In this episode, Toby Mathis, Esq. chats with fellow attorney John Anderson, Esq. of Anderson Business Advisors about the pros and cons of establishing trusts in Nevada. The discussion digs into Nevada trusts’ specific functions and benefits, including the “seasoning period” and the role of trustees. Toby and John explore how a third-party trustee can offer protection, methods for withdrawing funds, and the power of appointment in Nevada trusts. Additionally, they touch upon safeguarding your home with a trust, using a trust for essential expenses, and the potential risks of insolvency and bankruptcy. The conversation highlights the likelihood of lawsuits settling against a Nevada trust while acknowledging the absence of tax advantages.
Highlights/Topics:
- Trusts – to revocable or irrevocable?
- Advantages to setting up trusts in Nevada and South Dakota
- The “seasoning” period
- Trustees and their functions in these states
- Protection through a third-party trustee
- Filing taxes and withdrawing money – Nevada trusts
- Power of appointment
- Protecting your home with a Nevada trust
- Using an asset protection trust to pay for essentials
- Risks of voluntary insolvency and bankruptcy
- Most lawsuits will choose to settle against a Nevada trust
- Tax advantages – there aren’t many
- Pro-rata vs. non-pro-rata
- A high-profile divorce case with a Nevada trust, and the outcome
- Not subject to the Corporate Transparency Act
- Setting up a Nevada trust, statute of limitations
Resources:
Email John Anderson for a consult
Tax and Asset Protection Events
Full Episode Transcript:
Toby: Hey, guys. Toby Mathis here, and I’m joined by John Anderson of Anderson Business Advisors. Today, we’re going to dive into everything you want to know about Nevada Asset Protection Trusts and more importantly, how you can put one together. First off, hey, John, welcome.
John: Thanks, it’s great to be here
Toby: All right, John’s been here before. He’s a trust expert, trust attorney, and deals with this stuff day in and day out, so it’s really easy for him. What I’ve asked him to do is please make it easy for us. John, I’m going to hand it to you so you can explain what Nevada Asset Protection Trusts are and who might benefit from them. If it is something that would benefit somebody, how could they actually put one together?
John: Sure. In order to understand the Nevada Asset Protection Trust, we’ve got to understand what we had before when it comes to trust and asset protection. Primarily, there are two types of trusts, you have revocable and irrevocable. If you have a revocable trust, there is no asset protection at all. We could use irrevocable trust to provide some asset protection, but in order to do that, you had to either give up control or not receive any kind of benefit from the assets in the trust.
If you think back to when Mitt Romney was running for president, there was a big uproar about how he had so many assets, and he could use his position as president to enrich himself. One of his proposals was that he would create a blind trust, where he would turn over all of his assets into a trust and give full control over to an independent trustee. He wouldn’t have any control over it. He wouldn’t even know what they’re doing in there. That way, he couldn’t technically enrich himself.
That’s what we used to have to do in order to get some protection out of a trust, but that changed. In 1997, Alaska, they didn’t have anything else to do up there, decided to create a whole new trust. What we do is we take and we split the trustee powers into different pieces. I’ll explain that in a minute.
It allowed the grantor, the person who creates the trust, to still have some control over the assets, but still provide asset protection. Alaska did this in order to try and draw business to the state, particularly the banks, because one of the requirements was one of the trustees had to be a bank in the state of Alaska. That was their motivation for this.
Since then, 19 states have adopted these laws. Of those states that have adopted it, the two best states are Nevada and South Dakota. The reason why they are considered the best or the strongest for asset protection is because they have what’s called a no statutory exception for creditors. Meaning that in most of the other states, they have some type of a creditor like alimony, child support, and other types of creditors that can access the assets in the trust. But in Nevada and South Dakota, there’s nobody allowed to access the assets in the trust without the approval of what’s called a distribution trustee.
Let’s talk about what is involved when you set up one of these trusts. It’s an irrevocable trust. It means once you sign the document, you can’t change the terms. There are some limited changes you can make to it, but for the most part, it’s going to be set. You have a statute of limitations period or what we call a seasoning period, where the assets need to sit in the trust for that time period in order to get the full protection from the trust.
