FAQ: Asset Protection Trusts
Certain kinds of trusts are particularly effective at guarding against asset sale and creditor claims. Self-settled spendthrift trusts (SSST) are one of these instruments. Below are answers to some frequently asked questions.
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Q. What is a self-settled spendthrift trust (SSST)?
A. A self-settled spendthrift trust is a trust created pursuant to Nevada Revised Statutes Chapter 166. A spendthrift trust contains certain restrictions on the beneficiaries’ ability to sell, assign or convey their interest in the trust, as well as limitations on the ability of the beneficiaries’ creditors to attach the trust property.
A self-settled spendthrift trust contains spendthrift provisions for the benefit of the settlor (the person creating the trust). Nevada law states that “the trustee of a spendthrift trust is required to disregard and defeat every assignment or other act, voluntary or involuntary, that is attempted contrary to the provisions of [the Spendthrift Trust Act of Nevada].” Only a handful of states permit someone to set up a spendthrift trust for his or her own benefit. Fortunately, Nevada, which passed the Spendthrift Trust Act of Nevada in 1999, is one of those states.
Q. What are the benefits of establishing an SSST?
A. The major benefit of establishing and funding an SSST is that the assets transferred into and owned by the SSST are insulated from your creditors. This is a tremendous advantage for individuals who are in high-risk professions such as doctors or business owners who are at risk of lawsuits and wish to shield their assets from possible future liabilities.
Q. Does an SSST protect against existing creditors?
A. No. The statute specifically states that a person may not establish an SSST with the intent to hinder, delay or defraud known creditors. However, the statute also states that known creditors only have a two-year window within which to challenge any transfer of property into an SSST. Thus, each transfer of property to the SSST appears to be within a statutory safe harbor after the two-year anniversary of the transfer.
Q. Can I retain control of my assets with an SSST?
A. The use of an SSST typically involves forming a board of trustees. You may serve as one of the trustees. The powers you may hold as trustee include the ability to control the manner in which the assets of the trust are invested. You may also have veto power over the distribution of any assets of the trust to other beneficiaries.
Q. I already have a revocable living trust. Doesn’t that protect my assets?
A. No. This is one of the most widespread misconceptions about revocable living trusts. While your revocable living trust may contain a spendthrift provision, it will apply only to protect the other beneficiaries of the trust. A spendthrift trust must comply with NRS Chapter 166 for the settlor of the trust to benefit from a spendthrift provision.
Q. What are the disadvantages to using an SSST?
A. The Nevada Legislature created the Spendthrift Trust Act of Nevada and provided the opportunity for you to create an asset protection trust for your own benefit. Unfortunately, in exchange for granting that invaluable protection from creditors, the Legislature put certain restrictions on SSSTs that make them unsuitable for some people. For example, the SSST is an irrevocable trust. Once the trust is established, you cannot revoke it and take all of the assets back.
Does this mean you cannot change the beneficiaries of the trust? No, it does not. While the trust is irrevocable, there are several planning opportunities within the framework of the statute that allow you to modify some beneficial interests after the trust has been created.
Also, the trust instrument may not require that any part of the income or principal of the trust be distributed back to the settlor. To meet this requirement, the settlor may not have the power to make distributions from the trust to him/herself. One of the members of the board of trustees is typically appointed and empowered with the sole responsibility of making distributions to the settlor. This trustee cannot be the settlor and should not be the settlor’s spouse.
Further, the SSST is a highly technical and sophisticated instrument. Failure to have the SSST drafted by a competent attorney could result in a trust that does not provide the asset protection you are seeking.
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For experienced handling of an advanced estate planning matter, contact our Las Vegas trusts attorney. We serve clients throughout southern Nevada who require legal advice regarding wills, probate, irrevocable life insurance trusts (ILITs), qualified personal residence trusts (QPRTs) and FLIPs.