New Laws Offer Greater Asset Protection for Clients
Two new laws that recently took effect in Nevada offer clients across the country new avenues for asset protection.
One law addresses self-settled trusts, which allow personal use of the trust assets by the settlor. The measure includes a provision that allows trusts set up in other jurisdictions to be moved to Nevada without re-starting the applicable statute of limitations.
The second law establishes the charging order as the exclusive remedy for creditors against certain corporations, LLCs and LPs.
In addition – setting Nevada apart from states with similar statutes – this new law eliminates equitable remedies for creditors, said Steve Oshins, a partner at Oshins & Associates in Las Vegas, Nev., who helped draft the laws.
The updated laws, which went into effect on Oct. 1, “offer a lot of bigger advantages” than other states, he said, making Nevada “the number one state” for asset protection.
While 12 other states allow an individual to establish a spendthrift trust, where the settlor of the trust can remain a discretionary beneficiary, the updated law, SB221, establishes Nevada as having “the leading law” on this type of trust, said Oshins & Associate attorney Kristen E. Simmons, who co-authored the new legislation with Oshins.
The law broadens the type of spendthrift trusts available to explicitly include a charitable remainder trust, a grantor retained annuity trust and a qualified personal residence trust.
Nevada already provided protection from creditors after a two-year time period, Simmons said, but the new law extends that protection to trusts from other jurisdictions.
Now clients “can set up trusts in other jurisdictions and move them to Nevada after the fact without re-starting the statute of limitations,” she said. That way, settlors do not have to empty the trust and start the clock again in order to take advantage of Nevada’s protections. This makes Nevada “a very favorable situs” to establish a self-settled spendthrift trust, Simmons said.
Another advantage of the new law: it allows settlors “to decant a trust into a Nevada asset protection trust without having to start the two-year statute of limitations period again,” Simmons said, in situations where the beneficiary circumstances change, for example. The date the trust property was transferred into the original spendthrift trust will be deemed the transfer date for the property decanted into the second spendthrift trust.
Once transferred, the spendthrift trust property is protected from future creditors after the two-year statute of limitations period, Simmons said.
The new law also helps those who wish to use their self-settled spendthrift trust as a completed trust gift, Simmons added.
A recent private letter ruling from the IRS said that such a trust was outside of the grantor’s estate for estate tax purposes, but noted that the grantor and the trustee may have had an “implied understanding” or some other pre-existing arrangement that would have included the trust in the grantor’s estate. To counter this concern, the new Nevada law explicitly states that any agreement between the grantor and the trustee, whether express or implied, will be deemed void if it expands the powers and/or rights of the grantor. This means grantors can avoid any estate tax implications by excluding the trust from their estates.
That provision provides support for those who also want to use their asset protection trust as an estate tax savings tool, Simmons said.
Robert S. Keebler, a CPA at Keebler & Associates in Green Bay, Wis., agreed.
“I think what we are going to see is a real evolution in the use of domestic asset protection trusts as lawyers and CPAs better understand their role beyond pure asset protection planning, and into estate and tax planning,” he said.
Charging orders, no equitable remedies
The charging order law, SB405, which Oshins co-authored, passed the Nevada legislature unanimously before being approved by Governor Brian Sandoval and taking effect Oct. 1.
The law offers extraordinary benefits for clients, Oshins said.
“A charging order is simply a lien,” he said. “If I set up an entity and an individual gets sued and has a judgment against them, a creditor will try to take his or her interest in the asset of their LLC or limited partnership.”
But instead of being able to pierce the entity, all the creditor will get is a lien on the partnership interest, Oshins said. “The creditor has a nearly worthless piece of paper and the individual is able to protect his or her assets.”
The new law makes charging orders the sole remedy for creditors against Nevada LLCs, LPs and some corporations (S and C corporations with one or more shareholders but fewer than 100. The corporation cannot be a publicly traded company or the subsidiary of a publicly traded company).
Even more importantly, the law disallows equitable remedies, Oshins added.
“Equitable remedies allow a judge an end-run around [such statutes] in order to punish a defendant,” he said, using theories like a constructive trust or a reverse veil piercing in order to make the entity’s assets available to the plaintiff.
This change applies even to single-member LLCs, Oshins said, which is unique to Nevada.
“This is a really, really big deal,” Keebler said.
Since 2003, four states – Colorado, Florida, Idaho and Maryland – have case law where a judge used equitable remedies to get around a charging order for single-member LLCs, Oshins explained. But drafted into the Nevada legislation is language explicitly including single-member LLCs, which offers entities “an amazing opportunity” to domicile in Nevada in order to take advantage of the creditor protections, Oshins said.
Gideon Rothschild, a partner at Moses & Singer in Manhattan who focuses on asset protection and estate planning, offered a note of caution to those considering creating trusts using the new Nevada laws.
“If you live in Nevada, [the new laws] are likely going to be quite effective,” he said.
But those domiciled elsewhere who choose to locate their asset protection trust or LLC in Nevada to take advantage of the new laws should recognize that courts are more inclined to apply the laws of their own state legislatures, he said.
“If I have a client who lives in Delaware, I’m going to choose Delaware law over Nevada for asset protection,” Rothschild said.
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By: Correy Stephenson
Oshins & Associates, LLC
1645 Village Center Cir., Ste. 170
Las Vegas, NV 89134
Published: December 23, 2011