It does give some protection even if it’s before the seasoning period has ended, but we want to at least get the assets in there for that full seasoning period. Depending on the state where you’re at, it’s going to have a different seasoning period. Nevada has one of the lowest seasoning periods, which is two years or six months, depending on if you make publications. If you do publications at six months, if you just transfer the assets, but don’t do any kind of notices or publication, it’s two years.
I talked about how the trustee powers are split. They’re actually split into three different trustees. You have an administrative trustee. This is the person who signs on behalf of the trust. They move the assets around. You have an investment trustee who determines how assets within the trust are managed.
For example, if you had a house in the trust, and you wanted to sell that house. The investment trustee would tell the administrative trustee, go sell that house, take the proceeds, and go buy this new house in the name of the trust. The investment trustee is telling the administrative trustee how to actually manage the assets.
The third trustee, and this is where we get the asset protection from, is what we call a distribution trustee. This has to be an independent person, typically from the other trustees. It has to be independent from the, the person who creates the trust, the grantor, and it also has to be someone who’s located in the state of Nevada so that we can avail ourselves of the laws of the state, so we can use Nevada laws.
The distribution trustee is the only person authorized to allow for a distribution. That doesn’t mean they have access to the assets themselves. It just simply means if you as a beneficiary want a distribution, you want to pull out a hundred thousand dollars. You have to go to the distribution trustee and say, hey, I want to pull out a hundred thousand dollars from the trust. The distribution trustee has full discretion on whether to say yes or no. If they say yes, then they tell the administrative trustee, they take a hundred thousand out of the trust and go give it to the beneficiary.
Of those three trustees, you as the grantor can be the administrative trustee, and you can be the investment trustee. You can take an asset, you can put it into the trust, you can still manage it and control it. You’re the one that has the authority to sign on behalf of it, but you just don’t have the ability to remove the asset from the trust. That’s only the distribution trustee. That means if a court tries to get to the assets, you can just simply tell them, I don’t have access to these assets, someone else does.
In order for me to remove it from the trust to give to the creditor, I’d have to have their approval first. The distribution trustee has full discretion on whether to allow that or not. If the court says, hey, pull this out of the trust, the distribution trustee can just say, no, I’m going to keep it in the trust. That’s what allows us to have this asset protection, because you don’t have the authority to pull assets out of the trust, a third party does.
The trust is also a grantor transfer tax purposes. That just means it’s, it’s a pass through. If you put a business into the trust, you still file your taxes exactly the same, it just flows straight through the trust to you personally. It doesn’t create any kind of tax issues.
Also, one thing that’s fairly unique to Nevada is within the code, it allows you to remove an asset from the trust temporarily to refinance or use it as collateral or something like that, then put it back into the trust, and it doesn’t reset the seasoning period or the statute of limitations period.
If you’ve had a property in there, it’s been there for two years and you decide, I want to refinance this property, you could pull it out of the trust in your own name, refinance it, and then put it right back into the trust. You’re not restarting that seasoning period. That’s another advantage that Nevada has over most of the other states.
You as the grantor, what kind of powers do you retain? You still have some control over the assets as far as how they’re invested within the trust. You have veto power over the distributions. This probably wouldn’t happen, but if a court ordered a distribution from the trust and for some reason, the distribution trustee said yes to it, you still have the power to veto that and say, no, I’m going to veto that distribution. You can pull that out.
You can have powers of appointment. Power of appointment is where you can redirect what’s going to happen with the assets after you pass away through something like a living trust or a will. It allows you to change who the beneficiaries are. The problem with an irrevocable trust is you can’t go in and change who the beneficiaries are or redo the trust very easily. But there are ways around that by using powers of appointment or even having a living trust tied to as a contingent beneficiary on the irrevocable trust.
You can remove and replace a trustee. For example, if you named a distribution trustee and you decide, I don’t want to use them anymore, I want to get a new distribution trustee, as long as it still qualifies as a Nevada trustee, you could fire that trustee and go hire a new one. You still have the ability to move around who the trustee is going to be.
You also have the use of the trust assets. A lot of people will actually use this as protection for their personal residence. You can have the use and enjoyment of your personal home, have it within this trust, and protect it from potential creditors.
