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The following is for educational use only. This material is not intended to replace any tax or legal advice. The reader should obtain personal counsel before implementing any methods described herein. Masculine can mean feminine, and singular can mean plural.

1.  Spendthrift Trust History. Common spendthrift trust law has been around since almost the beginning of the uses of trusts centuries ago. The term “spendthrift”, as associated with a trust, pertains to a distribution restriction over a beneficial vested portion held IN TRUST. The trust restriction prevents a legal debtor action against a beneficiary that would otherwise be allowed to a creditor. That means that a beneficiary’s portion, held in a spendthrift trust, is not available to satisfy a claim that a creditor may have against the beneficiary. Spendthrift trust law is foundational in its application and can be a crucial part of the estate planning objectives for many. Through its common law application, spendthrift trust regulations exist in all 50 states.

2.  Self-settled Spendthrift Trusts. Prior to April 1, 1997, spendthrift trust law only applied to protecting the assets of a 3rd party beneficiary – that is, a party (beneficiary) of the trust who did not create the trust. That meant that a creator/grantor of a trust could not enjoy the benefits of spendthrift trust law for his own asset protection with the trust that he established. That changed in 1997 with the enactment of the Alaska Trust Act soon thereafter known as “self-settled spendthrift trust” law. Delaware quickly followed suit and passed similar legislation in that same year. Nevada enacted its own version in 1999. (As of this writing, there are currently 19 states that have codified similar law.)

3.  Personal Asset Protection. The primary concept of a self-settled spendthrift trust is that the creator/settlor/grantor would transfer assets to the trustee of a trust to which he – as well as any other beneficiary of the trust – is recognized as a “discretionary beneficiary” even though he would be considered as a first party to the trust. That arrangement provides a dimension of asset protection for not just the (other) beneficiaries of the trust but also for the asset-owner grantor during his lifetime. Such trusts are now widely referred to as “Domestic Asset Protection Trusts” (DAPTs) – made in America, not offshore – and are growing in popularity along with the public’s increased awareness of their benefits.

4.  Nevada is the Leader. Comparative tables indicate that Nevada is the best state in the nation for an asset owner to establish a DAPT. Forbes Magazine gave its only A+ rating to Nevada of all asset protection states in a recent publication. Nevada has clearly adopted a “pro-trust” attitude (inclined to be favorable to a grantor’s intentions) and have combined that position with their digital-age promotion of electronic signature (ESIGN) law. In addition to Utah, Nevada is the only state to apply “no exception creditors” law. So, we will hereafter refer to the DAPT more specifically as our branded NWPTTM derived from –

Chapter 166 of the Nevada Revised Statutes (NRS)

5.  An Asset Protection Fortress. For a Nevada resident/grantor, a properly “seasoned” NWPT (that is, a NWPT in existence beyond Nevada’s 2-year statute of limitations) would be very difficult for any subsequent creditor to penetrate in order to satisfy a claim against the property transferred by the grantor to the NWPT. In fact, Nevada law not only disregards such a claim but also prohibits it. (See NRS §166.170.)

6.  For All Other Americans. Citizens of foreign (non-Nevada) states may also establish a NWPT and may expect much of the same level of protection as a Nevada resident. However, there is a method to create very strong asset protection levels with the NWPT for non-Nevada residents that will alter the self-settled format. It can be done by establishing the NWPT as a “third-party” (non-grantor) spendthrift trust” where the grantor is not a permitted beneficiary, but his (or her) spouse remains a discretionary beneficiary (along with their children, or whoever they have named in the NWPT). Additionally, the trust can empower a trust protector to name the grantor as a permitted beneficiary within a “support trust” scenario – if that ever becomes necessary (albeit possibly reduce the otherwise high-level of asset protection).

