We all have heard the overused phrase that “we live in a litigious society.” For many of us, being a named defendant in a lawsuit can be compared to being stuck in a lightning storm with an umbrella – an unsettling proposition. Even if a person believes that he or she is not at fault for another’s damages or injuries, that person is relying on what many believe is an imperfect justice system to find the truth.
Some believe that his or her auto or homeowner’s insurance, professional liability insurance, or an umbrella insurance policy will satisfy any potential liability that could arise in his or her personal or professional life. However, there are numerous judgments that have exceeded the coverage limits provided by an individual’s personal liability insurance. Furthermore, it appears that the cost for professional liability insurance and umbrella insurance continually increases while such coverage is becoming more narrow and limited in its protection from the potential range of tort liability. Typically, professional liability insurance and umbrella insurance does not cover claims arising out of employment related lawsuits, breach of contract claims, or claims arising out of a business endeavor. If the court assesses punitive damages, those damages will not be paid by a person’s umbrella insurance.
Nevada has been nationally recognized as a leader in passing powerful asset protection laws. A number of these laws provide automatic protection with little or no action required to be made on behalf of the individual. Some of these statutorily protected assets include money, not exceeding $500,000 in present value, held in an IRA and all money, benefits, privileges or immunities accruing or in any manner growing out of any life insurance policy. In addition, Nevada has a generous homestead exemption of $550,000.
Other favorable Nevada asset protection laws require a person to implement certain legal entities such as corporations, professional corporations (PC), and limited liability companies (LLC). These legal entities provide a person with asset protection when properly structured and operated. For example, a physician might choose to operate his or her medical practice within a PC while owning rental property in an LLC. The physician’s patient who successfully sues for a medical malpractice claim cannot look to the rental property as a means to satisfy his or her judgment. Under Nevada law, a judgment creditor’s sole remedy with regards to a person owning a membership interest in a LLC is a charging order. A charging order does not grant the judgment creditor the ability to force distributions or assume a voting interest in the LLC. Rather, a judgment creditor is only afforded the actual distributions, if and when made, to the debtor member of the LLC.
With its continued statutory improvement in each Nevada legislative session, the Nevada self-settled spendthrift trust, or more commonly known as the Nevada asset protection trust (NAPT), has become an increasingly popular tool in providing asset protection. The NAPT is an irrevocable trust. In basic terms, a trust is a legal relationship in which one person – the trustee – holds assets for the benefit of another – the beneficiary. The person who creates the trust is known as the settlor. Under Nevada law, a settlor is able to create a spendthrift trust which provides a way for the settlor to secure his or her property by shielding such property from potential creditors’ claims. After a period of time (two years) after which an asset has been transferred to the NAPT, the property becomes exempt from creditor levy or attachment. For example, a physician creates a NAPT in which he or she transfers a non-retirement brokerage account valued at more than $250,000. More than two years elapses at which time the physician is involved in a multivehicle collision in which he or she is found to be at fault. The damages awarded by the court exceed the coverage limits of both his or her auto insurance and umbrella insurance policies. The $250,000 brokerage account is not available for use in satisfying the court awarded damages due to the fact they are held in the NAPT.
While we firmly advocate that all individuals and businesses should carry adequate insurance, it is also reasonable and prudent to take advantage of Nevada laws that allow you to further protect your assets. It is always possible that you could face a judgment in excess of insurance limits – or face a judgment for something that is not covered by insurance.
Everyone should seek the advice of competent and experienced legal counsel to see if sophisticated asset protection planning is right for them.
In many cases, clients choose to name a professional trustee to serve either as the initial trustee or successor trustee of one or more of their trusts. The modern trend toward the use of professional trustees is likely the result of the complexities involved in: 1) the way a trust may be structured; 2) the management of certain types of assets contained in the trust; and 3) the application of the current tax rules and regulations to the trust. A professional trustee is typically comprised of a Bank’s trust department or a separate trust and investment company that specializes in the administration of trusts.
A professional trustee is an alternative to naming a personal trustee, such as a family member or friend. One reason some clients choose to shy away from naming a personal trustee is to avoid placing a burden on their families and friends. Being a trustee involves a great deal of work on the part of the trustee and can be quite disruptive to a person’s life. Another reason clients may consider a professional trustee is to avoid contention among the beneficiaries, such as in the case where one child is named as the trustee of funds being held in trust for the benefit of another child. In that situation, the child trustee may feel pressure to approve a distribution that may not otherwise be exactly in line with the terms of the trust. Conversely, if the child trustee refuses to make a distribution requested by a beneficiary child, it may create ill feelings among the siblings.
A professional trustee, on the other hand, is a neutral third-party. It is a fiduciary whose primary focus is on the language of the trust and doing what is in the best interest of the beneficiaries, both current and remainder. It is unbiased and acts objectively when it comes to favoring any one beneficiary over another. Consequently, a professional trustee will not cave to pressure or have any qualms saying no to a beneficiary when it finds that a distribution request is not authorized by the trust. A professional trustee handles each distribution request cautiously and often has committees in place to approve distribution requests that follow the provisions of the trust. To that end, a professional trustee ordinarily complies and maintains back-up documentation to support why a particular distribution is being made in case there is ever a dispute.
