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Tips of the Trade: Asset Protection Planning

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6 nevada lawyer May 2013
By caTherIne colomBo, esQ. and
Jeremy spacKman, esQ.
high-net-worth clients, or clients who are engaged in high-
risk professions, should consider asset protection planning,
including the use of nevada asset protection trusts and
limited liability companies, a vital and necessary part of
their overall estate plan. when properly structured, asset
protection planning can be a useful tool for protecting a
client’s valuable assets from potential creditors. on the other
hand, a poorly executed plan can be detrimental, allowing
creditors to reach a client’s assets, exposing clients to
unfavorable court orders and even potential incarceration.
to increase the probability that an asset protection plan will
be successful and will sustain a challenge by a creditor, it
is imperative that the planning is done correctly. to ensure
proper planning, consider the following when assisting a
client with an asset protection plan:
plan in advance of
potential problems
The best way to avoid liability is to establish
an asset protection strategy long before it is ever
needed. Once a claim against a client arises or
a client is served with a lawsuit, it is often too
late to implement any effective asset protection
strategies. Planning becomes moot at this stage,
because any transfers made with the intention to
hinder, delay or defraud creditors are considered
fraudulent conveyances.
If a transfer is deemed
fraudulent by a court, then the law provides that
the transfer can be undone. As such, the best
time to institute asset protection planning is well
before a potential lawsuit is on the horizon.
nevada asset protection
Trust (napT)
Nevada is unique in that it is one of a
handful of states that allows an individual
(settlor) to establish a trust in which the settlor
is a permissible benefciary and the assets of the
trust are protected from that individual’s creditors.
Under Nevada law, the assets of a spendthrift trust
will be protected if the trust document is:
1. Irrevocable;
2. Does not require that any part of the
principal or income of the trust be
distributed to the settlor; and
3. Was not set up with the intention
to hinder, delay or defraud known
Assuming there are no known creditors
at the time assets are transferred to the
trust, the client’s assets should be protected
from creditors two years after the assets are
transferred to the trust.
May 2013 nevada lawyer 7
Business entities
Various business entities, such as limited
partnerships or limited liability companies, may be
used to provide a layer of creditor protection. Such
entities do not necessarily have to be engaged in an
operational business and are often used to protect
investment assets, such as brokerage accounts.
Not all entities are created equal, so when setting
up entities for asset protection, it is imperative to
choose the right type of entity. Under Nevada law,
the sole remedy of a judgment creditor of a debtor
member/partner is a “charging order.” A charging
order essentially acts as a lien against a debtor
member/partner’s interest in the business entity.
A creditor cannot execute on the charging order
unless a distribution is made to the member/partner.
If a client has planned properly, a charging order
can be a powerful tool for forcing the creditor
to agree to a favorable settlement. In Nevada,
certain shareholders of corporate stock may also
beneft from the charging order, but Nevada is the
only state that recognizes this remedy. Therefore,
clients should still consider the use of a limited
liability company or limited partnership. Note that
general partnerships should never be used for asset
protection planning purposes as they do not afford
the same protection that a limited liability company
or limited partnership provides.
maintain formalities
It is important to maintain the integrity of
the established entity to ensure asset protection.
For example, if a client sets up a Nevada Asset
Protection Trust, the trustees must uphold their
fduciary duties as outlined by the trust document.
All trust distributions should be authorized in
writing by the distribution trustee prior to being
made. If the formalities of the trust document
are not followed and a client is sued, a court
continued from page 7
could potentially pierce through the trust using an
equitable remedy such as the “alter ego” theory.
Likewise, it’s vital for business entities to follow
corporate formalities. For example, business assets
owned by the entity should not be co-mingled with
an owner’s/member’s personal assets. Further,
all major transactions and investments should be
approved and documented by the owners/members
of the entity and the owners/members should hold
annual meetings and follow all of the operating
requirements as provided in the governing
documents of the entity.
assets protected By law
State law provides that several classes of assets
are protected by law and are therefore exempt from
judgment. A complete asset protection plan should also
take advantage of any federal or state law exemptions.
For example, in Nevada, a client can protect up to
$550,000 of the equity in their personal residence by
fling a homestead.
Additionally, retirement accounts
are protected up to $500,000, as are all monies,
benefts, privileges or immunities accruing, or in any
manner growing out of, any life insurance.
Clients work hard to build their wealth and it is
essential that they give proper care and consideration
to asset protection planning in order to protect their
hard-earned assets. There is no single planning tool or
technique that will universally protect all of a client’s
assets, so the most effective asset protection plan
involves a mix of the various tools and techniques
available to clients. By planning far in advance of any
potential problems and by following the formalities
and requirements of any asset protection entities,
clients can signifcantly increase the likelihood that
their plan will withstand any potential challenges by
creditors. More importantly, they will sleep soundly
knowing the wealth they have amassed is protected.
1 NRS112.180
2 NRS166.040(1)(b)
3 NRS166.070
4 NRS21.090(l)
5 NRS21.090(k)
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