Asset Protection Trusts and Public Records

by Layne T. Rushforth

Nevada has exceptional laws relating to self-settled spendthrift trusts, which are more commonly called "asset-protection trusts".  Since 1999, Nevada has permitted the settlor (creator) of a trust to transfer assets into an irrevocable spendthrift trust to make those assets unreachable by creditors while at the same time allowing discretionary distributions to the settlor. Nevada law was not intended to allow one to hide assets from known creditors, but it was intended to protect against the future claims of unknown creditors. To protect the claims of known creditor's, Nevada law prohibits transfers that are intended to hinder, defraud, or delay the claims on creditors. Such "fraudulent transfers" can be declared void by a court.

Nevada's spendthrift trust law has always allowed a creditor two years to challenge a transfer to a spendthrift trust as being fraudulent and void. If the settlor of a spendthrift trust puts assets into the trust at a time when someone has a claim against the settlor, Nevada law allows more than two years to challenge the transfer as long as the claimant (creditor) challenged the transfer within six months of becoming aware of the transfer. [See NRS 166.170(1)(a)(2).] Since creditors are rarely aware of transfers to trusts, this made the two-year limitation potentially meaningless. Some asset transfers, such as the conveyance of a home, are made part of the public record, but the law was previously unclear as to whether or not a creditor would be deemed to be aware of such a transfer.

Under the 2007 change to the law, everyone is deemed to be aware of any asset transfers for which there is a public record. [See NRS 166.170(2).] This means that anyone wishing to assert that a transfer of an asset was fraudulent and void cannot argue that he or she has more than two years to make that assertion if the transfer to the spendthrift trust is a matter of public record. In such a situation, it is no longer possible for a creditor to say, "I was not aware of that transfer until today and so I have another six months in which to assert a claim on trust assets."

Of course, that means that for the best protection, there should be a public record of all asset transfers to a self-settled spendthrift trust. If the settlor of a spendthrift trust chooses not to make his asset transfers public, then he or she is choosing privacy over protection. For our clients, we are recommending protection over privacy, and we suggest that a schedule of trust assets be recorded when a spendthrift trust is initially formed and that a supplemental schedule showing additional assets be recorded each time additional assets are added. Ultimately, however, the clients must decide how much they want to make part of the public record, and the decision boils down to "privacy or protection".

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