Recent announcements on Wall Street have left many Americans wondering about their financial security. As Americans face unprecedented challenges in the economy and an uncertain political climate in Washington, many hard working men and women are concerned about the safety and security of their assets.
Up until a few years ago, an individual in the United States could not establish a domestic trust that would shield his or her assets from potential creditors. To create such an instrument, a person would have to travel to a foreign jurisdiction such as the Isle of Nevis or the Cook Islands that had enacted favorable legislation that allowed the creation of such trusts; and where local tribunals had established a precedent of not overturning these trusts which would have the effect of allowing creditors to attach trust assets. As one can easily imagine, the creation and maintenance of such trusts is extremely expensive and thus available to only a select few.
All of this began to change several years ago when the Alaska legislature enacted the Alaska Trust Act of 1997 which allows the creation of self settled spendthrift trusts. A self settled spendthrift trust is defined as a trust formed for the benefit of the person who created the trust, with spendthrift provisions that attempt to disallow a creditor from invading the trust assets or forcing a distribution to the beneficiary that the creditor would then seize.
The State of Nevada quickly followed suit by enacting its own statute in 1999. The Nevada statute made the creation of such trusts even more attractive by shortening the look back period, the amount of time an asset must be in a trust in order for the transfer to be considered legitimate, to only two years.
This is how a self settled spendthrift trust works. An individual with substantial assets wishes to shield these assets from potential creditors. The word "potential" is critical here because one cannot establish a self settled spendthrift trust to defraud known, identified creditors. In situations where a creditor has already been identified, certain techniques such as the homestead exemption and garnishment statutes may exist to protect some assets, but these methods vary from state to state and cannot provide the far reaching security of a self settled spendthrift trust.
If an individual feels he or she may benefit from the creation of a self settled spendthrift trust, he or she should consult an attorney qualified in advanced estate planning in a state, such as Nevada, that has a favorable statute. Even though the individual may not reside in Nevada, courts will uphold the validity of such a trust for a non-resident if a local trust protector is named. The trust protector is the individual or organization charged with overseeing the performance of the trustees and, in many cases, will be the attorney or law firm who drafted the trust.
Although a self settled spendthrift trust must be irrevocable in order to afford the maker, legally called the grantor or the settlor, with asset protection, the trust can be drafted in such a way that will allow the grantor or the beneficiary to reserve certain powers over trust affairs without affecting creditor protection. For example, the trust may name the grantor as one of the trustees. A trustee is an individual or organization charged with the operation of the trust. The trustee makes the day to day decisions regarding the administration of a trust.
Since distributions under the trust are made at the discretion of the trustee, the trust contains a spendthrift provision that specifically states that distributions may not be made for the benefit of a beneficiary’s creditor, and since the trust is irrevocable, a court cannot order a trustee to make a distribution or compel the dissolution of the trust.
For an added layer of security, client assets may also be re-titled in the name of a newly formed limited liability company and a membership interest in the limited liability company may be assigned to the trust.
Domestic self settled spendthrift trusts are an economical alternative to sending money offshore. While maintaining the asset protection advantages of a foreign trust, they minimize the risk associated with depositing assets in other countries. In conjunction with a comprehensive estate planning strategy, a self settled spendthrift trust can be an effective mechanism for sheltering assets from creditors that may arise in the future. In today’s uncertain financial environment, asset protection trusts are likely to become even more popular instruments for the protection of savings and assets of hard working individuals across the country.
To learn more about Nevada self settled spendthrift trusts, you may contact Kenneth M. Roberts, Esq. at Dempsey, Roberts & Smith, Ltd.
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Copyright: Dempsey, Roberts & Smith, Ltd. 2012.