Wednesday, June 22, 2011

New Updates to the Self-Settled Spendthrift Trust Laws:

Nevada’s self-settled spendthrift trust laws have long been considered the most favorable of the thirteen states allowing these types of trusts. (See NRS 166 for the laws pertaining to the “Nevada On-Shore Trust,” as we like to call it, or “NOST”). This is because Nevada has the shortest statute of limitations period and has no statutory exceptions allowing certain creditors such as divorcing spouses, preexisting tort creditors, etc. to pierce the trust.

On June 4, 2011, Governor Sandoval signed SB 221 into law, which makes our spendthrift trust laws even stronger. The changes to the statutes, which are discussed in further detail below, will become effective on October 1, 2011.

1. Expansion of the types of trusts that qualify

Under the new language, a charitable remainder trust, a grantor retained annuity trust, and a qualified personal residence trust all qualify as a NOST.

2. Clarification of settlor’s ability to use property owned by the NOST

If a NOST owns real or personal property, the settlor is now explicitly permitted to use that property without decreasing the protection offered by the NOST.

3. Tacking of statute of limitations period for trusts changing situs to Nevada

If a non-Nevada spendthrift trust is domiciled in a state with substantially similar spendthrift laws to Nevada’s, and the trust’s domicile is properly changed to Nevada, the statute of limitations period does not have to be restarted. The transfer date will be deemed to date back to the actual date of transfer to the trust, or the date on which the laws of the non-Nevada jurisdiction became substantially similar to those of Nevada.

This new provision will allow individuals who have established asset protection trusts in other states with less favorable laws to change the situs to Nevada without restarting the statute of limitations.

4. Trustee liability limited

Currently, Nevada law already protects an advisor to the settlor or trustee of a spendthrift trust from claims unless the claimant can prove by clear and convincing evidence that the advisor knowingly and in bad faith violated Nevada law, and that his actions directly caused damage to the claimant. The new legislation now also protects the trustee of a spendthrift trust unless the claimant can make the same showing as to the trustee.

5. “Last in, First Out”

The new laws clarify that, when a settlor makes more than one transfer to the NOST, a more recent transfer will not result in the earlier transfers becoming accessible to creditors if they would otherwise be protected due to the statute of limitations.

Additionally, any distributions made from the NOST will be considered to have come from the most recent transfer, leaving older “seasoned” transfers in the trust and protected.

6. Decanting Spendthrift Trusts

Under the new law, the trustee of a NOST may decant the trust into another spendthrift trust without affecting the statute of limitations period applicable to the assets in the original trust.

7. Limitations of actions against a spendthrift trust

Until now, it was unclear whether Nevada’s four year Statute of Limitations period for fraudulent transfers would negate the favorable two-year rule under Nevada’s spendthrift trust provisions. Now, it is clear that no action may be brought against the NOST’s trustee at law or in equity if, at the date the action is brought, an action by a creditor with respect to a transfer to the NOST would be barred.

Additionally, in order to bring an action as to a transfer to a NOST, the creditor will have to prove by clear and convincing evidence that the transfer (i) was a fraudulent transfer, or (ii) violates a legal obligation owed to the creditor under a legally enforceable contract or valid court order.

8. Unauthorized agreements by Trustee are void

The new legislation clarifies that the settlor only has rights and powers conferred specifically in the instrument, and any agreement between the settlor and trustee attempting to grant or expand those rights is void. This provision strengthens the use of the NV self-settled spendthrift trust as a completed gift trust, which will bolster its use as an estate tax savings tool for some clients.

 - Attorney Serena Baig

1 comment:

  1. These trust laws are wonderful. I have gone through these with interest. I think these will help me a lot for investing in charitable annuity.

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