7. Permitted/Recommended Secrecy. Confidentiality is generally considered the initial wall of defense with any asset protection plan including the NWPT. When establishing a NWPT as a sub-trust with a sole-grantor RLT, it is recommended to use an abstract term, rather than a family last name, when choosing nomenclature for the RLT. That way, the name of the asset-owner (the RLT grantor) would not appear in public records with respect to the NWPT assets. Also, assets that have been assigned to the trustee of the NWPT must be retitled to the trustee. And since the trustee of a NWPT is normally going to be a corporation, the holder of the NWPT assets – the corporate trustee – will not have the grantor’s personal name on the NWPT asset accounts either; the NWPT account will show only the corporate trustee’s identity along with the trust’s abstract name.

8.  A Barrier for Existing Creditors. Nevada law creates significant challenges for even existing creditors wanting to get property transferred to a NWPT to satisfy a claim. An existing creditor may not bring an action with respect to a transfer of property unless the creditor can prove by clear and convincing evidence that it was a fraudulent transfer (pursuant to NRS Chapter 112) or that the transfer violated a legal obligation owed to the creditor under a contract or a valid court order enforceable by the creditor. In the absence of such burdensome proof, the property transferred is not subject to the claims of the creditor. Moreover, any such action taken by a creditor, relative to property transferred to the NWPT, must be done within two years of the transfer – or within six months from the time the creditor discovers, or reasonably should have discovered, the transfer, whichever is later – or the case will not be heard by a Nevada court.

 – A Closer Look at Nevada’s Spendthrift Trust Law –

  A)  Under the terms of a NWPT, a beneficiary’s interest may be deemed as:

• ENTIRELY EXEMPT from all legal or equitable processes initiated against the beneficiary by his/her creditors – other than those granted by the governing instrument (the trust) unless contrary to public policy (such as U.S. bankruptcy laws);

• COMPLETELY SECURE from the beneficiary’s creditors regardless of the type or the extent of the value of the interest(s) or even the length of time the interest is held in trust provided the transfers to the DAPT were established lawfully;

• NOT ASSIGNABLE or subjected to waiver by the beneficiary – either voluntarily or involuntarily, directly or indirectly – for the benefit of any other person or entity(s), including not being available to satisfy a marital elective share.

  B)  A trustee of a NWPT cannot be required to:

• NOTIFY A CREDITOR or to disclose the terms of an outright distribution made to the beneficiary – regardless of the value of the distribution;

• MAKE AN OUTRIGHT DISTRIBUTION(s) regardless if distributions from the trust are subject to the trustee’s exercise of discretion;

• WITHHOLD A DISTRIBUTION to or for the benefit of the beneficiary whether or not distributions from the trust are subject to the trustee’s discretion;

• COERCE THE BENEFICIARY to exercise a power of appointment over his beneficial interestvor to revoke the trust.

  C) Under Nevada’s specific APT statutes:

• THE GRANTOR MAY OPT TO VETO income distributions from the NWPT, without cause, otherwise intended by the trustee to be distributed and may also remove the trustee.

• NO-EXEMPTION CREDITOR laws are enforceable including against divorcing spouses (recently upheld in Nevada Supreme Court case; See Klabacka v Nelson) and pre-existing tort creditors – such as a physician’s patient who believes he was harmed years ago from a medical procedure and now wants to bring action.

• AN AFFIDAVIT OF SOLVENCY needs to be signed only once with the first transfer to the NWPT (and not every time a property is transferred to the NWPT), which is a declaration that the transferor is not making a fraudulent transfer and is solvent after the transfer.

• NO LEGAL ESTATE EXISTS in trust for any permitted beneficiary of a NWPT, including the grantor of the NWPT, which essentially precludes the otherwise applied legal doctrine of beneficial interests being subject to attachment once distributed out of the trust.

Irrevocable Non-grantor Third Party Trusts

– The Foundation for Maximum Safety –

The Irrevocable Non-Grantor Third Party Trust (INGTPT) format provides the highest form of asset protection that can be offered through Domestic Asset Protection Trusts. We have therefore installed the INGTPT as our “Tier1“ asset protection planning strategy with its design making up the core structure of our Nevada Wealth Preservation Trusts (NWPT). Historically, INGTPTs have always protected assets from creditors against trust beneficiaries – assuming no fraudulent transfers were involved (the horizon was clear when the transfers were made by the grantor) and the trust was not mismanaged.

