In 1999, the Nevada Legislature amended NRS Chapter 166 to permit self-settled spendthrift trusts, which are commonly referred to as domestic asset protection trusts (“DAPTs”). A DAPT is an irrevocable trust that allows the trust creator (“settlor”) to protect assets from the reach of his/her personal creditors while offering a significant level of protection for the trust assets. While twenty states now allow for some form of DAPTs, five important things about a Nevada DAPT (“NAPT”) are as follows:
1. A NAPT must be irrevocable
NRS 166.040(1)(a) requires a NAPT to be irrevocable.
2. A NAPT must not require that its income or principal be distributed to the settlor
A NAPT cannot require the income or principal of a NAPT to be distributed to the settlor. See NRS 166.040(2)(a). Notwithstanding, a settlor can still receive distributions if subject to the discretion of a third-party, generally referred to as a distribution trustee, which may be chosen by the settlor. The settlor may also prevent a distribution from the trust, grant the authority to use real or personal property, hold lifetime or testamentary limited powers of appointment, remove and replace the trustees, direct trust investments, and execute other management powers.
3. Claims against a NAPT
If a person is a creditor of the settlor at the time the settlor made a transfer to the DAPT, that creditor must commence 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 person who was not a creditor of the trust creator at the time the transfer was made to the NAPT must commence an action to challenge the transfer within two years of the transfer. The statute of limitations is based on, and thus begins, upon the transfer of an asset to the trust. Consequently, each time an asset is transferred to a NAPT, a new transfer has occurred and the statute will begin to run on a claim against that specific asset.
4. Nevada does not recognize exception creditors
An exception creditor is a creditor that is able to gain access to assets in a NAPT after the statute of limitations has expired for public policy reasons, such as a payment of alimony, child support, etc. Nevada is one of only a few states that does not have statutory exception creditors. See, e.g., Klabacka v. Nelson, 133. Nev. 164, 394 P.3d 940 (2017) (Nevada law does not “allow for an exception for child- and spousal-support orders of a beneficiary to be enforced against a spendthrift trust.”).
5. Be careful of funding the DAPT with assets outside of Nevada
Because DAPT’s are not allowed/recognized in every state, it is unclear whether a state that does not allow/recognize DAPT’s, or that has a different statutory structure then Nevada, will protect assets titled in the name of a NAPT located outside of Nevada, particularly real property.
About the authors
Jeffrey P. Luszeck, Esq. is a member of the Las Vegas law firm of Solomon, Dwiggins & Freer Ltd., where he focuses his practice primarily on trust and estate litigation, and small business litigation.
Brian K. Steadman, Esq. is a member of the Las Vegas law firm of Solomon, Dwiggins & Freer Ltd. where he primarily focuses his practice in the areas of tax planning, estate planning, business planning and asset protection.
About this article
This article was originally published in the “Five Things” issue of Communiqué, the official publication of the Clark County Bar Association, (January 2021). See https://clarkcountybar.org/about/member-benefits/communique-2021/communique-january-2021/.
© 2020 Clark County Bar Association (CCBA). All rights reserved. No reproduction of any portion of this issue is allowed without written permission from the publisher. Editorial policy available upon request.