On May 25th, the Nevada Supreme Court reaffirmed that Nevada has the most protective trust laws in the nation, by rejecting Lynita Sue Nelson’s claim for alimony and child support to be taken out of a self-settled spendthrift trust established by her husband, Eric L. Nelson.
The court ruled that Nelson still had to pay $800,000 in alimony, back child support and tuition for his daughter’s private school education, but out of his personal assets, not the trust he had established.
The Nelsons had divided their assets in 1993. The property division was intended to shield the wife from riskier assets in the Nelson portfolio, including casinos and liquor licenses. In 2001, shortly after the Nevada legislature enacted laws enabling them, the two placed their separate assets into two self-settled spendthrift trusts.
A self-settled spendthrift trust is a form of irrevocable trust which names the grantor as a beneficiary. Self-settled spendthrift trusts are typically structured so that neither the grantor nor his creditors have the power to access trust assets; rather the trust delegates authority for distributions to an independent trustee.
If a creditor or spouse is suing the grantor for assets in the trust, the trustee can simply not make any distributions. As a result the assets are protected unless the law allows exceptions, as several state statutes do, for alimony and child support. Klabacka vs. Nelson tested whether the Nevada Courts would allow these exceptions.
In 2009, the couple began divorce proceedings, and Lynita Sue sued for alimony and child support. A district court judge ruled that these costs should be paid out of Eric's trust, citing statutes from South Dakota and Wyoming, as well as case law from Florida, which allowed self-settled spendthrift trusts to be accessed for alimony and child support. The Nevada Supreme court rejected this interpretation and overturned this decision in May.
“Asset protection plans have become more and more popular in the last 10-15 years, and Nevada has really prided itself on having some of the strongest and most thorough asset protection laws here in the nation,” explained Brian Steadman, a partner at Solomon Dwiggins & Freer, Ltd. (Solomon Dwiggins litigated the case on behalf of the trust.) “One of the issues, though, that we’ve been running into with all asset protection plans are, how are the courts going to handle these case?
What is the court going to do if, as in this situation, we have child support and alimony issues, what are the courts going to do in the event we have a third-party creditor and the trust wasn’t run as cleanly as it should be? But all those questions have been answered with this case, at least in Nevada.”
“Nevada has been known for years as having the most protective domestic asset protection trust laws,” explained Steve Oshins of Oshins & Associates in Las Vegas, Nevada, who was named the Las Vegas Trusts and Estates Lawyer of the Year in 2012 and 2015 and the Las Vegas Tax Law Lawyer of the Year in 2016 by The Best Lawyers in America®.
“Some of the practitioners in other states have suggested that Nevada’s laws are too protective and therefore won’t work. The Supreme Court just showed us that they do work and that Nevada will protect the laws as written.”
The out of state question
Both Eric and Lynita Sue Nelson were Nevada residents, their assets included both liquid assets and real estate and those assets were located in Nevada. But what about individuals who live outside Nevada or hold assets out of state?
“If an individual lives in another state and they sue in that state, there’s some question about whether the court will recognize self-settled spendthrift trusts,” says Jay Larsen, a partner in the Nevada law firm of Cox Gerrard Larsen. Only 17 states, including Nevada, allow this type of trust and some of them make an explicit exception for alimony and child support claims.
“There is a whole body of law called ‘choice of law’ and ‘conflicts of law’, and each state has its own history and precedent in that regard,” explains James Duggan, founding principal of the Chicago-based business, tax, estate and wealth planning firm Duggan Bertsch, when asked why it’s so difficult to predict how other states might treat a Nevada self-settled spendthrift trust. “Each state has its own principles that it follows when it comes to choice of law or conflicts of law between jurisdictions. And the approach they take can differ, based on the type of law being addressed in the case. They may be deferential in one case. They may follow another state’s lead.”
Indeed in the original ruling, in Nevada District court, the judge applied statutes from South Dakota, Wyoming and Florida case law in determining that the trust’s assets could be accessed. The Supreme Court’s reversal, says Duggan, is one of the things that makes Klabacka vs. Nelson so interesting.