The “non-grantor” class means that the NWPT is not a grantor trust for income tax purposes under IRC §677(a)(1) because the grantor is not receiving support-associated distributions of income from the trust even though the grantor’s spouse and/or other “related and subordinate” beneficiaries are permitted to receive income distributions from the trust as discretionary beneficiaries. Therefore, the income generated in such a trust is not taxable to the grantor or to grantor’s spouse other than those distributions directly made to the spouse.

NOTE: In order to maintain “non-grantor trust” status – so to exclude grantor from taxation with respect to the income generated by the trust – all distributions made to the spouse must be “approved” by all of the other non-spousal beneficiaries.

The value transferred to this type of trust is a gift taxable event, but which can be sheltered through the Unified Gift/Estate Tax Credit. Because the transfer to this trust would be a completed gift, the principal of the trust will not be in the grantor’s estate for transfer tax purposes. That estate tax avoidance strategy will always work regardless of (i) the value that was transferred by gift or (ii) the appreciation of the transferred property and (iii) come what may in the ever-changing US Tax Code world. (Notwithstanding, it is to be understood that lifetime transfers effectively reduce the amount that might otherwise be protected from estate taxation upon the transferor’s decease.) Tier1. The INGTPT/Tier1 format provides the highest level of domestic asset protection available. Assets transferred to this structure are always completed gifts and therefore excluded from the grantor’s estate for transfer tax purposes.

• The Tier1 design also features interchangeable Spousal Lifetime Access Trust (SLAT) applications that are available to the grantor regardless if currently married, single or divorced. This is accomplished through the versatility of “floating spouse” provisions.

• That means the spouse/beneficiary referred to in the trust will only ever be that person to whom the grantor is then legally married to at the time, and from time to time. In addition, the grantor’s children, and certain other relatives, can also be named as beneficiaries of the trust.

• As long as this trust utilizes only “discretionary income distribution” (by trustee) terms and does not include (IRC §2036) “retained income interests” and/or (IRC §2038) “limited power to alter, amend or revoke” clauses, it will be deemed as an INGTPT with its accompanying maximum asset protection benefits.

• With the Tier1 format, the NWPT is the (income) taxpayer and will pay taxes on any undistributed income. Allocations of all income receipts to the Tier1 beneficiaries will be accompanied by a 1041 Schedule K-1 report at calendar year’s end.

• It should also be noted that the Tier1 NWPT allows the grantor to empower his spouse with lifetime (and testamentary) limited powers of appointment. Those powers include the authority to add or remove beneficiaries and trustee appointments but not for spouse to directly benefit herself, or her estate, or her creditors, or her creditors’ estates. Moreover, even after being appointed with (and accepting/exercising) such power, the value of the trust estate will not be included in spouse’s taxable estate upon her decease.

Tier2. If it should become necessary or wanted, the grantor may request – of the trust protector or the independent trustee – to be named as a discretionary income beneficiary. The trust protector (or the independent trustee) may then appoint the grantor as such, which will serve to recast the NWPT as a (Tier2) self-settled spendthrift trust.

• Even if the grantor requests and becomes a discretionary income beneficiary, no retained interests/powers would apply to cause a shift in the taxable status of the trust. Therefore, the values transferred to the discretionary-income-only Tier2 NWPT are still deemed as completed gifts and are thus not includable in the grantor’s estate.

• It should also be noted that if the grantor is domiciled in Nevada, it is quite certain that nothing will have changed for asset protection purposes (as well) with the Tier2 format even though it is now classified as a self-settled spendthrift trust.

• If a non-Nevada-resident grantor is enjoying a copacetic spousal relationship, there may be no compelling enough reason to employ a Tier2 plan when realizing that (a) such an election may lessen the degree of Tier1 asset protection certainty and (b) along with the fortress-like protection of the (Tier1) INGTPT structure, the grantor still benefits from the income distributions to his spouse and/or children even if only indirectly.

