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Asset Protection Trusts


DOMESTIC ASSET PROTECTION TRUSTS

Perhaps the best Asset Protection tool that we have available to us in the United States is the Domestic Asset Protection Trust.  There are 6 states that have adopted an Asset Protection Trust law that enables individuals to create a trust that is designed to protect assets from future personal judgment creditors.  These asset protection trust laws are what are traditionally called "Spendthrift Trusts" and are found under each adopting state's Spendthrift Trust Statute.  More specifically, the Domestic Asset Protection Trusts are "Self-Settled Spendthrift Trusts they are typically designed so as to enable the "Settlor" (the person that creates the trust) to be the trustee and the beneficiary of the trust.  In other words, the Domestic Asset Protection Trusts are generally designed to enable the Settlor to stay in the driver's seat and maintain maximum control of the trust while fully benefiting from the trust as the beneficiary (this is unlike the traditional Irrevocable Trust where the settlor has to give up the trusteeship and all or most of the controls). 

States that have, to date, adopted a Self-Settled Spendthrift Trust law(Domestic Asset Protection Trust law) are: Nevada, Alaska, Delaware, Rhode Island, Oklahoma and Utah.  While the basic concept with these trust laws is the same, they do vary in some of the details and in how favorable they are to the person seeking the protection. 

The primary differences come down to a couple if issues:

(1) the exceptions that are carved out that could enable a judgment creditor to get to the assets of the trust (each of the Asset Protection Trust enacting states have 1 or more exceptions to what is otherwise intended to provide as bullet proof of protection as possible); and

(2) the length of time that the "window" is statutorily left open for a judgment creditor to be able to get into the trust to get at the assets of the trust (these open window periods are there with the intent to minimize a creditor from being defrauded and left without a remedy). 

So far, Nevada continues to lead the pack with the most favorable and protective Spendthrift Trust law. 

The Nevada Spendthrift Trust law enables the Settlor (aka: the Grantor or the Trustor - all synonomous terms meaning the person that creates the Trust) to be a Trustee of the Trust, as well as the Beneficiary of the Trust.  The Nevada Spendthrift Trust law specifies that, if the Settlor is a Trustee and the Beneficiary of the Trust, there must be a valid restraint on the Beneficiary's ability to force money or assets out of the Trust to himself/herself.  This "restraint" is usually accomplished by having at least one co-trustee of the Trust that is designated as a "Distribution Trustee".  The Distribution Trustee is appointed as the one with the authority to exercise the discretion to authorize or withhold authorization for distributions from the Trust to the Beneficiary of the Trust.  This Distribution Trustee issue is important, not only for purpose of complying with the statute's mandate, but because the statutory mandate is there for protective reasons that are beneficial to us.  The reason this Distribution Trustee issue is beneficial to us is that, if the Beneficiary had the power to demand and force distributions from the Trust to the Beneficiary, a court ultimately could order the Beneficiary to exercise that power in favor of a Judgment Creditor and they would end up with the distribution (which could be everything that is in the Trust).  Since distributions are discretionary in an independent 3rd party, distributions can't be forced out of the Trust to the beneficiary and diverted to a Judgment Creditor.  This is one of the primary protective aspects of the Spendthrift Trust. 

Under the Nevada Spendthrift Trust law, it is perfectly legitimate for the Settlor to be the Primary Trustee of the Trust with the primary transactional authority for the Trust.  The only limitation on the Settlor/Trustee's powers under the Nevada Spendthrift Trust law must be that the Settlor/Trustee cannot authorize or make any distribution to the Settlor/Beneficiary without the Distribution Trustee's authorization.  Otherwise, the Settlor, as Primary Trustee, may have the power to buy, sell, trade, transfer, invest on behalf of the Trust.  [Note that if the risks are higher, it may be warranted to go beyond the minimums of what the law requires and allocate fewer transactional powers to the Settlor.  For example, another person could be designated as the Primary Trustee with the transactional authority, while the Settlor is designated as a "Trust Advisor" and it is specified that the Primary Trustee must have the consent or authorization from the Investment Advisor before making any transaction for the Trust.  The Investment Advisor could also be endowed with the power to replace the Primary Trustee at any time for any reason or no reason at all in his/her discretion.] 

The primary reasons that the Nevada Spendthrift Trust is the most favorable and protective is that the Nevada Spendthrift Trust law has only one exception that could enable a Judgment Creditor to get to any asset of the Trust and the limitation period is limited to a short period of time (the shortest period of time of any of the other states that have a Self-Settled Spendthrift Trust law). 

The only exception under the Nevada Spendthrift Trust law that could enable someone to get to any asset of the Nevada Spendthrift Trust is a Fraudulent Transfer exception.  The way the Nevada Spendthrift Trust law reads, no one can get in to any asset of the Trust unless that creditor can prove that what was transferred from the Settlor/Judgment Debtor to the Spendthrift Trust was fraudulent as to that specific creditor at the time the transfer was made.  If the "transfer" is deemed by the court not to have been fraudulent as to the challenging creditor, the creditor will not be allowed access to the asset(s) that was transferred to the Trust.  In addition, no other creditor can piggy-back on any other creditor's case.  Just because fraudulent transfer may be proven as to one creditor against one or more of the Trust's assets, does not allow any other creditor to use that as a basis to make their own case.  Each challenging creditor has to make their own case that the "transfer" that they are complaining about to the Trust was fraudulent as to them specifically.  The fraudulent transfer basis is the only exception to the protection of the assets of the Trust under the Nevada Spendthrift Trust law. 

The time limit for any creditor to bring their fraudulent transfer case under the Nevada Spendthrift Trust law is 2 years from the time of the transfer (the "transfer" is the key issue, not the date of Trust formation), or, if an existing creditor at the time of the transfer, 2 years from the date of the transfer or the date that the creditor knew or reasonably should have known of the transfer.  If the property that was transferred to the trust was of public record (such as real estate), the date of the recording of the transfer in the public record is legally deemed to be the date that the creditor was on notice of the transfer. 

All of the other states that have a Self-Settled Spendthrift Trust law have at least one more exception to the otherwise total protection intended for the assets of the Spendthrift Trust.  For example, some states have an exception for a Personal Injury Judgment. Some have exceptions for spousal or familial support.  And some, such as Utah, have more extensive lists of exceptions carved out in the law that could enable a Judgment Creditor to get to the assets of the Trust. 

We will be looking at comparisons with other states Self-Settled Spendthrift Trust laws in future writings to come soon. 

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