Nevada is the only top-tier Domestic Asset Protection Trust (DAPT) jurisdiction that has no statutory exception creditors that enables creditors to pierce trusts.
Some critics have opined that Nevada DAPT laws are too protective and therefore will not work as represented. However, in May the Supreme Court of the State of Nevada ruled in a unanimous opinion (Klabacka v. Nelson) that Nevada DAPTs are, definitively protected from spousal and child support claims.
A reading of the ruling also emphasizes the importance of engaging a professional fiduciary to administer trusts. If a professional fiduciary is not used, the trust may become vulnerable.
Below are a few excerpts from the ruling:
Klabacka v. Nelson
SUPREME COURT OF THE STATE OF NEVADA
133 Nev., Advance Opinion 24 No. 66772 No. 68292
By the Court, GIBBONS, J.
Requirements of a valid SSST in Nevada
No specific language is necessary to create a spendthrift trust. NRS 166.050. A spendthrift trust is created “if by the terms of the writing (construed in the light of [NRS Chapter 166] if necessary) the creator manifests an intention to create such a trust.” Id. In addition to the spendthrift requirements, to create a valid SSST, NRS 166.015(2)(a) requires the settlor to name as trustee a person who is a Nevada resident. Further, NRS 166.040(1)(b) provides that the SSST must (1) be in writing, (2) be irrevocable, (3) not require that any part of the trust’s income or principal be distributed to the settlor, and (4) not be “intended to hinder, delay or defraud known creditors.”
Validity of [the] Trust
To determine the validity of the trusts, one must first look to the words of the trust agreement to determine if the settlor had the intent to create a spendthrift trust. 76 Am. Jur. 2d Trusts § 29 (2016). Accordingly, “courts look first and foremost to the language in the trust and interpret that language to effectuate the intent of the settlors.” Id. If a trust’s language is plain and unambiguous, then courts determine intent from this language alone. Id. § 30.
Tracing trust assets
In a divorce involving trust assets, the district court must trace those trust assets to determine whether any community property exists within the trusts—as discussed below, the parties’ respective separate property in the SSSTs would be afforded the statutory protections against court-ordered distribution, while any community property would be subject to the district court’s equal distribution.
Despite the public policy rationale used in the other jurisdictions, Nevada statutes explicitly protect spendthrift trust assets from the personal obligations of beneficiaries. Indeed, “[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.” NRS 166.090(1) (emphasis added).
The legislative history of SSSTs in Nevada supports this conclusion. It appears that the Legislature enacted the statutory framework allowing SSSTs to make Nevada an attractive place for wealthy individuals to invest their assets, which, in turn, provides Nevada increased estate and inheritance tax revenues……..Additionally, in 2013, the Legislature proposed changes to NRS Chapter 166 that would have allowed a spouse or child to collect spousal support or child support from otherwise-protected spendthrift trust assets. See Hearing on A.B. 378 Before the Senate Judiciary Comm., 77th Leg. (Nev., May 8, 2013) (statement of Assemblywoman Marilyn Dondero Loop). However, the proposed changes to NRS Chapter 166 did not pass, and, as a result, the Nevada spendthrift trust statutes were not amended to allow for an exception for child- and spousal-support orders of a beneficiary to be enforced against a spendthrift trust.
This rigid scheme makes Nevada’s self-settled spendthrift framework unique; indeed, the “key difference” among Nevada’s self-settled spendthrift statutes and statutes of other states with SSSTs, including Florida, South Dakota, and Wyoming, “is that Nevada abandoned the interests of child- and spousal-support creditors, as well as involuntary tort creditors,” seemingly in an effort to “attract the trust business of those individuals seeking maximum asset protection.” Michael Sjuggerud, Defeating the Self-Settled Spendthrift Trust in Bankruptcy, 28 Fla. St. U. L. Rev. 977, 986 (2001).