We do not know what will happen in the future with our marriage, our children or any other facet of our lives. None of us PLAN on getting a divorce when marrying the love of our life, we do not PLAN paying child support when a child is not under our roof and certainly most of us do not PLAN for a huge lawsuit.
Certain state legislatures and attorneys have thought of planning techniques to protect wealth. Often a trust, either self-settled or a third party trust created by a parent for a child or grandchild’s benefit, may protect those assets from creditors. However, many states’ public policies will NOT protect those assets from creditors such as child support or spousal support. Such creditors are called “exception creditors”. A recent case in Florida determined that a third party trust created for the benefit of a beneficiary is not necessarily protected from the beneficiary’s exception creditors.
One of the few states that permits a self-settled trust AND protection from exception creditors is Nevada. Until recently, however, no one was sure how a court would rule. A recent Nevada Supreme Court case approves such trusts and protection from exception creditors.
In Klabacka v. Nelson, prior to any divorce proceedings, Matt and Lynita (husband and wife) transitioned their community property assets into each of their separate property self-settled trusts through a separate property agreement. In 2009, they began divorce proceedings and, in the course of the proceedings, the lower court awarded Lynita spousal support and child support.
The self-settled trust Matt created had specific “spendthrift trust language” in the trust which provided that “[n]o property (income or principal) distributable under this Trust Agreement, …shall be subject to anticipation or assignment by any beneficiary, or to attachment by or of the interference or control of any creditor or assignee of any beneficiary, or be taken or reached by any legal or equitable process in satisfaction of any debt or liability of any beneficiary, and any attempted transfer or encumbrance of any interest in such property by any beneficiary hereunder shall be absolutely and wholly void”. Matt’s trust is considered a self-settled spendthrift trust.
The lower court ordered that husband’s personal obligations of spousal and child support (the exception creditors) could be asserted against his self-settled spendthrift trust, in spite of the trust language noted above.
On appeal, the appellate court looked at other jurisdictions (such as Florida ) which permitted exception creditors’ claims to be asserted against third party trust assets (Florida does not permit self-settled trusts), but found that, under Nevada law, exception creditor claims are not allowed to be satisfied from a self-settled spendthrift trust if those creditors were NOT known at the time the trust was created. Further, Nevada has never amended their spendthrift trust statutes to allow exception creditors to be enforced against a spendthrift trust.
The court noted that “despite the public policy rationale used in other jurisdictions Nevada statutes explicitly protect spendthrift trust assets from the personal obligations of the beneficiaries”. The Nevada statute provides that “[p]rovision for the spendthrift trust beneficiary will be for the support education, maintenance and benefit of the beneficiary ALONE, and without reference to … the needs of any other person, whether dependent upon the beneficiary or not” (Emphasis added).
As Matt was (1) the sole beneficiary of his own spendthrift trust; (2) Nevada permits self-settled trusts and (3) exception creditors were NOT known at the time of the creation of the trust, Lynita could not satisfy the exception creditor claims from Matt’s self-settled spendthrift trust.
ADVICE: While you may not personally agree with Nevada’s public policy (and Florida does not), if you have clients or if you want to create a trust for your loved ones and do not want the assets to be subject to claims from creditors, including exception creditors (either yours or a beneficiary’s), it appears that the Nevada Supreme Court has paved the way for such protection. Be aware of other possible issues, such as state income tax, if any, or state estate tax, if any, and perhaps community property issues. Consultation with a Nevada attorney is a must in these situations. The Nevada attorney can work with the Florida attorney. Attorneys need to advise their clients of alternatives, especially if asset protection is high on their list of needs.
WORD OF THE WEEK: Self-Settled Trust: The self-settled trust originated from offshore planning and made its way to the United States. A self-settled trust is self explanatory. I create a trust and put my assets in the trust and, even though it is “self-settled” (I created and funded the trust), the assets are protected from my creditors. Normally, if I have complete access to assets, those assets, unless exempt under Florida or federal law, are subject to creditor claims. The self-settled trust, although accessible my me, is protected from my creditors.Obviously, this description barely touches all of the details and requirements of a self-settled trust.
States that permit self-settled trusts have statutes governing these trusts. Most important, if the person creating a self-settled trust already has creditors or know they may have potential creditors (a lawsuit has been filed), such creditor protection may not be allowed within certain time periods. Self-settled trust legislation was voted down in Florida a few years ago. To this author’s knowledge 16 states allow self-settled trusts. If you are interested in a self-settled trust, discuss with your attorney and determine the best location and the ramifications of such a trust.
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