If you live, have lived, or are planning to live in the United States, it is important to think about how your time spent in the US could affect your wealth. Along with tax and estate planning considerations, foreign nationals (and citizens alike) must also consider the very real possibility that they could lose their wealth as a result of a lawsuit, divorce, or other event resulting in substantial personal liability.

But, it does not have to be this way. These days, there are a number of different asset protection tools that wealthy individuals (both US citizens and foreign nationals) can use to shield their accumulated assets from liability. For assets located in the United States, one of the best tools available is the domestic asset protection trust, and the State of Nevada has what is widely recognized as the most-favorable domestic asset protection law in the country.

An Overview: The Nevada Domestic Asset Protection Trust

What is a Domestic Asset Protection Trust?

As an individual living in the United States, there are numerous potential threats to your wealth. If you get divorced (without a protective prenuptial or postnuptial agreement), your wealth is at risk. If you make a split-second mistake and cause a serious car accident, your wealth is at risk. If you own real estate and an issue with your property causes an injury, your wealth is at risk. If you are a lawyer, doctor, accountant, or other professional and you get accused of malpractice, your wealth is at risk. If you own a business that lacks the proper protections and your business gets sued, your wealth is at risk.

Get the picture?

The United States is known for its litigious society; and, while the average person lacks the assets to be considered a target for litigation (for example, most personal injury lawsuit settlements in the US cap out at the defendant’s insurance coverage), having accumulated substantial wealth makes you an exception. In other words, not only do you have more to lose, but you are also at greater risk of losing it.

This is where a domestic asset protection trust can help. Here’s how it works:

First, you form a qualifying trust. In forming the trust, you become the “grantor.” In the trust’s documentation, you also name yourself as the trust’s “beneficiary” (the person entitled to receive trust distributions), and you select one or more “trustees” to administer the trust (if you have multiple trustees, one of which can be you). You can also appoint a “trust protector,” who oversees third-party trustees’ actions to make sure that the trust is administered with your best interests in mind.

The domestic asset protection trust is a legally distinct entity from the grantor, beneficiary, trustee, and trust protector. Once the trust has been established, the grantor funds the trust with his or her personal assets. This “funding” process involves transferring legal title to the assets to the trust. As a result, the grantor no longer owns the assets (the trust does), and this means that the assets are no longer subject to the claims of the grantor’s personal creditors. The result? The transferred assets are protected, and the grantor can still enjoy the fruits of his or her labor as the trust’s beneficiary.

We will discuss some limitations of domestic asset protection trusts below, but this is the general framework that supplies the risk-mitigation benefits that many wealthy US citizens and foreign nationals desire.

Why Choose Nevada for Your Domestic Asset Protection Trust?

Several US states now offer the ability to establish a domestic asset protection trust. So, why choose Nevada?

Nevada law actually includes several provisions that are favorable to wealthy individuals seeking to protect their assets using the trust structure. These provisions include:

• No Residency Requirement – You do not have to live in Nevada, or even have assets in Nevada, in order to form a Nevada asset protection trust. The only connection you need to have to Nevada is that one of your trustees must reside in the state. This could be an attorney or other advisor, or a Nevada trust company.
• Short Statute of Limitations for Creditor Claims – With a Nevada asset protection trust, assets transferred to the trust become insulated from current and future creditors after just two years (though, note that there is a special six-month “discovery” exception for existing creditors). In other states, trust assets can be at risk for as long as six years.
• No Exception Creditors – A Nevada asset protection trust protects assets against all creditor claims. Other states’ laws have exceptions for claims of divorcing spouses, co-parents who are owed child support, and certain other creditors.
• No Affidavit of Solvency – In some states, the grantor must submit an affidavit of solvency with each trust funding transaction. Nevada does not have this requirement.
• Personal Privacy – In addition to the unique provisions of Nevada’s domestic asset protection law, Nevada’s privacy laws are also generally considered to be among the strongest in the nation.

Nevada Domestic Asset Protection Trusts: Advantages and Disadvantages

While Nevada will be most people’s best option for forming a domestic asset protection trust in the US, it is important to keep in mind that these trusts are not the only asset protection tools that are available. For example, in certain circumstances, a foreign asset protection trust may be an option, and limited liability companies (LLCs), prenuptial and postnuptial agreements, insurance policies, and other trust forms can be used – in appropriate circumstances – to legally shield personal assets from creditors, as well.

In addition to protecting assets from litigations and other threats, a foreign national who is not a US resident can use a Nevada trust to minimize estate and income taxes for US assets. A non-resident foreign national has only $60,000 estate tax exemption compared to $5.49 million (adjusted for inflation) for US citizens and residents. That means any US situated assets over $60,000 will be subject to estate tax up to 40% for foreign nationals. If a foreign national owns real estate in US and sells subsequently, he is required to withhold what is called FIRPTA (Foreign Investment in Real Property Tax Act) tax for IRS. Nevada irrevocable trust can help minimize both estate tax and FIRPTA tax by transferring US properties to a third party trustee.

When evaluating whether a Nevada asset protection trust is right for you, here are some of the key advantages and disadvantages to consider:

The Advantages

The advantages of Nevada asset protection trusts as compared to other options include:

• Strong recognition in most US jurisdictions
• Not limited to assets located in Nevada or Nevada residents
• No need to relocate assets overseas
• Protection from all creditors after limitations period
• Retain control over your assets with appropriate trust structuring
• Minimize estate & income taxes

The Disadvantages

Some of the disadvantages of Nevada asset protection trusts are:

• Nevada asset protection trusts are irrevocable, while other types of trusts and LLCs can be terminated
• May not offer as much privacy and security as transferring assets to a foreign jurisdiction that does not recognize US judgments
• Assets are not protected during the first two years following trust funding
• Governed by US law, which inherently presents certain vulnerabilities as compared to asset protection strategies focused on foreign jurisdictions

Keep in mind, however, that some or all of these disadvantages will typically apply to other asset protection tools as well. For example, the concept of “fraudulent conveyances” in the US generally allows creditors to claim assets that have been transferred solely for the purpose of avoiding judgment liability. As a result, for most wealthy foreign nationals and American citizens with US-based assets, the Nevada asset protection trust will be a strong option for protecting assets that cannot be transferred (or which are not desirable to transfer) overseas.

Discuss Your Asset Protection Strategy with a Wealth Planning Attorney

If you would like more information about the Nevada asset protection trust, contact Jiah Kim & Associates for an initial consultation. You can schedule an appointment online, or call (646) 389-5065 to discuss your wealth preservation strategy in confidence today.

This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.

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