What kind of protection does this actually provide? The beneficiary can’t assign or demand access to any of the trust assets. Because the beneficiary can’t do that, that also means a court can’t force it. Any powers that a beneficiary can have, a court can exercise on their behalf. We’ve got to make sure that the beneficiary doesn’t have any kind of rights to the assets or require a distribution from the trust.
Distributions can only be made directly to a named beneficiary. If you have a creditor, we can’t make a distribution as if we’re the distribution trustee. We couldn’t make a distribution to that creditor because they’re not a named beneficiary. If you even tried for some reason to assign your beneficial interest, the distribution trustee can just say, nope, can’t do that. I’m not going to honor that in any way. It really does lock down the assets so that no one can really get to them.
Also, the trust can make payments on your behalf. For example, if you have a lawsuit that’s coming against you, and you’ve got income coming into this trust, you could technically have the trust go and pay for your mortgage. It could pay for your utilities. It could pay for your food and things like that. That’s not necessarily a distribution to you, it’s just paying for those things straight out of the trust. It allows you to have creditors coming after you, but they can’t get to anything. But you can still receive benefits from the trust indirectly. It’s not distributions of cash to you, it’s paying for whatever your needs are.
There’s a few things you don’t want to do with an asset protection trust, one is create voluntary insolvency. In this situation, you would be taking all of your assets and putting it into one of these irrevocable trusts. If you do that, you create voluntary insolvency because you don’t have any assets anymore. That can trigger a fraudulent transaction and undo the trust. We don’t want to do that. We want to keep some assets out of the trust, but we want to have other assets in the trust that are going to be segregated and protected. I’ll show you what that might look like here in a minute.
You don’t want to declare bankruptcy. You want to try and force the creditor to either do an involuntary bankruptcy, which is incredibly difficult to do. Or you just make them sit, and you keep getting the trust to pay for your needs and things like that.
The main purpose of this trust isn’t necessarily to get into that position where you have creditors already coming after you, and they have judgments against you. The purpose of the trust is when someone sues you, if they have a valid claim, you can go to them and say, okay, maybe you have a valid claim, but I have most of my assets in one of these asset protection trust, it’s going to be very difficult for you to even get to those assets. Let’s negotiate, let’s settle, and maybe for pennies on the dollar, we can make this all go away.
That’s typically what happens with these trusts. When you look at the case law, as far as Nevada Trust go, there are only two cases. These have been around for a couple decades. The reason for that is because most of them are just settling out. They don’t want to go to court and try and fight these things, because it’s going to be incredibly difficult and incredibly costly. It gives you incredible leverage in the negotiations if someone is trying to sue you.
The other thing is tax avoidance. This is not helping you with taxes in any way. There are a lot of marketing out there for spendthrift trusts that are going to help you avoid paying taxes. That is not what a spendthrift trust does. Income taxes or even estate taxes, this is not a vehicle for reducing or eliminating those types of taxes. It’s just for protecting the assets from potential creditors.
What would this look like? You’ve got your asset, you transfer it into the trust. The trust is going to manage it by the trustees for the benefit of the beneficiary, which can be you as the beneficiary. The trust can make distributions of income and other assets to you, if the distribution trustee allows for it. Upon your death, we’re going to have some type of a contingency distribution so that the assets can then be transferred within the trust to whoever you want your heirs to be.
A lot of times, we actually use a living trust in that situation to allow for the distribution provisions to be changed. We would say, distributed according to what my living trust has set out, and it will allow you more flexibility as far as how you want that to look. As far as structuring it goes, typically, the situation where we want to use one of these trusts is where you have a high liability.
I set these up for doctors, restaurant owners who are serving alcohol, tow truck drivers, or they have a tow truck business. They get sued all the time. Where we’ve got this high liability, we’re going to have that segregated. You’re going to own that business off to the side, and then you’re going to have safe assets like real estate if it’s not too risky.
Some real estate can be risky. You might be a high liability. But say for real estate, stocks, bonds, cash, things like that, that aren’t going to create a liability of their own, we’ll put those into typically some type of a holding LLC like a Wyoming LLC, and then we’ll have the ownership be 90% to the asset protection trust, 10% to you as an individual or to your living trust if you have one.
