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.
Many of our clients who are married have joint revocable trusts that include instructions for the possible division of the trust upon the first spouse’s death. The purpose of the division of the trust into two separate trusts upon the first spouse’s death is primarily estate tax reduction. Sometimes these types of trusts are called “A-B trusts,” “2 trusts,” “credit shelter trusts,” and “exemption trusts.” More recent clients may have trusts known as “disclaimer A-B” or “disclaimer 2 trust” and these trusts would also fit within the topic of this article.
Most planners feel that we currently have a disappearing opportunity to engage in lifetime gifting in excess of $1 Million. In 2011, the lifetime Gift Tax exclusion amount for each person was increased to $5 Million. For 2012, this amount was adjusted for inflation and is now $5,120,000. This amount will change back to $1 Million in 2013 unless Congress enacts a change prior to December 31 of this year.
One strategy for utilizing this higher gift tax exemption that people have been receptive to is to utilize the “exemption” or “credit shelter” that already exists in one of the trust types described in the first paragraph, and to make a completed gift into this type of trust for the benefit of a spouse. Both spouses can accomplish this, but careful attention will be required to be sure that these credit shelter trusts funded with gifts are not treated as reciprocal trusts by the IRS.
Some clients find the idea of making large gifts difficult since they are usually gifting these funds to children or grandchildren and the client essentially loses the ability to control or enjoy the property that has been gifted. Gifting to a spouse, however, might be more easily tolerated than a substantial gift to children or grandchildren. Aside from the dynamics of whether it is easier to gift to a spouse or successive generations, gifting is a powerful estate tax reduction technique. The funding of a credit shelter trust is just one of many ideas that our firm can assist you with. Please call your attorney to discuss gifting techniques or for more information on funding a credit shelter trust for your spouse.
The Nevada Supreme Court recently issued a ruling in the court case Weddell v. H20, Inc. The case addressed the rights of LLC members where a creditor has obtained a charging order against a member of the LLC. A charging order is a remedy for creditors which directs the LLC to make any distributions to the judgment creditor rather than to the debtor LLC member. The charging order gives the creditor some recourse against a personal debtor who owns an interest in an LLC.
In Weddell v. H20, Inc, Rolland Weddell and his business partner Michael Stewart each owned percentages of two LLCs. An unrelated creditor obtained a personal judgment against Weddell for over $6 million. The creditor obtained a charging order against Weddell’s interest in the LLCs. The issue that the Nevada Supreme Court addressed was whether the creditor had rights under the charging order to participate in the management of the LLCs or to solely receive any distributions the LLC made to Weddell.
In reversing the District Court, the Court ruled that the charging order only allowed the creditor to obtain distributions made from the LLC to Weddell and did not affect Weddell’s managerial rights nor did it give the creditor an interest in the LLC’s assets.
This case is important as it protects the other members of the LLC. If one member of an LLC has personal judgments against him, the creditors will not be able to step in to the management of the LLC which could affect the other members of the LLC. The case also reaffirms that LLC’s are an effective asset protection planning tool as the courts will respect the charging order limitations. If you have any questions about asset protection laws in Nevada, feel free to contact our office for a consultation.
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 is often an uneasy proposition. Even if a person believes that he or she is not at fault for another’s injuries, that person is relying on what many believe is an imperfect justice system to find the truth. In recent times, the area of law known as asset protection has become increasingly popular both as a practice for attorneys and as a solution for their clients. However, what many people do not fully understand is that they may own protected assets which did not require the assistance of an attorney in obtaining protection.
Many of these protected assets are contained within the Nevada Revised Statute (NRS) at Section 21. The following is just a partial list of such assets:
This list does not include cash accounts, business interests and assets, or investment property. In order to protect those assets, a person will need to seek the advice of an attorney to properly establish what we at JEFFREY BURR, LTD. call an “Integrated Estate Plan.” An Integrated Estate Plan not only provides asset protection for unprotected assets, but it will also provide solutions for avoiding probate and guardianship.
At JEFFREY BURR, LTD., we have the knowledge and experience necessary to assist our clients in creating an Integrated Estate Plan.
