Asset Protection Planning: Spendthrift Trusts

February 19, 2013

In the recent economic recession, many people have or will lose significants amounts of wealth. Perhaps with the right estate planning, some could have preserved at least a portion of that wealth. In any event, there are certain estate planning tools people can use to protect their assets.  One of these tools is a spendthrift trust.

A spendthrift trust protects the assets of the trust from the creditors of a beneficiary. A spendthrift trust also protects against beneficiaries trying to reach the assets of the trust in violation of the terms of the trust. In Nevada, spendthrift trusts are known as “Domestic Asset-Protection Trusts (DAPT)” or “Nevada Asset-Protection Trusts (NAPT).” Nevada has very favorable laws for protecting assets through spendthrift trusts, as settlors can create spendthrift trusts even if they are beneficiaries of the trusts, and in doing so, they can protect their assets from creditors.

In order for spendthrift trusts to work correctly, they must meet certain requirements. In Nevada, some of the requirements are that the trust must be irrevocable, the trust must not be created fraudulently, and distributions from the trust can only be made by an independent person other than the settlor. The trust must otherwise be legitimate and comply with the law, and not be commingled with assets outside of the trust. There are also other requirements.

If the requirements are met, then typically creditors will not be able to reach the assets of the spendthrift trust. However, if there are transfers to or from the trust that were fraudulent or in violation of a court-order, the law does not protect those transfers from creditors. In Nevada, there is a “look-back period” that limits the amount of time in which a creditor can challenge any transfers to or from the spendthrift trust as being fraudulent or in violation of a court-order. Usually, the look-back period is two years.

Spendthrift trusts are a very important tool for asset protection, but must be drawn with expertise and satisfy various statutory requirements. Failing to do so will compromise the spendthrift trust and potentially allow creditors to reach the assets. The Morris Estate Planning attorneys have the expertise to draft these trusts and ensure that your assets will be protected.