The reason why we give you 10% ownership is because if you don’t have any creditors coming after you, you can take a non pro rata distribution out of the trust. You can get income from these assets, and you don’t have to go through the distribution trustee. But as soon as you have a creditor coming after you, you can switch it. You have the income going into the asset protection trust and not to you personally.
When you take out non pro rata distributions from an LLC, it skews the capital accounts. In other words, what we’re doing is we’re almost creating a lien on behalf of the asset protection trust for that holding LLC. If a creditor comes along and somehow they force the liquidation of that LLC, the first thing you have to do in liquidation is even out the capital accounts.
The trust is owed a whole bunch of money because we’ve skewed the capital account in favor of you as an individual, so there’s a bunch of money owed now to the trust. That creates asset protection in that situation. Because if you’ve got the high liability outside the trust, if they sue you, they somehow get to you personally, then all the assets are locked down under this asset protection trust.
If you didn’t have an asset protection trust and you just had the LLC, they could get a charging order against you. They may not be able to actually get to the assets, but you wouldn’t be able to make any kind of distributions to yourself. If you make a distribution from the LLC to you as the owner and they have a charging order against it, all that money goes to the creditor. If we have the asset protection trust in place, the asset protection trust, like I mentioned before, can pay for personal expenses. We can get around the charging order. It’s giving even more protection than just what an LLC would provide on its own.
It’s very difficult to get into these trusts. It’s going to cost the creditor a lot of time and a lot of money, so most of them will just settle and allow you to get out of the lawsuit fairly easily. The two cases where we do have someone that challenged the asset protection trust, both of them are divorce cases.
In one of the cases, the trust was upheld, and the other spouse could not get access to it. The other case, the spouse was allowed access to the assets in the trust, but the reasoning why under the court ruling was because the lawyer who drafted the trust screwed up. He said it was a revocable trust, not an irrevocable trust. That was why they were allowed access. In that case, it had to go all the way up to the state Supreme Court before they could even get that ruling.
If you looked at the legal fees versus how much the marital assets were worth, it far exceeded everything that they had. It was basically mutually assured destruction. Each spouse just hated each other, and they were just willing to do anything to just destroy each other in the courts. Most creditors are not that vindictive. Maybe an ex spouse, but other types of creditors are not going to be going that far. So you’re able to get quite a bit of protection for the assets in the trust.
One little story about how these trusts protect even in case of a divorce. There was a case in Texas, a rich billionaire guy. Texas is community property. I’m going to ask you, Toby, what you think the outcome was? We’ve got community property, or do you already know this case?
Toby: No, I don’t. Give me the facts.
John: Okay. Texas community property married for over 30 years. The business that’s worth all this money was founded while they were married, the husband put most of the assets into South Dakota asset protection trust and divorced his wife.
Toby: Did his wife know?
John: The wife did not know.
Toby: Yeah, then that’s a community asset. That’s going to get pierced.
John: In the court, he filed for divorce. How much do you think she got?
Toby: If I’m that judge, and I clerked for a divorce lawyer who ended up being a judge, I would imagine that they would make an example out of him. If it was me, if I’m that judge, I’m probably punishing the guy for secreting marital assets. But what happened?
John: This actually made national news. It was written up in Forbes, CNBC, Wall Street Journal. All did stories on this before it even got to the court case, basically lampooning this rich billionaire guy. There were women’s rights organizations protesting his company and him personally. It went on and on because of Covid partially. In the end, she settled for less than $100 million.
Toby: They didn’t take the asset out of the trust. It seems to me like that would have been a community asset that they transferred in there.
John: It was.
Toby: Yeah. That doesn’t make sense to me.
John: Basically, the costs of actually going after the assets and trying to pierce one of these trusts was going to take so much time and so much money that the wife just said, screw it, I’ll take it. We don’t know the specific amount because it’s in a settlement, but she said it was less than $100 million.
Toby: Did the court have jurisdiction of the assets? He must have had something that was not in the state of Texas.
John: They never got that far in the case.
Toby: Yeah, that sounds like he secreted marital assets. I know there’s the case in Washington where they had an Alaska trust, and a guy went bankrupt. They used the 10-year clawback to get it out. I would say that the court would have been apt to say, nope, take it out, grab the guy. What they like to do is put you in jail for contempt until you move the asset. Even if they don’t have jurisdiction over the asset, they might still have jurisdiction over the person and force them to do something. But she gave up, huh?