- Attorney A. Collins Hunsaker
There are many types of Trusts that exist under the law. Trusts can be either revocable or irrevocable. A revocable trust allows the Grantor of a trust to transfer property into the trust with the unrestricted ability to undo such transfer by transferring the property from trust and even terminating such trust. In other words, the Grantor is not required to permanently part with ownership and control of property transferred into the trust. In fact, the trust terms can be amended by the Grantor as he or she deems necessary from time to time.
With regards to an irrevocable trust, once the Grantor has transferred property into the trust, the Grantor no longer retains the unrestricted right to remove such property or terminate the trust. The Grantor is unable to amend the terms of the trust.
A very powerful asset protection planning technique involves the use of the Nevada On- Shore Trust (sometime referred to as the Nevada Asset ProtectionTrust or the Nevada Self- Settled Spendthrift Trust) The Nevada On-Shore Trust is an irrevocable trust. For some, the concept of irrevocability causes some hesitations in proceeding with implementing the Nevada On-Shore Trust as part of their asset protection planning. The most often asked question by a person being introduced to the Nevada On-Shore Trust is whether or not the terms of the agreement can be amended from time to time. The answer to such question is “yes.” Although irrevocable and otherwise not amendable by the Grantor, the trust agreement usually allows for amendments or restatements to the trust agreement, including its dispositive and administrative provisions. However the Grantor is unable to make such changes directly, and most often calls for a Trust Protector to effectuate an amendment to the Trust.
A Trust Protector can be any person or institution. However, this person or institution cannot be anyone who has ever made a transfer to the trust. Thus, the Grantor cannot be his or her own Trust Protector. The Trust Protector’s powers are usually outlined with the trust agreement itself and, by way of example, often include such powers:
Although a trust may be irrevocable, the Trust Protector’s role affords the Grantor the ability to have a trust agreement that can change and evolve to meet the changes both to the law and changes in the Grantor’s life.
- Attorney A. Collins Hunsaker
If any of you are going through the unfortunate process of a divorce, it’s important that you preserve any asset protection planning you have done with our office by having special language included in the Marital Settlement Agreement and Divorce Decree regarding your Nevada On Shore Trust. Here is some sample language that we’ve used in the past:
“It is the intent of the parties to maintain, to the extent practicable, the integrity and the enforceability of the [NAME OF NOST], an irrevocable trust, for their mutual benefit. The parties acknowledge and understand that to effectuate the provisions of this agreement it may be necessary to effectuate trustee to trustee transfers between the above referenced trust rather than to either party individually under the terms of the respective trust, including but not limited to the specific section of the trust entitled “Trustee Actions”. The parties hereby agree to jointly seek an appropriate order from the Court authorizing such distribution to themselves as trustees.”
Nevada’s self-settled spendthrift trust laws have long been considered the most favorable of the thirteen states allowing these types of trusts. (See NRS 166 for the laws pertaining to the “Nevada On-Shore Trust,” as we like to call it, or “NOST”). This is because Nevada has the shortest statute of limitations period and has no statutory exceptions allowing certain creditors such as forcing spouses, preexisting tort creditors, etc. to pierce the trust.
On June 4, 2011, Governor Sandoval signed SB 221 into law, which makes our spendthrift trust laws even stronger. The changes to the statutes, which are discussed in further detail below, will become effective on October 1, 2011.
1. Expansion of the types of trusts that qualify
Under the new language, a charitable remainder trust, a grantor retained annuity trust, and a qualified personal residence trust all qualify as a NOST.
2. Clarification of settlor’s ability to use property owned by the NOST
If a NOST owns real or personal property, the settlor is now explicitly permitted to use that property without decreasing the protection offered by the NOST.
3. Tacking of statute of limitations period for trusts changing situs to Nevada
If a non-Nevada spendthrift trust is domiciled in a state with substantially similar spendthrift laws to Nevada’s, and the trust’s domicile is properly changed to Nevada, the statute of limitations period does not have to be restarted. The transfer date will be deemed to date back to the actual date of transfer to the trust, or the date on which the laws of the non-Nevada jurisdiction became substantially similar to those of Nevada.