• However, with the above point in mind, having an additional NWPT beneficiary in the family (the grantor) gives room for the logic that, all things considered, a greater amount of aggregate $cash flow could be realized by the grantor’s family unit and still stay within defensible, safe harbor boundaries in case a legal challenge ever came about.

Tier3. The “Tier3” NWPT format is quite remarkable on its own distinction since it provides the highest level of accessibility available for a grantor while maintaining a Nevada self-settled spendthrift trust status. It empowers the grantor with (i) §2036 type authority to veto trustee’s intended income-distributions and (ii) §2038 limited powers of appointment to amend the trust.

• Such IRC §2038 limited powers for the grantor include lifetime (and testamentary) authority to exercise the same but not the power to appoint trust assets back to the grantor or his estate, or to grantor’s creditors or their estates.

• Therefore, the Tier3 format (in which the grantor is an income beneficiary) makes sense primarily for the grantor who wants to retain additional control over income distributions by making it an income-veto type of “support trust” with a defined-need-distribution structure instead of a more limited discretionary distribution (Tier1) format.

• An important note to consider is that when the grantor has been vested with veto-power over the trustee’s intended distributions inside the Tier3 format, the NWPT now becomes a so called “grantor trust” by operation of law under the IRC §677(a) and IRC §2036 (transfers with a retained life estate) rules. That means that all trust income shall be taxable to the grantor even if not distributed to the grantor, and the income distributed to others becomes a (taxable) gift from the grantor for transfer tax purposes.

• The Tier3 “support trust” essentially provides for an independent trustee to make distributions to any named beneficiary (including the grantor) on a broader scale for determining income allocations, and principal, if necessary, for health, education, maintenance, and support purposes.

• All transfers to a Tier3 NWPT format are “incompleted gifts” for transfer tax purposes and, consequently, will be entirely includable in the grantor’s taxable estate value upon his decease.

• In addition to the significant amount of control retained by the grantor, another upside of the Tier3 structure is that the transferred assets receive a step-up-in-basis upon grantor’s decease because of the incompleted gift status of the assets transferred.

– Important Final Points –

• Proper Funding. The NWPT must be funded ONLY with the “sole and separate” assets of the grantor. If jointly owned property between the spouses was originally intended for funding, it must first be bifurcated into equalized sole & separate ownership wherein the grantor/spouse’s separate account becomes the source for funding. Community (and other jointly owned) property can be “transmuted” into sole and separate property by agreement between the spouses and then applied accordingly.

• Floating Spousal Rule. Any grantor establishing a NWPT/SLAT who is not then legally married at the time, may allude to a spousal-beneficiary within the trust – by way of the “floating spouse” provision – which will automatically apply if the time ever comes for marriage. It should also be noted that the assets of the SLAT are generally outside the reach of a divorcing spouse since a properly funded SLAT is not part of a marital estate.

• Trustee Removal Power. Under Nevada law, the grantor of the NWPT, regardless of which “Tier” is being used, has the unrestrained power to remove/replace any trustee appointee of the NWPT. It is a considerable power that can (and should) be retained by the grantor, in all cases, as it does not cause any adverse tax or asset protection forfeiture issues.

• Irrevocable Life Insurance Trust. A Tier1 NWPT may also safely function as an irrevocable life insurance trust (ILIT) wherein annual gift-tax exclusion amounts can be transferred to the trust using “Crummey Letter Notices” to pay for premiums without using gift-tax credits. And since the Tier1 format functions as a discretionary distribution NWPT administered by an independent trustee, gift-splitting between the spouses can be utilized for maximum use of the annual exclusion allowance. Proceeds from an insurance policy owned by a Tier1 ILIT will avoid inclusion in the grantor’s taxable estate upon decease.

• Reciprocating Applications. Reciprocal SLATs (one for each spouse) can be made but with much caution: See > United States v. Estate of Grace, 395 U.S. 316 (1969). If created, they should be established at separate calendar times, and with significantly different terms. For example, one may utilize a Tier1 format and the other a Tier3 structure. If feasible, the respective SLATs should also identify a different ensemble of beneficiaries.