John: Yup, she gave up. She was owed. There’s a lot of different estimates I’ve read out there, but it’s between $1 and $3 billion of assets.
Toby: I’m not familiar, but she might have just said, you know what, a hundred million, I’m good or whatever it is. Do we even know the amount or is it just hyperbole?
John: We don’t know the exact amount, but as far as she has publicly said, it was less than $100 million.
Toby: Yeah, I’m not familiar with that. I’m going to take a look at that now. That’s smacks of unfairness. Here’s the thing, whenever you have a fraudulent conveyance, these things don’t necessarily work or is a voidable transaction. I have a creditor and I remove it. There’s a timeline where it starts ticking, and then it can work.
Generally speaking, when you’re moving assets whether it be Medicare, bankruptcy, or you put yourself in insolvency, which means you have less assets than you have liabilities, the court can undo that. They can unring that bell.
John: They can, but it’s going to take quite a bit of effort on behalf of the creditor to be able to get to those assets. That’s why you don’t want to declare bankruptcy with one of these trusts. You just sit on it and just say, hey, I’m just going to sit on this for a long time until the statute of limitations or something runs out. If you want to try and get to something out of it, let’s go to the negotiating table and settle this.
Toby: John, two questions. (1) Are these trusts subject to the Corporate Transparency Act and this new beneficial owner reporting?
John: Nope, they are not subject to the Corporate Transparency Act. It’s another benefit of one of these trusts. It can hide assets.
Toby: (2) How do you set one up? Is it something you have to file with the state, or is it something you just document with the trust attorney like yourself?
John: It’s not recorded or published in any way. You draft up the documents, sign it. Once the trust is signed, it is legal, and then you have to fund or transfer the ownership of the asset into the name of the trust. That’s why we often will use the holding company so you’ll have a holding company on title, so no one will even know that this trust exists.
Toby: Yeah. Do you publish any notice, or do you do anything that puts anybody on notice that you’ve set up the trust and funded it?
John: You can. If you want to shorten that statute of limitations period from two years to six months, you can make a publication in the newspaper about, hey, I set up this trust and assets have been transferred into it. Some people want to do that, Some people don’t, some people just want to keep it on the download. They don’t want anybody to even know about it. That just means you have a two-year statute of limitations period instead of the six months.
Toby: Who do you normally make as the beneficiary? Let’s say that I’m married, but I’m really bad at marriage. Let’s say you’re a rich executive at a casino who likes to go through wives or vice versa, a wife who likes to go through husbands, or somebody likes to go through partners, whatever. Is there language that we can put in there to protect ourselves so that you don’t create a trust, then you get a divorce, and now my spouse is still the named beneficiary?
John: Yeah. We can technically write it in a way. We can say that your spouse can be a beneficiary, but we don’t identify who that spouse is.
Toby: My then spouse?
John: Right. When they become your ex spouse, they are no longer a beneficiary of that trust because it’s only your spouse that qualifies. If you get remarried, hey, your new spouse is now a beneficiary.
Toby: They can have the distribution. If you get the lightning suit out of you, they can still get assets to help your household.
John: We might also name you and your kids as the beneficiaries so that when it goes to court, you can say, hey, I set this up for the benefit of my kids.
Toby: Pretty wild. I think you did a really good dive. I just sat back and listened because I thought you were doing a great job. If somebody wants to set one up, can they just reach out to you? I could put a link that gives them a consult and get set up.
John: Yeah, you can reach out to me. Probably the best way is to email estateplanning@andersonadvisors. I’ve got a secretary and some paralegals that man that, and they’ll set you up an appointment with me directly. We can talk about how to set one of these up, whether it’s a good fit for you or not. I talked to one client this morning that thought they wanted one of these, but after going through all of their things, it really wasn’t a good fit for what they were doing.
You really need that higher liability that you’re worried about. If everything you’ve got is just low liability, LLCs, corporations, those types of things will work just fine. You don’t need to add this on top of it.
Toby: Perfect. I appreciate you coming on and educating us. I’ll make sure that that link gets put in the show notes. Thanks again, John.
John: Hey, you’re welcome. Have a good day.