This new provision will allow individuals who have established asset protection trusts in other states with less favorable laws to change the situs to Nevada without restarting the statute of limitations.
4. Trustee liability limited
Currently, Nevada law already protects an advisor to the settlor or trustee of a spendthrift trust from claims unless the claimant can prove by clear and convincing evidence that the advisor knowingly and in bad faith violated Nevada law, and that his actions directly caused damage to the claimant. The new legislation now also protects the trustee of a spendthrift trust unless the claimant can make the same showing as to the trustee.
5. “Last in, First Out”
The new laws clarify that, when a settlor makes more than one transfer to the NOST, a more recent transfer will not result in the earlier transfers becoming accessible to creditors if they would otherwise be protected due to the statute of limitations.
Additionally, any distributions made from the NOST will be considered to have come from the most recent transfer, leaving older “seasoned” transfers in the trust and protected.
6. Decanting Spendthrift Trusts
Under the new law, the trustee of a NOST may decant the trust into another spendthrift trust without affecting the statute of limitations period applicable to the assets in the original trust.
7. Limitations of actions against a spendthrift trust
Until now, it was unclear whether Nevada’s four year Statute of Limitations period for fraudulent transfers would negate the favorable two-year rule under Nevada’s spendthrift trust provisions. Now, it is clear that no action may be brought against the NOST’s trustee at law or in equity if, at the date the action is brought, an action by a creditor with respect to a transfer to the NOST would be barred.
Additionally, in order to bring an action as to a transfer to a NOST, the creditor will have to prove by clear and convincing evidence that the transfer (i) was a fraudulent transfer, or (ii) violates a legal obligation owed to the creditor under a legally enforceable contract or valid court order.
8. Unauthorized agreements by Trustee are void
The new legislation clarifies that the settlor only has rights and powers conferred specifically in the instrument, and any agreement between the settlor and trustee attempting to grant or expand those rights is void. This provision strengthens the use of the NV self-settled spendthrift trust as a completed gift trust, which will bolster its use as an estate tax savings tool for some clients.
LLCs are currently a very popular form of legal entity largely due to its flow-through partnership taxation feature coupled with its corporation-like limited liability protections. As most LLC owners know, LLCs provide significant liability protection from the threat of “inside liabilities” provided the proper formalities are adhered to and the separate entity status of the LLC is maintained . Inside liabilities are the types of debts and obligations that arise during the course of the LLC’s business and operations.
What many LLCs owners may not know is that LLCs can also provide significant liability protection from “outside liabilities.” Outside liabilities are any other type of liability an LLC owner may incur as a result of non-LLC related activities. For example, if an LLC owner is sued as part of a personal injury claim that has nothing to do with the LLC’s operations, the owner could potentially face a liability that has originated outside the scope of the LLC if a judgment is awarded against him. However, such an award may be of little use to a judgment creditor if the LLC owner established his LLC in a state with favorable LLC laws.
In general, a state with favorable LLC laws is one that provides the charging order as the exclusive remedy available to judgment creditors attempting to attach an LLC owner’s interest in his LLC. A charging order is a judicial remedy that allows a judgment creditor to act as an assignee of the LLC interest he is attempting to attach. As such, the judgment creditor does not receive any ownership or managerial rights in the LLC, thus, rendering him incapable of forcing distributions from the LLC or seeking judicial liquidation in an effort to satisfy the award. Consequently, the judgment creditor is essentially forced to wait for distributions to be made from the LLC which he can then try to intercept as payment in satisfaction of the award.
As can be seen, the LLC is capable of providing powerful asset protection features especially if formed in a jurisdiction that limits the available remedies against an LLC for outside liabilities to a charging order. However, not all jurisdictions provide for such exclusivity. Nevada is an example of a state that does provide the charging order as the exclusive remedy. Nevada’s LLC statutes contain sole remedy charging order language in NRS 86.401(2)(a) (This section [p]provides the exclusive remedy by which a judgment creditor of a member or an assignee of a member may satisfy a judgment out of the member’s interest of the judgment debtor).
