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Nevada’s Self-Settled Spendthrift Trust Laws Further Strengthened with the Passage of Senate Bill 221 for Asset Protection Trusts!

Nevada has consistently been recognized as a best state for asset protection trusts. This distinction is largely due to the advantages of Nevada’s self-settled spendthrift trust laws, such as: the shortest statute of limitations period of the domestic asset protection states and no statutory exceptions enabling particular creditors to pierce the trust.

Nevertheless, on June 4, 2011, the Governor of Nevada signed into law Senate Bill 221, which makes Nevada’s already premier asset protection trust laws even stronger.

The changes to the statutes, effective October 1, 2011, are summarized as follows:

TACKING OF STATUTE OF LIMITATIONS PERIOD

1. Tacking of statute of limitations period for asset protection trusts that change situs to Nevada (Section 202 of the bill)

Senate Bill 221 includes a key tacking provision that enables the trustee of an asset protection trust established in a less attractive jurisdiction to move the trust to Nevada and take advantage of Nevada’s short two-year statute of limitations without restarting the clock. Unlike Nevada, most other jurisdictions that allow self-settled spendthrift trusts have a four-year statute of limitations before the trust assets are protected.

LIMITATIONS OF ACTIONS AGAINST SPENDTHRIFT TRUSTS

2. Limitations of actions against the spendthrift trust (Section 206 of the bill)

Unlike other jurisdictions, Nevada’s asset protection laws do not include statutory exceptions for child support, divorcing spouses, and preexisting tort creditors. Nevertheless, Senate Bill 221 has amended Nevada’s laws to make it even more challenging for a creditor to bring an action with respect to a transfer of property into a self-settled spendthrift trust. Indeed, in order to do so, the new bill provides that a creditor must prove “by clear and convincing evidence” that the transfer of property was fraudulent or “violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor.”

Furthermore, Senate Bill 221 confirms that no action of any kind can be brought at law or in equity against the trustee of a spendthrift trust if, as of the date the action is brought, an action by a creditor with respect to a transfer to the spendthrift trust would be barred. Previously, it was uncertain whether Nevada’s four-year statute of limitations for fraudulent transfers would negate Nevada’s two-year statute of limitations for spendthrift trusts.

LIMITED LIABILITY OF TRUSTEE

3. Limited liability of trustee (Section 206 of the bill)

Unlike other jurisdictions, Nevada’s asset protection laws do not include statutory exceptions for child support, divorcing spouses, and preexisting tort creditors. Nevertheless, Senate Bill 221 has amended Nevada’s laws to make it even more challenging for a creditor to bring an action with respect to a transfer of property into a self-settled spendthrift trust. Indeed, in order to do so, the new bill provides that a creditor must prove “by clear and convincing evidence” that the transfer of property was fraudulent or “violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor.”

Furthermore, Senate Bill 221 confirms that no action of any kind can be brought at law or in equity against the trustee of a spendthrift trust if, as of the date the action is brought, an action by a creditor with respect to a transfer to the spendthrift trust would be barred. Previously, it was uncertain whether Nevada’s four-year statute of limitations for fraudulent transfers would negate Nevada’s two-year statute of limitations for spendthrift trusts.

EXPANSION OF TYPES OF TRUSTS

4. Expansion of types of trusts that may provide asset protection (Section 205 of the bill)

Senate Bill 221 specifically permits charitable remainder trusts, grantor retained annuity trusts, and qualified personal residence trusts to qualify as spendthrift trusts.

IMPLIED AGREEMENTS BY TRUSTEE

5. Implied agreements by trustee are void (Section 203 of the bill)

Private Letter Ruling 200944002, released by the IRS on October 30, 2009, held that the self-settled spendthrift trust at issue, which was structured as a completed gift for gift tax purposes, would not be included in the grantor’s gross estate. Although non-binding, the ruling offers guidance that the assets of an appropriately structured self-settled spendthrift trust will not be per se includible in the grantor’s gross estate.

Nevertheless, the IRS cautioned that it was excepting from the ruling “an understanding or pre-existing arrangement between Grantor and trustee” that could otherwise cause the trust assets to be includible in the grantor’s gross estate under IRC § 2036.

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