There are several advantages of utilizing a professional trustee aside from those considerations mentioned above. A professional trustee is just that—a professional who is in the business of acting as trustee. A professional trustee is well versed on what steps need to be taken in the administration of various trusts, while an individual trustee would normally be subject to some degree of a learning curve in ascertaining and prioritizing what needs to be done. Because a professional trustee keeps abreast of current laws and is able to read and interpret complex trust agreements, it usually does not require as much guidance as an individual trustee who is without any formal training in this area. As such, a professional trustee can generally step in and administer the assets while keeping overall costs down.
Of course, a professional trustee is entitled to take a fee for its management services, which are customarily computed upon the value of the assets subject to its oversight on an annual basis. Most professional trustees have a standard fee schedule included in the trust administration package. The fees may differ as they pertain to various aspects of the administration process, including making investments, performing tax services and dealing with specialty assets, such as businesses, commercial properties and rentals to name a few. While some may see the charging of fees as an apparent disadvantage of using a professional trustee, it should be noted that any trustee has the right to take an appropriate fee from the trust, regardless of whether the trustee is an individual or a professional. For example, it is not at all uncommon for a child trustee to be deemed entitled to receive as much compensation as a professional trustee for performing like services.
It is good practice to interview your choice of professional trustees to confirm that the manner in which the trust will be administered matches with your expectations. You will want to feel comfortable with the professional trustee's approach since some may be more "hands-on" than others. Depending on the character of the trust assets, it may also be important to find out if the professional trustee is willing and equipped to handle certain non-investment properties that may involve a specific area of expertise.
Choosing a trustee is not a “one size fits all” decision. In many instances, it may make perfect sense to rely upon a family member, friend or trusted advisor, such as an accountant or attorney, to serve as trustee of a trust. Some clients may even prefer to use a hybrid arrangement by naming one or more individual and professional trustees to serve in particular circumstances. In other situations, there may be clear reasons that lend a trust to management by a professional trustee. Similar to entering into a relationship with any trustee, taking steps to clarify your expectations at the outset will go a long way in making sure that you select a professional trustee that most effectively meets your needs.
Assume John Smith established the John Smith Revocable Trust during his life with himself as the Trustee of the Trust. There are Trust assets with a bank or other financial institution, the records of which list the trustee as John Smith. John Smith dies, and under the terms of the Trust agreement Mary Jones is the successor trustee of the Trust. How does Mary Jones as successor trustee gain custody and control of the Trust assets?
In this situation, sometimes a bank or financial institution will request a copy of the complete Trust agreement, along with a death certificate of the deceased trustee. However, one of the advantages of a revocable trust is confidentiality, namely never making the complete Trust agreement a matter of public record like you are required to do so with a Last Will and Testament in an estate proceeding. A copy of the complete Trust agreement will contain the dispositive provisions (who the beneficiaries are and what their shares are) and may contain other provisions such as the disinheritance of a child. This information is not the concern or business of the bank or financial institution. All the bank or financial institution should be concerned with is the successor trustee provisions of the Trust. The response to the bank is an Affidavit of Successor Trustee, sometimes referred to as a Certificate Of Incumbency. This is a document which Mary Jones as successor trustee would sign that states in part that: (1) John Smith established the John Smith Revocable Trust and the date of the Trust agreement; (2) John Smith died and his date of death; (3) Mary Jones is the successor trustee under the terms of the Trust agreement, and (4) Mary Jones accepts the trusteeship and agrees to serve as trustee. A death certificate of John Smith is attached to the Affidavit. The Affidavit can then be shown to the bank or financial institution as proof of the death of John Smith and further proof of Mary Jones being the successor trustee of the Trust. The bank or financial institution will make a copy of the Affidavit or scan it into its records, and remove the name of John Smith as trustee and list the name of Mary Jones as the trustee on its records of the Trust assets. The bank or financial institution will then do whatever the new trustee, Mary Jones, instructs them to do regarding the Trust assets.
What about real estate is owned by the Trust? A search of the public records regarding the real estate will list John Smith as the trustee. Accordingly, if Mary Jones as the successor trustee tries to distribute or sell the real estate or place a mortgage or deed of trust thereon, the title company and bank would check the public records and want John Smith as trustee to sign the relevant documents. This is impossible since he is deceased. In a case where the Trust owned real estate, you add to the Affidavit of Successor Trustee a statement that the Trust owned the real estate and set out certain pertinent information regarding the real estate including its legal description. You then record the Affidavit with the county recorder in which the real estate is located. Upon recording, the county officials (recorder, treasurer, assessor, etc.) will change the public records regarding the real estate by removing John Smith as trustee and listing Mary Jones as the trustee. Any search of the public records after the recording of the Affidavit will show that Mary Jones is the successor trustee and the one who has legal title to the real estate.
In summary, a successor trustee can obtain control and custody of the Trust assets when the prior trustee dies through an Affidavit of Successor without having to disclose all of the terms of the Trust agreement.
There is a common misconception that estate planning is only for individuals or families with significant wealth. Estate planning is a necessity for families with minor children. There are several important objectives in creating an estate plan for young families:
It is important to consider each of these issues and discuss them with an estate planning attorney. The failure of parents to prepare an estate plan can be devastating to the children and extended family members upon the death or incapacity of the parents. Without written direction from the parents in properly created estate planning documents, minor children can get caught in the middle of expensive and time consuming court proceedings. If you have any questions regarding your estate planning documents or have not yet created an estate plan to protect your family, please call our office today for a free consultation. Once you have a plan in place, you will have the peace of mind that your family will be protected.
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