I recently co-authored an article on the state of Nevada being one of the most favorable jurisdictions for establishing a trust in the May issue of the Nevada Lawyer (Nevada Laws Provide Top Trust Situs). The article focuses on the recent attention Nevada has been receiving on a national level as a top tier situs for estate planning and asset protection. Nevada has always been a pioneer in the areas of progressive trust jurisprudence and asset protection, but recent legislative amendments to its trust laws have solidified Nevada’s place as a jurisdiction of choice in these areas.
While I strongly encourage you to visit the link above and read our article, the following is a high-level summary of the items it touches on:
• Nevada’s lengthy time period applicable to its Rule Against Perpetuities law (365 years). The duration of this time period allows inpiduals and families to dramatically increase their wealth over successive generations by shielding it from estate and generation skipping transfer tax.
• Virtual Representation laws that make it easier for unascertainable beneficiaries (e.g., unborn children) to have their interests represented in the context of trust administration.
• Codification of a Trust Protector Statute, Trust Protectors are sometimes called Trust Consultants.
• Statutes that now allow Decanting Provisions in Nevada trusts. Decanting provisions make it possible to transfer assets of one irrevocable trust to another provided there is no substantial change in beneficial interests.
• Updates to Nevada’s Domestic Asset Protection Trust statute which indicate further validation by the state of this instrument. Updates include provisions allowing settlors to serve as trustees and adviser protection language.
• No state income, estate, gift or inheritance taxes.
• A summary of Nevada’s favorable Charging Order laws and State Exemptions (e.g., $550,000 homestead exemption).
The article provides a good overview of these areas without going into too much detail. As practitioners in the area of estate planning, we felt it important to point out the many favorable aspects of forming a trust in Nevada and the efforts the state legislature is making to keep Nevada competitive with other trust-friendly states like Alaska and Delaware. The comprehensiveness of the most recent legislative changes make it seem likely that Nevada will continue to be a pioneer with respect to trust law and asset protection and remain at the forefront of these areas.
With the downturn in the economy, it is hardly surprising that creditors are getting more aggressive and creative in their efforts to reach the assets of debtors. There have been several cases recently which resulted in creditors successfully seizing a beneficiary’s interest in an inherited IRA.
To give the reader some perspective, assets held in an IRA which originated with the owner (i.e. the owner of the IRA who actually made the initial contributions) are universally protected under the laws of the 50 states. The amount which is protected varies from state to state, but protection exists, nevertheless. Nevada makes $500,000 of an IRA owner’s accounts exempt from attachment by creditors. It may be helpful to note that ERISA retirement plans, such as 401(k)’s, 403(b)’s, qualified plans, etc. should have unlimited protection. Therefore, anyone considering rolling such a qualified plan into an IRA should think about the possible exposure which could occur when rolling a fully‐protected plan into an IRA with limited protection.
As long as the IRA is $500,000 or less, the IRA owner’s creditors will not have a claim against the IRA and there is no requirement that the required minimum distribution be paid to the creditor. Therefore, if the IRA owner is careful, even after reaching age 70 ½, the distributions can be received and creditors will not be able to reach the distributions.
When an IRA owner dies, and the remaining IRA passes to a beneficiary, the beneficiary can usually opt to take the IRA as an “inherited IRA”, which allows the new beneficiary to obtain continuing tax deferral on the IRA, with minimum distributions not required until the end of the first year following the death of the IRA owner (and the first year minimum distribution may actually be deferred until April 15th of the following year). In two recent cases it was held that an inherited IRA does not receive protection from the creditors of the beneficiary of the inherited IRA. These cases were a surprise to many attorneys who practice in the asset protection area of the law; nevertheless, they must be recognized and dealt with. (On a positive note, one recent case did hold that an inherited IRA is protected.) The point is, that in the current environment, one cannot be certain of the protection which a court may grant to an inherited IRA.
There is a fairly simple method to avoid a bad result and that is to make your trust the beneficiary of your IRA and then allow the trustee to accumulate required annual distributions and make distributions in the trustee’s discretion. With this approach, a creditor would be blocked from getting at the IRA because of the trust holding the IRA, as well as the accumulated distributions. The trustee can still make distributions, and because there is no duty on the part of the trustee to inform the creditor that a trust distribution will be made, the funds can be distributed out to the beneficiary with minimal risk of the creditor seizing them. Care must be taken in drafting the trust which will be the IRA beneficiary to ensure that maximum tax deferral of distributions will be achievable. If you are concerned about your beneficiaries losing the IRA they will inherit from you, it may be wise to give us a call to explore some solutions to these potential pitfalls.
For more than ten years, we at Jeffrey Burr have been advocating the use of the Nevada trust statutes for asset protection. Unfortunately, although we are pleased with the number of people who have taken this important step in their planning, most of our clients have not taken advantage of the protection offered with this trust which we affectionately call the “Nevada On-Shore Trust” or “NOST”, with the result that when a client comes to us with the prospect of being sued or incurring a large debt due to foreclosure on a property, we are limited in our ability to provide legitimate asset protection beyond a homestead and some other minor exemptions allowed under the law. Some people mistakenly believe that they can implement asset protection strategies after the events have occurred which may result in loss or liability, and we generally explain that although it is possible that some strategies will work, it is also possible that any post-loss strategies may be set aside by a judgment creditor. It is always best to have bought the fire insurance before the house is discovered to be on fire.
The exciting feature of protection of assets through the Nevada On-Shore Trust is that you protect the asset instead of merely insuring against a loss. While insurance has its place, it is impossible to insure against all risks. That is why it is important to not only insure against risk, but to insure the assets against a judgment or other liability not covered by insurance. Nevada law provides that once the NOST has been funded (i.e. after assets have been transferred to the trust) the assets are protected from future creditors after those assets have been held in the trust for two years. And even though creditors are prevented from accessing the assets of the NOST, the trustee of the NOST may generally make distributions to the beneficiaries without regard to the existing creditors. This is in sharp contrast to a limited liability company or limited partnership where although assets might not be reachable by creditors, the assets are effectively frozen within the LLC or partnership.
During the last three years we have seen “adjustments” in asset valuations which most of us would never have expected. The time to prepare for the unknown future is now. We recommend all of our clients, and those who wish to become our clients, speak with one of the attorneys at Jeffrey Burr and take advantage of the Nevada On-Shore Trust today.
In Nevada’s most recent legislative session, significant changes were made to NRS 166,Nevada’s statute governing asset protection trusts. We believe these changes, which became effective on October 1, 2009, further validate Nevada’s asset protection trusts, or Nevada On-shore Trusts (NOSTs), as legitimate and effective asset protection and wealth preservation tools.
Some highlights of the recent changes to the statute are as follows:
As a reminder, Nevada’s asset protection trust statute has been in place for nearly ten years. Nevada is commonly recognized as not only a pioneer in the area of asset protection, but one of the most favorable asset protection jurisdictions in the country. Other states are now joining Nevada and a handful of other jurisdictions to provide the same asset protection techniques Nevada offers to its residents. Fortunately, as a front runner in the industry, Nevada is a seasoned veteran in the field of asset protection and wealth preservation. Consequently, those who formed Asset Protection Trusts early on are now reaping the benefits of increased protection. We remain confident that Nevada’s Asset Protection Trusts are one of the most effective asset protection tools available.
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