Nevada and 12 other states provide various legislation to help individuals protect their assets through the use of trusts. More states have begun to embrace these special kinds of trusts in order to build upon existing financial planning methods and to attract foreign capital. Asset protection trusts do not actually hide assets or avoid income taxes. However, they may be able to reduce the impact of income taxes in certain limited circumstances or in conjunction with other estate planning methods.
Each state law is different from the laws of other states. However, all of the states that use this type of trust provide for protection for the settlor for self-settled trusts. Additionally, states typically shorten the statute of limitations for challenges that are made regarding the establishment of the asset-protected trust. These states have also limited the application of fraudulent transfer laws.
Other states have found that these special trusts go against public policy. Nevada contains no exception for creditors. Additionally, it only has a two-year statute of limitations for future creditors. Other states may have longer statutes of limitations, a specific amount that they protect or exceptions for spousal or child support. Individuals who use asset-protection trusts may also use a limited liability entity that do not offend public policy. However, at least one state supreme court has ruled that a single-member LLC could not be protected in this form. No United States Supreme Court opinion has been issued that proves whether a domestic asset protection trust will be effective.
Individuals who believe that their assets may be targeted by creditors or other individuals may choose to establish an asset-protection trust. This financial vehicle may be used in a broader estate plan. Individuals may have an estate planning lawyer set up an asset-protection trust and other legal documents to make such an estate plan.
Source: Money News, “More States Embrace Asset-Protection Trusts“, Denis Kleinfeld, December 21, 2014