Nevada’s Self-Settled Spendthrift Trust Laws Further Strengthened with the Passage of Senate Bill 221

Nevada State Senate, 1897

Nevada has consistently been recognized as a best state for asset protection trusts.  This distinction is largely due to the advantages of Nevada’s self-settled spendthrift trust laws, such as: the shortest statute of limitations period of the domestic asset protection states and no statutory exceptions enabling particular creditors to pierce the trust.

Nevertheless, on June 4, 2011, the Governor of Nevada signed into law Senate Bill 221, which makes Nevada’s already premier asset protection trust laws even stronger.

The changes to the statutes, effective October 1, 2011, are summarized as follows:

1. Tacking of statute of limitations period for asset protection trusts that change situs to Nevada (Section 202 of the bill)

Senate Bill 221 includes a key tacking provision that enables the trustee of an asset protection trust established in a less attractive jurisdiction to move the trust to Nevada and take advantage of Nevada’s short two-year statute of limitations without restarting the clock.  Unlike Nevada, most other jurisdictions that allow self-settled spendthrift trusts have a four-year statute of limitations before the trust assets are protected.

2. Limitations of actions against the spendthrift trust (Section 206 of the bill)

Unlike other jurisdictions, Nevada’s asset protection laws do not include statutory exceptions for child support, divorcing spouses, and preexisting tort creditors.  Nevertheless, Senate Bill 221 has amended Nevada’s laws to make it even more challenging for a creditor to bring an action with respect to a transfer of property into a self-settled spendthrift trust.  Indeed, in order to do so, the new bill provides that a creditor must prove “by clear and convincing evidence” that the transfer of property was fraudulent or “violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor.”

Furthermore, Senate Bill 221 confirms that no action of any kind can be brought at law or in equity against the trustee of a spendthrift trust if, as of the date the action is brought, an action by a creditor with respect to a transfer to the spendthrift trust would be barred.  Previously, it was uncertain whether Nevada’s four-year statute of limitations for fraudulent transfers would negate Nevada’s two-year statute of limitations for spendthrift trusts.

3. Limited liability of trustee (Section 206 of the bill)

Under the new legislation, the trustee of a spendthrift trust is protected from claims (other than from a beneficiary or the settlor) except if the claimant can prove by clear and convincing evidence that the trustee knowingly and in bad faith violated Nevada law, and that the trustee’s actions directly caused the damages suffered by the claimant.  Accordingly, trustees will now receive the same protection that has been in place under Nevada law for advisers to the settlor or trustee of a spendthrift trust.

4. Expansion of types of trusts that may provide asset protection (Section 205 of the bill)

Senate Bill 221 specifically permits charitable remainder trusts, grantor retained annuity trusts, and qualified personal residence trusts to qualify as spendthrift trusts.

5. Implied agreements by trustee are void (Section 203 of the bill)

Private Letter Ruling 200944002, released by the IRS on October 30, 2009, held that the self-settled spendthrift trust at issue, which was structured as a completed gift for gift tax purposes, would not be included in the grantor’s gross estate.  Although non-binding, the ruling offers guidance that the assets of an appropriately structured self-settled spendthrift trust will not be per se includible in the grantor’s gross estate.  Nevertheless, the IRS cautioned that it was excepting from the ruling “an understanding or pre-existing arrangement between Grantor and trustee” that could otherwise cause the trust assets to be includible in the grantor’s gross estate under IRC § 2036.

Accordingly, Senate Bill 221 provides that the settlor of a spendthrift trust only has the rights and powers conferred to the settlor explicitly in the trust instrument, and that any agreement, express or implied, between the settlor and trustee attempting to grant or expand such rights is void.  With the addition of this language, Senate Bill 221 should strengthen the use of a Nevada self-settled spendthrift trust as an estate tax savings strategy in addition to providing asset protection.

6. “Last in, first out” mechanism (Section 206 of the bill)

The new legislation confirms that, if more than one transfer is made to the spendthrift trust, the subsequent transfers to the trust must be disregarded for purposes of determining whether a creditor can bring an action with respect to an earlier transfer to the trust.  In addition, any distribution to a beneficiary from the spendthrift trust will be considered to have been made from the most recent transfer made to the spendthrift trust.

7. Decanting a spendthrift trust (Section 206 of the bill)

With the passage of Senate Bill 221, the trustee of a self-settled spendthrift trust can now decant the trust into a second spendthrift trust without affecting the statute of limitations period applicable to the transfers made to the original trust.  Indeed, the date the property was first transferred to the original spendthrift trust will be the deemed transfer date for the property, regardless of the fact that it has been decanted into the second spendthrift trust.