By: Jeremy Spackman, Esq.
Since 1997, 13 states have enacted laws permitting self-settled trusts (often referred to as “asset protection trusts”). A self-settled trust is one wherein the settlor establishes a trust in which the settlor is a permissible beneficiary and trust assets are also protected from the creditors of the settlor. Not all jurisdictions are equal; therefore, when a client is contemplating creating a self settled asset protection trust, it is imperative to go to the jurisdiction with the most favorable laws. The following chart gives a state by state ranking of the various asset protection trust states:
As reflected in the chart, Nevada offers several key advantages and therefore should always be the go to state for creating and forming a self settled trust. Specifically, Nevada (along with South Dakota) has the shortest statute of limitations period, which is two years. This means, assuming there are no pre-existing creditor issues, two years from the date assets are transferred into the trust they should be protected from the settlors creditors (assuming there are no fraudulent conveyance issues). Further, Nevada is the only jurisdiction that does not provide for exception creditors. All other jurisdictions provide for some type of exception creditors, such as divorcing spouses or preexisting torts. Essentially, this means that in other jurisdictions, even if you have made it past the statute of limitations and there are no fraudulent conveyance issues, the exception creditor could still pierce through the trust. In Nevada this would not happen because there are no exception creditors.
Under Nevada law, the settlor can also serve as investment trustee over trust assets. Therefore, the settlor retains control of trust assets. A second trustee will be appointed to serve as distribution trustee. In order to use Nevada jurisdiction, at least one trustee needs to be a Nevada resident or bank or trust company. The settlor can also retain a veto power over distributions to trust beneficiaries other than the settlor and can also retain a power of appointment, which allows the settlor to re-write the terms of the trust in the future if necessary.
Because the Nevada asset protection trust is “invisible” for the first two years, it is important to combine the trust with one or more limited liability companies (LLCs) to add a second layer of protection. The LLC should be formed in a state, such as Nevada, that makes the charging order the exclusive remedy of a judgment creditor. A charging order is essentially a lien. Therefore, if the settlor is sued in the first two years, all the creditor can get is a charging order over the LLC interest. The creditor cannot force a distribution or take over management of the LLC assets.
To date, self-settled trusts have not been fully challenged through the court system, therefore all clients should be aware that asset protection planning is not a guaranty that a creditor or potential creditor will not be able to get a judgment against you and take your assets in satisfaction of the judgment. However, asset protection planning should put the client in a better position for settlement and is generally better than the alternative of not engaging in any such planning. A well drafted self settled trust combined with one or more LLCs can provide the client with a high degree of asset protection.