States that do not have exclusive remedy language can potentially result in forced judicial liquidations of LLC assets or forced partnerships that were clearly never intended to be. Therefore, it is advisable to seek out a jurisdiction that expressly limits a creditor’s remedy for an outside liability to a charging order. As an example, in Florida, the state’s Supreme Court recently decided (Shaun Olmstead, et. al., v. The Federal Trade Commission) that charging order protection did not apply to an LLC because the LLC statute regarding charging orders did not expressly state that the charging order was the exclusive remedy available. Consequently, the LLC owners did not receive the degree of asset protection they thought they were receiving when establishing their LLC in Florida. Thus, the importance of “sole remedy” language is apparent in this situation which indicates that one must be very selective in deciding which jurisdiction to use in establishing limited liability entities so as to achieve maximum asset protection.
In conjunction with the exercise of putting in place a prenuptial, postnuptial, or cohabitation agreement, (collectively “personal relationship contracts”) an additional measure that would be recommended by savvy legal advisors would be the use of asset protection strategies to shore up the contract. In most, if not all cases, the personal relationship contract is put in place for the main purpose of preserving certain assets of one or both parties as items of “separate property.” This intent as provided in the contract should generally be honored and would withstand the scrutiny of a court or judge so long as the contract was not unconscionable, provided for adequate disclosure of both parties’ assets, and each party had an opportunity for separate legal counsel to review the agreement.
However, what better way to shore up such an agreement than to definitively segregate items of separate property into a trust? And what better trust is available for residents of Nevada (and others) than a Nevada On-Shore Trust ? (Self settled spendthrift trust or domestic asset protection trust - NRS 166).
A spouse, partner, ex-spouse or ex-partner has the ability to become a creditor when a disagreement arises regarding a personal relationship contract. If, however, the separate property assets in question have been properly funded into a Nevada On-Shore Trust, and the statutory period of two years time has elapsed (and such funding is not deemed to be a fraudulent transfer), the assets in the trust should be adequately protected from the spouse or partner creditor. At the very least, this additional step would give the spouse- or partner-creditor a reason to second-guess any dispute or lawsuit attempting to collect against the assets intended to be held as the sole and separate property of the party that established and funded the trust.
If you are getting married, already married, or just living with your significant other, you might consider making an agreement with your partner to clearly define your rights with respect to your separate and jointly-held property. Each of these personal relationship contracts can be briefly explained as follows:
The Prenup. A prenuptial agreement, or premarital agreement as it is sometimes called, is a contract entered into prior to marriage by those people intending to marry each other. The provisions of this contract may vary widely, but commonly include terms for how property will be divided and how spousal support will be handled in the event of divorce or separation. Prenups should be completed and signed by both parties with ample time before the wedding. If signed at the last minute, one party could later make the argument that they entered into the agreement because of undue influence or in a state of duress. Moreover, each party should be represented by his or her own separate attorney to avoid the later argument that unbalanced or unfair bargaining took place. In every case, a prenup must fully disclose the assets, liabilities, and incomes of each party. Leaving such financial information out could potentially invalidate the entire agreement. Full disclosure is the best policy.
The Postnup. Postnuptial agreements, or separate property agreements, are written contracts entered into by and between husband and wife after they are married. Like a prenup, a postnup establishes how a married couple’s assets and affairs will be settled in the event of a separation or divorce. Without a prenup or a postnup, state statues will determine the nature of a couple’s property: whether it is community property, jointly-owned, or separate property. As with a prenup, both spouses should be represented by their own attorney when entering into a postnup.
The Cohab. A cohabitation agreement is a legal agreement between partners who are unmarried and have chosen to live together and desire to protect themselves from the needless cost of litigation should their relationship break down. Although such parties do not develop community or marital property rights as a married couple would, a cohab can assist in sorting out complex contractual rights which may develop as related to jointly purchased property, debts, etc. Such an agreement is intended to bind both parties such that when the relationship ends, the procedure for splitting-up is understood. Again, it is highly recommended that each party have their own separate legal counsel.
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