounts and expenses separate from personal debts. If you treat the business account as your personal piggy bank, forget about a court respecting the corporate identity.

Next, insure the business. That may include insuring the property, product liability insurance, and professional and general liability policies. A commercial umbrella policy doesn't hurt either. In the same way you insure your own car and home from liabilities that may arise, you must think the similarly about your business. Undercapitalization invites a successful veil piercing action. Adequately capitalizing your business such that it can reasonably meet prospective liabilities is a must and insurance is a terrific way to accomplish this.

Finally, forget about a court of equity respecting the corporate form when it was opened or funded for unethical or dishonest purposes. This may be a no-brainer, but stuffing real property or cash in an LLC to hide it from known creditors is never going to work.

When successful veil piercing happens, frequently it's the result of a lackadaisical, ignorant or dishonest owner treating the business as an alter ego of himself. If you think of the business as a distinct and separate individual from yourself and deal with it as such (don't steal from its accounts, contract with it at arms length, etc.), a lot of the mistakes that lead to veil piercing can be avoided.

Health care powers of attorney are more critical than ever

The US Department of Health and Human and Services has been ramping up their enforcement of HIPAA privacy rules as of late. Most recently significant fines have been levied against UCLA Medical Center. What this means to you is that health care providers are going to scrutinize ever more who receives your personal health information. In general, that's good news. The primary purpose of HIPAA is to protect your confidential health information. However, there are times when you want others to have access to your that information. Hospitals will be less likely to cooperate (to some extent out of fear of incurring the wrath of the USDHHS) unless you have formally authorized it.

That's where a well-drafted health care power of attorney comes in. Any time you check in to a hospital, they have you complete a stack of forms. Among them is a HIPAA waiver for identified parties. However, if you enter a hospital in an incapacitated condition, obviously you're not completing those forms. Having done so in advance as part of your estate plan will alleviate the issues that may arise. Moreover, completing those intake forms upon entry to a hospital is rarely done in a fully lucid state of mind anyway, since most hospital stays are not initiated deliberately. By completing a health care directive or medical power of attorney, you will have made all the pertinent decisions in advance, free of the stress of the hospital waiting room.

Choosing a retirement account

I don't often advise my clients on choosing a retirement account to fund. Your financial planner is usually in a better position to advise. Instead I focus on the impact to your estate planning after the fact. Of course, this knowledge will help inform you as to which is your best option, but ultimately I will leave that decision to you and your financial planner.

The above notwithstanding, I can't help but point out this IRA matrix found on Wikipedia. Generally, Wikipedia is a great source for objective (and generally correct) information. I believe this to be no exception. Apply your unique circumstances against this table to help guide you to the right account.

One thing I'd like to point out is about seven rows from the top of the table in the "Forced Distributions" row. Notice that Roth IRAs do not require forced distributions. For estate planning, this can be extremely valuable. While generally the guidelines are drawn up so that your retirement account is used up before you die based on actuarial tables and effected through Required Minimum Distributions ("RMDs"), Roth IRAs do not require distributions during the contributor's life. This allows a Roth IRA owner to pass on her account to her children who can withdraw tax-free (Roth IRAs are built on after-tax contributions). Naming an IRA trust as a beneficiary where the oldest beneficiary is relatively young, can allow the account to grow substantially. Since the the distribution rate is based on the life expectancy of the eldest trust beneficiary, the minimum payouts can be minimal depending on the beneficiary's age.

Over time, as payouts are made to the trust, the funds may be reinvested and held based on the discretion of the trustee and distributed for certain life events and/or at different ages. A good article ran in Forbes a while back extolling the virtues of such an arrangement.

Of course such a strategy should be examined on a case by case basis, but it's just one more factor to consider when creating and funding that all-important retirement account.

The value of an independent trustee on your asset protection trust

When establishing an asset protection trust, I advise my clients to retain an independent professional trustee in Nevada with limited duties in addition to the trustee they have chosen who will carry the bulk of the responsibility. Here are a few reasons why:

1) If the Nevada resident settlor ever leaves the state, establishing a domicile elsewhere, then the settlor risks losing Nevada as the trust situs. NRS 166.015(1)(c) requires the settlor to be domiciled in Nevada for NRS 166 to govern the trust. Alternatively, the trust property may be located in Nevada, but as the years go by, Nevada property may be sold and accounts may be moved out of state, so I don't feel comfortable relying on those provisions alone. Moreover, if the trust is self-settled then the Nevada property provisions don't apply. The safer option is to take advantage of paragraph (d) in that statute that provides for a "qualified person" trustee (aka Nevada trustee) who has limited powers such as maintaining trust records and handling some trust administration. No matter what becomes of the trust property or where the settlor is domiciled, the trust will remain a "Nevada Trust."

2) A Nevada trustee will add another layer of legitimacy as a result of the trustee's independent relationship with the settlor. Unlike the appointed investment trustee, the Nevada trustee has no prior relationship with the settlor. In exchange for a fee agreed upon between the settlor and the trustee, the Nevada trustee will fill his or her role from a distance without any personal ties to the settlor.

3) The Nevada trustee's job description includes duties that might otherwise be overlooked. If a note is owed by the trust, the trustee will maintain an amortization schedule to keep track of payments. The trustee will arrange for tax returns to be filed and maintain all trust records. In my opinion the value of the trustee's administrative supervision far exceeds the monetary cost to retain the trustee.

Ultimately it's the client's decision whether to appoint a Nevada trustee since it's not mandatory, provided the other requirements in NRS 166.015 are met. But when the purpose of the trust is to protect significant and valuable assets against all claims, any additional layers of available, nonsuperfluous protection should be investigated and considered.