With a few exceptions , all of your assets are subject to collection by your creditors. The Nevada Asset Protection Trust (“NAPT”) is a separate entity under state law; therefore, your creditors cannot take assets owned by the NAPT because they are not your assets.
Although it sounds too-good-to-be-true, it isn’t. It is Nevada statutory law and has been for nearly twenty years. It has been tested and proven. The Nevada Supreme Court recently decided in favor of the debtor, upholding the integrity of the NAPT.
A proper NAPT must be drafted and operated in a specific way. First, it must comply with statutory requirements. Second, it must be operated as a separate and distinct entity. And third, it must not be funded with the intent to defraud a creditor.
You form the NAPT by transferring your assets to the NAPT. You are the beneficiary of the NAPT and receive discretionary distributions of income and principal. You also serve as the Investment Trustee of the NAPT, which allows you to manage the day-to-day of your investments and businesses, as well as make changes (buy or sell, refinance, etc.) to those assets. In many cases, we recommend that the NAPT form limited liability companies (“LLC”) and contribute investments into separate LLCs, naming you as Manager of each LLC. Not only does this provide added asset protection, it also provides you with managerial control of the assets.
You are not, and cannot be, the Trustee in charge of distributions. This must be a truly independent person or entity, such as a trust company, bank, lawyer, or CPA. You should avoid using family members and employees. The Distribution Trustee has sole and exclusive responsibility for making distributions. He, she, or it decides the “if,” “when,” and “amount” of distributions.
Distributions are made in compliance with the Trust Agreement. The Trust Agreement will prohibit the Distribution Trustee from making distributions when he, she, or it knows that you will not receive the benefit of that distribution. For example, if you are in the midst of a divorce proceeding, the Distribution Trustee will wait until its conclusion before making distributions. Otherwise, the Distribution Trustee is free to distribute as much, and as often, as it deems is in your best interest. If a Distribution Trustee abuses its powers, it may be removed and replaced immediately.
To avoid even the appearance of you controlling the Distribution Trustee, we also recommend that the NAPT identify a Trust Protector whose sole function is to hire and fire the Distribution Trustee. This Trust Protector is often a good friend or relative. He or she has no fiduciary obligations and often is not paid for this service.
At all times you must have at least one trustee located in Nevada. The trustee must perform some administrative functions. For this reason, we recommend that the Distribution Trustee be the Nevada trustee.
A NAPT is usually drafted to be tax neutral. Transfers to the NAPT do not trigger income tax and do not trigger gift tax. Furthermore, the NAPT does not pay income tax. All of the income tax generated by the NAPT’s investments flows onto your individual tax return. Additionally, you are not taxed separately on the NAPT’s distribution. In essence, your current tax situation will not change.
Respecting the aforementioned formalities is crucial to preserving the asset protection benefit of a NAPT. Failure to respect these formalities, or should you otherwise deal with the NAPT as if it were not a separate entity, may result in a creditor setting aside the NAPT and absconding with the NAPT’s assets.
In addition to respecting the formalities, the NAPT must be properly funded. Proper funding is a facts and circumstances inquiry, so no two clients are the same. In general, the key issues are when it was funded and what it was funded with. It is important that you are not insolvent after it is funded. Additionally, it should not be funded with the intent to hinder or delay an active creditor from collecting a judgment. On this note, remember that NAPTs are also estate planning tools and may also serve a tax planning purpose (see footnote 4). Through the consultation process, we will design and implement the NAPT to provide an array of benefits; its sole intent will not be to hinder or delay a creditor’s collections.
We recommend NAPTs to most of our clients, each tailored to his or her specific circumstances. The costs to forming and maintaining a NAPT vary based on the NAPTs complexity. In addition to the legal formation fees, if you hire a professional trustee, he, she, or it will charge an annual fee. These charges will provide you with peace of mind, knowing that your estate is insulated from unpredictable and aggressive creditors.