Domestic Asset Protection Trusts



Over the past several years, many professionals have become much more sensitive to the risk of lawsuits and other serious economic threats. For these professionals, asset protection has become a vital part of their estate plan. The relationship between asset protection and estate planning is clear: it is necessary to protect assets from creditors in order to maximize the wealth that is ultimately transferred to beneficiaries.

One method that has been tried to varying degrees of success is to transfer assets to “offshore” trusts, which are simply trusts that are established pursuant to the laws of a foreign jurisdiction. Effective as they may be, the cost of establishing and maintaining offshore trusts is in many cases simply too much to consider it a realistic option.

In some states, legislation has been recently enacted that may allow these professionals to at least partially shield their assets from claims made by creditors by transferring the assets to a domestic self-settled spendthrift trust. A spendthrift trust is a trust that contains a provision that prohibits the beneficiary of the trust from assigning his or her interest in the trust, which prevents the beneficiary’s creditors from reaching the interest. Most states do not allow this spendthrift protection if the trust was “self-settled”, meaning the person creating and funding the trust (the “settler”) is also the beneficiary of the trust.

Nevada is one of only a few states that have enacted such legislation with the objective of becoming a venue for asset protection trusts. In order to create a Nevada Asset Protection Trust (“NAPT”), several specific statutory requirements must be met. In addition, there is generally a two-year window after assets have been transferred to the NAPT before the assets would no longer be available to creditors. As is always the case when discussing asset protection strategies, it is important that the planning takes place before a liability is incurred, while the waters are calm, rather than after, when the creditors are swarming.

While a NAPT is usually less expensive than an offshore trust, it is important to be aware of the limitations that arise due to their untested nature. For example, it is unclear whether Arizona courts are constitutionally mandated to give “full faith and credit” to Nevada’s trust laws when a creditor sues someone that owns property located in Arizona that is titled in a NAPT. It is also unlikely that a person can protect assets from the IRS by transferring them into a NAPT.

Clearly, there is no guarantee that a NAPT will provide bullet-proof asset protection. However, if the settler and the appointed trustee fully comply with the provisions of the Nevada statutes, the level of protection provided could provide a significant barrier between the settlor’s creditors and assets.