Why to Choose Nevada When Forming an Asset Protection Trust
When seeking to protect your assets from creditors, you have several options available. One of these options—and one of the best options in many cases—is forming an asset protection trust.
But, deciding that you should form an asset protection trust is just the first step in the process. Once you decide that an asset protection trust makes sense for your individual circumstances, you then need to decide where to form your trust in order to realize the most benefits possible.
Some high-net-worth individuals will realize the most benefits by forming their asset protection trusts overseas. Countries like Belize, the Cayman Islands, the Cook Islands, Nevis, and Luxembourg have adopted laws that are extremely favorable for asset protection purposes. But, going offshore won’t always be necessary. When it isn’t necessary, the question of where to form an asset protection trust often has a single answer: Nevada.
Why is Nevada best for forming a domestic asset protection trust? Here is an overview of what you need to know:
The Benefits of Forming a Nevada Asset Protection Trust
Each state has its own trust laws. While many states have adopted some form of the Uniform Trust Code, there are some notable exceptions—and Nevada is one of them. Nevada’s trust laws are unique from those in every other state, and the unique aspects of Nevada’s trust laws are particularly beneficial for individuals seeking asset protection.
In general, trusts provide asset protection by creating a barrier between the individual who forms the trust (the “grantor”) and the grantor’s assets. Here’s how it works:
- Step 1: The grantor forms an asset protection trust.
- Step 2: The grantor funds the trust with assets from his or her estate.
- Step 3: The trust takes ownership of these assets, removing them from the grantor’s estate.
And that’s essentially it. Of course, there’s more to it—each of the steps listed above involves multiple sub-steps that all require careful and custom-tailored consideration—and grantors can (and should) dictate the terms of their asset protection trusts during the formation process. But, the basic idea is that by transferring ownership of the grantor’s assets to the trust, these assets are no longer subject to the claims of the grantor’s creditors.
Now, why Nevada?
While the fundamentals of asset protection trusts are the same in all states that have asset protection trust laws, Nevada’s trust laws provide several unique benefits. These benefits include (but are not limited to):
1. A Shorter Statute of Limitations
When you form a domestic asset protection trust in the United States, the assets you place into the trust are not protected immediately. Instead, your creditors (both present and future) have a limited period of time to file claims and “claw back” assets placed into the trust.
In many states, the statute of limitations for new creditors is four years from the date of the transfer, while existing creditors typically have the longer of four years from the date of the transfer or one year from the date that they learned (or should have learned) of their claim. However, in Nevada, these limitations periods are reduced to two years and six months, respectively. This is a significant benefit, and this alone is enough of a reason to choose Nevada in many cases.
2. No Exception Creditors
In most states, the benefits afforded by asset protection trusts are subject to certain exceptions. Specifically, certain types of creditors (referred to as “exception creditors”) have the right to access trust assets even after the statute of limitations expires. Common examples of exception creditors include:
- Former spouses with divorce-related claims (including claims for marital property and alimony)
- Former spouses and partners with child support claims
- Preexisting tort creditors (i.e., personal injury and wrongful death claimants)
However, under Nevada’s asset protection trust law, there are no exception creditors. As a result, once the statute of limitations expires, all creditors are barred from asserting claims against the trust’s assets. While this may or may not be a concern given your present circumstances, your circumstances could change in the future; and, in any case, the other benefits of forming your asset protection trust in Nevada will warrant doing so in most cases.
3. Limited Formation Requirements
Another benefit of forming a Nevada asset protection trust is that Nevada’s requirements for forming a valid trust are fairly minimal. In fact, to be properly formed, a Nevada asset protection trust only needs to meet three basic requirements:
- The trust’s formation documents cannot require that income or principal be distributed to the grantor (though the trustee, who the grantor selects, can have discretion to make distributions to the grantor);
- The trust must have at least one Nevada trustee; and,
- The trust must not be formed for the purpose of defrauding or hindering known creditors.
As long as these three basic requirements are satisfied, an asset protection trust formed in Nevada will be fully recognized and provide the full protections afforded by Nevada’s asset protection trust statutes. By working with experienced counsel, high-net-worth individuals seeking to protect their assets can use their trust documentation to demonstrate compliance with these statutory requirements and establish defenses should a creditor seek to challenge their trust’s validity in the future.
4. Control Over Trust Investments and Distributions
Asset protection trusts must generally have two (or at least two) trustees: an investment trustee and a distribution trustee. Many states prohibit the grantor of an asset protection trust from serving in either of these roles.
But, not Nevada. Under Nevada’s asset protection laws, a grantor is able to serve as investment trustee. This means that the grantor can retain control of all investment-related decisions, including the divestiture of trust assets and reinvestment of proceeds. Additionally, while grantors are not permitted to serve as their own distribution trustees, they do have the ability to reserve veto power over distribution trustees’ decisions. As a result, by serving as investment trustee (and thus retaining signing authority over the trust’s accounts), grantors can effectively retain full control over the assets that they place into their asset protection trusts.
Grantors in Nevada also enjoy broad “appointment” powers. These powers allow grantors to designate new beneficiaries and to modify the terms of their trusts. Thus, while asset protection trusts are “irrevocable” as a form of spendthrift trust, in practice, grantors who form Nevada asset protection trusts retain the flexibility they need to adapt to changes in their financial and family circumstances over time.
5. Access to Trust Assets
In addition to retaining substantial control over the investment, reinvestment, and distribution of trust assets, grantors of Nevada asset protection trusts also retain the ability to use the property held by their trusts with very few restrictions. In other states, in order to use trust assets, grantors may need to work with their trustees to distribute these assets back out of the trust—thus exposing them to creditor claims. In Nevada, this isn’t required, and grantors also are not required to pay rent in exchange for using assets held by their trusts. As a result, grantors can achieve the asset protection benefits they desire without losing the ability to use their protected assets during their lifetime.
6. No State Income Tax
Nevada is one of the limited number of states that does not have an individual or corporate income tax. This means that income generated by the assets held in a Nevada asset protection trust is subject to federal taxation only. With several states having income tax rates in excess of 10% (and many having income tax rates in the 8% to 9% range), this is another significant benefit.
7. The Option to Form a Dynasty Trust
Finally, Nevada’s asset protection trust laws give grantors the option of forming what is known as a Dynasty Trust. Essentially, this is a trust that remains in effect far past the grantor’s lifetime rather than terminating at the time of the grantor’s death or the death of the grantor’s children or grandchildren. The benefit of forming a Dynasty Trust in Nevada is that it can defer estate tax liability for up to 365 years. Combined with the flexibility that Nevada asset protection trusts offer, this means that multiple generations can benefit from the trust’s asset protection and tax benefits without the need to establish additional trusts or take additional steps in the future.
While any one of these benefits can be reason enough to choose Nevada when forming an asset protection trust, the combination of these benefits makes Nevada the go-to jurisdiction for forming asset protection trusts in most cases.
Speak with a Senior Asset Protection Lawyer at Oberheiden P.C.
Would you like to know more about forming a Nevada asset protection trust? If so, we invite you to contact us for a complimentary initial consultation. To discuss your asset protection needs with a senior lawyer at Oberheiden P.C. in confidence, please call 888-680-1745 or tell us how we can reach you online today.