Asset protection planning is a process that involves organizing one’s affairs to prevent the loss of wealth due to legal actions, divorce, and taxes. To achieve this goal, many people have created asset protection trusts, which are legal arrangements that allow individuals to safeguard their assets, such as their home or other property, business, retirement funds, and children’s education savings. One type of asset protection trust that is available is the Nevada Asset Protection Trust (“NAPT“).
The NAPT is designed to protect assets from creditors by creating a legal barrier between the assets held in trust and the creditors of the trust’s beneficiaries. The NAPT is structured so that the assets are held by a trustee, who is responsible for managing and distributing the assets according to the terms of the trust.
Under the Nevada Spendthrift Trust Act, which governs the NAPT, the trust’s beneficiaries are prohibited from transferring the trust property either voluntarily or involuntarily. This means that the beneficiaries cannot force the trustee to transfer the trust property, and the trustee cannot be compelled to transfer the trust property to a creditor of the beneficiary.
To further protect the beneficiary’s interest in the trust, the Nevada Spendthrift Trust Act requires the trustee to disregard and defeat any assignment or other act that is contrary to the provisions of the act, whether voluntary or involuntary. This includes attempts by the beneficiary or a creditor to transfer the trust property. In other words, the Nevada Spendthrift Trust Act provides protections to ensure that the trust property is not transferred to a creditor of the beneficiary, even if the beneficiary or creditor attempts to do so. The act requires the trustee to take action to prevent any such transfer and to protect the trust property for the benefit of the beneficiary.
The specific provisions of the Nevada Spendthrift Trust Act that protect the interests of the beneficiaries of a Nevada asset protection trust (NAPT) from creditors are found in Nevada Revised Statutes (NRS) Section 166.020:
“The interest of a beneficiary in a trust is not subject to attachment, garnishment, legal process or other creditor’s claim, whether the claim arises before or after the creation of the trust, unless the beneficiary has an enforceable right to receive the principal or income of the trust. The trustee shall disregard and defeat every assignment or other act, whether voluntary or involuntary, that is contrary to the provisions of this section.“
This provision of the Nevada Spendthrift Trust Act prohibits creditors from attaching, garnishing, or otherwise seeking to claim the interest of a beneficiary in a trust, unless the beneficiary has a legally enforceable right to receive the principal or income of the trust. It also requires the trustee to take action to prevent any assignment or other act that is contrary to this protection of the beneficiary’s interest in the trust.
Overall, the NAPT is designed to provide a legal shield against creditors by separating the trust assets from the creditors of the trust’s beneficiaries and limiting the ability of those creditors to access or seize the trust assets. Of course, it is important to note that the effectiveness of the NAPT at protecting assets from creditors may depend on a variety of factors, including the specific laws and regulations that apply to the trust in the jurisdiction where it is recognized.
In order for a NAPT to be effective at protecting the grantor’s assets from creditors, it must meet certain requirements. Specifically, the NAPT must be irrevocable, must not require the distribution of any income or principal to the grantor, must not be created with the intention to hinder, delay, or defraud creditors, and must have at least one Nevada resident or Nevada-based bank or trust company serving as a trustee.
One of the primary advantages of Nevada’s NAPT law is that it provides a short time frame for creditors to challenge the transfer of assets to the trust. Under Nevada law, a creditor may not bring an action to set aside the transfer of assets to a NAPT if the creditor was a creditor at the time the transfer was made, unless the action is commenced within two years of the transfer or six months after the creditor discovers or reasonably should have discovered the transfer, whichever is later. If the creditor becomes a creditor after the transfer, the action must be commenced within two years of the transfer.
Overall, the NAPT can be a useful tool for those seeking to protect their assets from creditors, but it is important to carefully weigh the risks and benefits and work with experienced professionals to properly structure and administer the trust. By understanding the potential risks and taking steps to mitigate them, individuals can effectively use the NAPT as a means of asset protection.