“States like South Dakota and Wyoming obviously don’t allow asset protection trusts to avoid paying child support or alimony. And in Nevada they actually contemplated that in the legislative history and they specifically excluded it,” he explains. “So when I compare all the different jurisdictions and the pros and cons of each statute, some of them have a lot of carve outs, for spousal support, for child support, for bodily harm tort claims. Nevada was clear that it doesn’t have any inclusion of spousal support.”
He concluded, “The court did the right thing. They said, listen, our legislature determined what the public policy was in our state and they specifically included it. It’s a clear statute.”
That’s settled in Nevada now, providing protection to Nevada residents who set up self-settled spendthrift trusts. The question is murkier for people who live elsewhere, though it may help if the assets in the trust are held in Nevada. Say, for instance, that a court outside Nevada disregarded the protection against alimony and child support and allowed trust assets to be tapped. “If the assets are liquid assets that are also held in Nevada where the trust is domiciled, then anyone suing in another state would have to bring that judgment here,” says Larsen. “Then the question would be whether the court would actually enforce it or not, and you get into issues with the choice of law and one state recognizing another state’s judgments.”
“What the decision means is that we’re 100% certain that [self-settled spendthrift trusts] work as advertised for Nevada residents,” says Oshins. “We still don’t know with 100% certainty that it will be the result if the grantor or settlor of a trust is a resident of a different state.”
Steadman says that roughly 30% of the asset protection trusts that his firm administers are for out-of-state clients. Californians are particularly interested in Nevada’s favorable statute, since their state does not authorize self-settled spendthrift trusts. For these clients, Steadman says, caution is still in order. “I give them every warning under the sun. I make sure we disclaim to them ‘I don’t know how California courts are going to look at this.’” The main case law, before Klabacka vs. Nelson, was the 2011 decision In Re Huber, where a Washington court essentially threw out an Alaska-domiciled asset protection trust, but that was a bankruptcy and fraudulent conveyance case.
Trusts are protected but personal assets are not
Eric Nelson will still have to pay alimony and child support after Klabacka vs. Nelson, just not out of his self-settled spendthrift trust. Only if he had not had enough money outside the trust would he have been able to declare bankruptcy and avoid paying the judgment, except to the extent to which he may have run afoul of the 10-year bankruptcy statute of limitations. Most trust grantors do have significant assets outside their self-settled spendthrift trusts.
They typically put only a portion of their assets into these vehicles, because in doing so, they lose direct access and control over distributions from the trust. In addition, sheltering too much money in a spendthrift trust can be a red flag for judges. All of which means that, from a strict dollars and cents perspective, the decision may not save Nevada trust grantors much, if any, money.
“Attorneys who are being prudent will leave sufficient wealth outside of a trust so that the settlor of the trust is not insolvent,” Oshins comments. “If they’re insolvent when they set this up, then the trust doesn’t work. So in other words, almost every one of these marital support and child support claims is paid despite this spectacular statute that Nevada has. We’re probably never going to see an actual case where someone puts assets into one of these trusts and actually makes use of that advantage since they generally have sufficient wealth outside the trust to pay these reasonably small debts.”
Nevada is #1 for divorce protection
Still Klabacka vs. Nelson reaffirms Nevada’s standing as the most protective state in the union in terms of trust law. “If anything, this decision should be pushing some of the planners to use Nevada law who were using other state laws. In my opinion, they all should have been using Nevada in the first place, but now they’ve actually seen a case where Nevada upheld its law,” says Oshins. “That should push them from whichever state they were using for these trusts to now start using Nevada for every one of these trusts.”
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Gino Pascucci heads the business development and marketing department for Premier Trust. He is an advisor liaison, assisting the estate planning community with advisory friendly trust services. Gino received his B.A. in English from the University of Nevada and is working towards obtaining his CFP designation.