Generally. A Nevada asset protection trust (“NAPT”) is an irrevocable trust established by a grantor (“Grantor”) that is subject to the laws of Nevada. It is a spendthrift trust, meaning creditors are specifically prohibited from making claims against a beneficiary’s interest and the beneficiaries are prohibited from transferring or pledging their interests in the trust. A NAPT is usually established by a Grantor who is concerned that one or more potential lawsuits may result in judgment that renders a Grantor unable to provide for himself or his intended beneficiaries. A NAPT can be established by a non-resident of Nevada, but some or all of the assets in the NAPT must be transferred into Nevada.
Creditor Protection. A creditor who was a creditor of the Grantor at the time of transfer of assets into the NAPT must bring an action to challenge the transfer within the later of (a) two years after the transfer, or (b) six months after the creditor discovers or reasonably should have discovered the transfer. A creditor who is not a creditor at the time of the transfer must commence an action to challenge the transfer within two years of the transfer. The claim is forever barred if not brought within this period.
Fraudulent Conveyance. Even if a creditor brings a claim within the two-year statute of limitations period, the creditor must prove that the transfer into the NAPT was a fraudulent conveyance, that is, that the transfer was made with the intent to hinder, delay, or defraud known creditors. If the Grantor has assets that have not been transferred into the NAPT, a fraudulent conveyance may be very difficult to prove.
Trust Beneficiaries. The Grantor’s children, grandchildren and others can be beneficiaries of the trust. So can the Grantor if, as an example, the Grantor’s other assets are depleted as a result of a financial disaster. Because the Grantor may be a beneficiary, the trust is often referred to as a “self settled” trust.
Trustee. Nevada requires that a Nevada bank or trust company serve as “distribution trustee.” The NAPT must provide that the distribution trustee approve all distributions to the Grantor, and may provide that the trustee make distributions to the beneficiaries only with the consent of the Grantor.
Powers of the Grantor. The Grantor can serve as investment or managing trustee and thus maintain control over the assets in the NAPT. The NAPT can reserve to the Grantor the power to remove and replace a distribution trustee under certain circumstances; to change the beneficiaries of the trust; and to approve all distributions other than to himself.
Tax Consequences. Nevada does not have a state income tax. The NAPT can be structured as a grantor trust, meaning the income be taxed to the Grantor for federal tax purposes; it is not even necessary to have a separate tax identification number for the NAPT or to file a fiduciary income tax return. As a result of the powers retained by the Grantor (as mentioned above), the transfer of assets into the NAPT is not considered a gift for tax purposes, and the assets in the NAPT are fully taxable in the Grantor’s estate for estate tax purposes.
Legality. No cases involving NAPTs have reached the Nevada Supreme Court. Hence, as of this date, NAPTs remain a relatively effective tool to discourage the claims of future creditors.