The number and size of lawsuits brought against wealthy individuals increases every year. With this increase in lawsuits comes an increasing need for people to protect their assets. Many people fail to address this need until after the liability occurs. Unfortunately, many asset protection opportunities are no longer available at such time because of fraudulent conveyance laws.
Nevada is one of only a limited number of states that allow a person to create an asset protection trust for oneself. This Nevada law became effective for trusts created on or after October 1, 1999, yet many doctors, business owners, corporate executives and other high net worth individuals still have not taken advantage of this opportunity.
This law is very similar to those laws in offshore jurisdictions that have existed for many years, yet the costs to establish and maintain a Nevada asset protection trust are significantly lower than the costs required for an offshore asset protection trust. In addition, the probability of successfully protecting the trust assets is significantly greater for a Nevada resident who uses a Nevada asset protection trust as opposed to an offshore asset protection trust given the certainty of the statutes. Residents of states other than Nevada do not have the same degree of certainty, but the majority of planners seem to believe that non-residents will also receive the intended protection. Residents of other states should consider both the Nevada asset protection trust and the foreign asset protection trust. At a minimum, either type of trust should make a potential creditor think twice about trying to sue given that recovering assets from either of these types of asset protection trusts is an uphill battle.
Assets transferred to a Nevada asset protection trust are generally protected from the transferor’s creditors two years after the transfer to the trust. Nevada law is superior to the laws of the other domestic asset protection jurisdictions in this regard since the required waiting period in most of the other jurisdictions is four years.
The waiting period is different with respect to pre-existing creditors of the transferor. With respect to pre-existing creditors, the waiting period is the longer of two years from the date of the transfer to the trust or six months from the date the creditor discovered the transfer or reasonably should have discovered the transfer. This is the reason why it is of utmost important that the trust be established well before a liability occurs. Although many people take care of this possibility in advance, many others put it off until the liability occurs.
The trust must be irrevocable in order to provide the desired protection. Although the trust is irrevocable, it can be modified by the trust creator at death if the trust is drafted to allow the trust creator to change the beneficiaries at death. Therefore, the Nevada asset protection trust can be designed to be very flexible despite being irrevocable.
The Nevada asset protection trust is generally combined with one or more Nevada limited liability companies in order to provide a second layer of protection from creditors called charging order protection. A “charging order” is a type of lien that gives the lien holder only an economic interest over the interest in the limited liability company to which the lien has attached. Since Nevada law makes the charging order the exclusive remedy of a judgment creditor, the creditor is unable to force a distribution from the limited liability company or make any investment decisions over the limited liability company assets. This limited remedy is undesirable to most creditors and therefore forces most judgment creditors to settle their lawsuits for significantly less than they would have otherwise been able to collect. This additional protection, when combined with a Nevada asset protection trust, results in a nearly insurmountable hurdle for a creditor.