On June 4, 2011, Nevada Governor Brian Sandoval signed into law S.B. 221 with an effective date of October 1, 2011. The legislation is intended to improve and update Nevada’s laws to make the state an ideal jurisdiction for the establishment of trusts. Chapter 166 of the Nevada Revised Statutes was previously amended to allow for self-settled asset protection trusts, which are irrevocable trusts that are exempt from claims of the settlor’s creditor provided that the transfer to the trust is not proven to be fraudulent during the 2-year period following the transfer. S.B. 221 further updates Chapter 166 to clarify and expand existing law.
Beginning on October 1, 2011, the following trusts will qualify as self-settled asset protection trusts, making the settlor’s interest in such trusts exempt from the claims of creditors:
- A Charitable Remainder Trust that provides for annual payments to the Settlor;
- A trust that distributes retirement benefits (whether as income or in the amount of the Required Minimum Distribution);
- A Grantor Retained Annuity Trust; and
- A Qualified Personal Residence Trust.
Additionally, the settlor of a self-settled asset protection trust may use real or personal property owned by the trust without limiting the scope of the protection provided by such trust.
The law makes clear that no action of any kind may be brought at law or in equity against the trustee of an asset protection trust if at the date the action is brought an action by the creditor would be barred by Section 166.170 of the Nevada Revised Statutes. This clarification is intended to dispose of any arguments that Nevada’s fraudulent transfer laws, which include a 4-year statute of limitations, negates the more favorable 2-year statute of limitation rule provided for self-settled asset protection trusts. The legislation makes clear that if an individual is a creditor at the time the transfer to the asset protection trust occurs, then such individual must bring an action by the longer of (i) two years from the date of the transfer to the trust or (ii) six months from when the person discovers or reasonably should have discovered the transfer.
The law also allows for the transfer of a trust from a foreign jurisdiction to Nevada without re-starting the statute of limitation period (i.e., the date of the original transfer to the trust is treated as the date the property was actually transferred to the trust rather than the date the trust situs was moved to Nevada). For this rule to apply, the transfer must be from a state where the asset protection laws are substantially similar to Nevada’s.
Pursuant to the revisions to Section 166.170, a creditor may not bring an action with respect to a transfer of property to an asset protection trust unless the creditor can prove by clear and convincing evidence that the transfer either (1) was a fraudulent transfer or (2) violates a legal obligation owed to the creditor under a contract or a valid court order that is legally enforceable by that creditor. The determination of whether a transfer is fraudulent does not affect a separate transfer to the trust. Consequently, if a transfer is determined to be fraudulent, it will not taint the exemption of the entire trust.
Also notable, the law provides that if assets are appointed into a second trust pursuant to Section 163.556 of the Nevada Revised Statutes (i.e., if the trust is decanted), the assets in the second trust are deemed to have been transferred to such trust as of the time they were transferred to the original trust. Therefore, decanting an irrevocable trust to a new trust will not re-start the statute of limitations.