What You Must Know About Domestic Asset Protection Trusts
If you’ve worked hard to build wealth, you need to know about Nevada self-settled spendthrift trusts (SSSTs) (created pursuant to Chapter 166 of the Nevada Revised Statutes), or as they are sometimes commonly referred to in various states, domestic asset protection trusts (DAPTs). These legal tools may help to protect property from lawsuits, creditors, divorcing spouses, and financial disasters. Only a limited number of states allow these types of trusts, and Nevada is one them.
Many people don’t understand how these types of trusts work or whether they’re right for their situation. At Lee Kiefer & Park, our Las Vegas estate planning lawyers are here to help you explore whether a SSST is right for you. Contact our Las Vegas estate planning law firm today at 702-333-1711.
What Is a Self-Settled Spendthrift (or “Domestic Asset Protection”) Trust?
A self-settled spendthrift trust is a special type of irrevocable trust you create during your lifetime to provide a measure of protection of property from future creditors. For example, you might transfer money, real estate, investments, or business interests into the trust, under the management of a trustee of that trust. The key feature that makes SSSTs different from other irrevocable trusts is that you may still remain as a permissible beneficiary of the trust, thereby preserving the possibility to benefit from the assets in the trust, while procuring a measure of protection over the assets from certain lawsuits and creditor claims.
Only 17 states currently allow some type of self-settled spendthrift trust (or domestic asset protection trust), and Nevada is among the best. Nevada has favorable laws that protect the trust beneficiaries and make it more challenging for creditors to access trust assets. Additionally, Nevada has no state income tax and a relatively short waiting period before SSST assets gain full protection under the law.
However, it is important to know that when you set up a SSST, you give up direct control of your assets. You cannot serve as the sole trustee, and you and the trustee must follow specific rules about how the trust operates. While you may continue to manage investments within the trust (as an investment advisor or investment trustee), a trustee other than you must first authorize and approve any distributions you receive.
How SSSTs Protect Your Wealth
The protection works because once assets are properly transferred into the trust, those assets no longer belong to you legally. If someone sues you or a creditor files a claim against you, theoretically they can reach only the assets you own, and you no longer own the assets transferred to the trust. The trust is a separate legal entity with its own identity.
Nevada law gives SSSTs fairly strong protection. Creditors have only two years from the date you transfer assets into the trust to challenge the transfer (or for existing creditors, six months after the person discovers or reasonably should have discovered the transfer). After that window, the assets are protected under Nevada law, even if lawsuits arise against you in the future. This is one of the shortest waiting periods in the country.
However, known or existing creditors at the time you fund the trust may challenge the transfers as fraudulent. Assets transferred specifically to defraud creditors receive no protection.
The trust must be set up correctly and funded properly for the protection to work. This isn’t something you can do on your own with online forms.
Who Should Consider a SSST
High-risk professionals often benefit most from SSSTs. Doctors, surgeons, and other medical professionals face risk of malpractice. Real estate developers and business owners may need protection if ventures ultimately fail. Lawyers, accountants, and financial advisors also face professional liability.
If you have significant wealth and work in a field where litigation is a real possibility, an SSST deserves some consideration. If you have acquired enough assets to justify the setup and administrative costs, as SSST might be a good option for you.
People who should not, and in most cases cannot, use SSSTs include those facing imminent lawsuits or those who need frequent and free access to their principal. These trusts are intended for long-term protection of assets that are not needed for daily living.
Setting Up a SSST in Nevada
Nevada requires several elements for a valid self-settled spendthrift (or, domestic asset protection) trust:
- Residency Requirements: At least one trustee must be a Nevada resident or a Nevada trust company. The trust must have some connection to Nevada.
- Trust Terms: The trust document must specifically state that Nevada law governs the trust. It must be irrevocable, and it must include language that protects trust assets from creditors.
- Trustee Requirements: You cannot be the sole trustee. You can serve as a co-trustee with an independent Nevada trustee, but someone other than you must have authority over distributions.
- Funding: You must actually transfer assets to the trust (or more correctly, to the trustee of the trust). Simply creating the trust document isn’t enough. Real estate needs new deeds, and bank and investment accounts need retitling.
The process can take several weeks to several months to complete properly. An experienced attorney will draft the trust document, help you select trustees, and as needed, guide you through the asset transfer process. Rushing the process, cutting corners, or failure to follow formalities can jeopardize the integrity of the trust and ultimately render little to no protection.
Common Mistakes That Destroy Protection
The biggest mistake people make is waiting until they already have legal problems. If you create a SSST after a creditor is known to you or after someone has filed a lawsuit against you, it is too late. Courts will set aside the transfer as fraudulent.
Other critical mistakes include:
- Maintaining too much control over the trust. If you can access assets whenever you want without restriction, courts may determine you still own those assets.
- Failing to properly transfer assets leaves them outside the trust and unprotected. You must complete deeds, retitle accounts, and follow through on all transfers.
- Using the trust to hide assets from current creditors is fraud. SSSTs may offer protection only against future unknown creditors.
- Mixing protected and unprotected assets weakens the entire structure. Keep SSST assets completely separate from your personal assets.
Is a Self-Settled Spendthrift (or “Domestic Asset Protection”) Trust Right for You?
If you face professional liability risks or own substantial assets, a SSST deserves some consideration. Nevada’s laws make it one of the best states to establish these types of trusts.
Our Las Vegas estate planning attorneys at Lee Kiefer & Park have experience creating self-settled spendthrift trusts for clients throughout Nevada. We can evaluate your situation and help you determine whether a SSST makes sense for you.
Call us at 702-333-1711 to schedule a consultation and discuss protecting your financial future. You can also fill out our confidential contact form.
Attorney Kennedy Lee practices in all aspects of trust and estate law. He views all legal issues from multiple angles (e.g. from litigation to administration point of view) to provide a higher quality of service to our client.
