The Domestic Asset Protection Debates: Nevada or Delaware in 2012?

Everybody wants your vote these days. Candidates are promoting their plans zealously, each of them jockeying for your attention with promises that money will seemingly rain from the sky if you trust in them, all the while running smear campaigns against one another. Despicable.

And that’s before even getting into the political candidates.

I’m talking about the competition between states’ respective domestic asset-protection trust laws. If you’re looking into structuring your asset-protection plan in one of the proud united states instead of weathering the IRS storms moving on those dubious offshore trusts, then you know what I mean. Which state can you trust to shield your assets from the claims of creditors? Before you fully commit to the domestic route, you’ll need to know where exactly to create a self-settled spendthrift trust.

Judging from the fuss over Round 1 of the Mitt Romney-Barack Obama presidential deathmatch last week and the hype building to this Thursday’s Paul Ryan v. Joe Biden encore, it seems the country has been hit by an epidemic of debate fever. It remains to be seen whether that means we’re all violently sick of debates or simply unable to get enough of them.

Nevertheless, with even Bill O’Reilly and John Stewart throwing down the gauntlet, we saw an opportunity to use an amusing and informative medium to compare the domestic asset-protection climates of four states with noteworthy trust laws: Delaware, Nevada, Alaska, and Wyoming (with the latter two to debate next time). I will serve as moderator but bear with us if some of the candidates surpass their allotted time or treat each other with hostility. Trust laws aren’t known for their brevity and states aren’t known for being civil.

Opening remarks will be made by Candidate Delaware, who is quick to outline that state’s criteria.

DE: “Thanks for having me, Randy. I’ll get right down to it. We have the simplest requirements for our asset-protection trust instruments. Each trust must: (1) be irrevocable; (2) expressly state that our Delaware law governs the validity, construction, and administration of the trust (unless it is being transferred to a Delaware trustee from a non-Delaware trustee); and, finally, (3) contain an explicit spendthrift clause. No complicated hoops, no fuss – unlike my esteemed colleague from Nevada.”

Indeed, Candidate Delaware, Your requirements are especially user-friendly but let’s try to keep the sniping to a minimum, thank you. Let’s hear now from Candidate Nevada:

NV: “Well, I must agree that ease-of-use is important. However, in Nevada we feel that it’s even more important that a self-settled spendthrift trust actually be able to hold up if challenged. I can understand why some states might prioritize convenience over effectiveness – so that they can simply rake in money from unsuspecting trust-makers – but we want trusts made in our state to work as intended. Which justifies why our self-settled spendthrift trust requirements are a bit more strict.

“Our asset-protection trust instrument is required to: (1) be irrevocable; (2) have all or part of corpus of trust be located in Nevada, or have the settlor be domiciled in Nevada, or appoint a Nevada trustee; and (3) distributions to the settlor must be approved by someone other than the settlor. Because of these safeguards, we feel Nevada self-settled spendthrift trusts are more reliable than others. Especially Delaware’s.”

Keep the discourse friendly, Candidates. Now that we’ve heard about of each your self-settled spendthrift trust requirements, let’s find out where Delaware and Nevada stand on the issues. 

Candidate Delaware, your opponent just championed its Nevada safeguards against the collapse of the asset-protection trust. Are you confident that Delaware self-settled spendthrift trusts can withstand legal challenge from creditors?

DE: “Randy, you and I both know that domestic asset-protection trusts are untested in the courts, so they carry a degree of risk no matter where they are made. Without any reliable judicial benchmark to evaluate the efficacy of these trusts, we felt that it was most important to simply make them as accessible as possible. We can’t control how the courts might rule but if it’s determined that our requirements leave something to be desired, then I would be open to revision.”

NV, incensed: “Flip-flopper!”

Candidate Nevada, please! A degree of decorum and respect is all I ask for.

NV, composed: “I apologize but, see, that’s exactly why we made our trusts so ironclad. Because you never know how the courts might rule, you must be prepared for all possibilities. Our trusts offer that kind of protection.”

Candidate Nevada, I must ask that you not speak out of turn again or I’ll simply give the rest of your allotted time to Candidate Delaware. Don’t make me get all Chris Matthews on you. Now, to be clear, exactly what contacts with your state are suggested or required to establish situs? Candidate Delaware?

DE: “Delaware merely requires: (1) some or all of trust assets to be deposited in state; (2) a Delaware trustee whose powers include (a) maintaining records (can be nonexclusive), (b) preparing or arranging for the preparation of income tax returns, (c) or otherwise materially participates in the administration of the trust. Top that, Nevada!”

Candidate Nevada?

NV: “Not unlike my rude Delaware colleague, Nevada trust law requires: (1) all or part of assets to be in state; (2) a Nevada trustee whose powers include: (a) maintaining records, (b) preparing income tax returns; (3) all or part of administration to be conducted in state.”

Candidate Delware, what interests in principal and income may the settlor retain?

DE: “We feel it’s only just that the settlor be allowed to retain interests in: (1) current income; (2) Charitable remainder trust income; (3) up to 5% interest in total return trusts; (4) Grantor Retained Annuity Trusts or Grantor Retained Unitrusts; (5) Qualified Personal Residence Trusts; (6) qualified annuity interest; (7) ability to be reimbursed for income taxes attributable to trust; and (8) the ability to have debts, expenses and taxes of the settlor’s estate paid from the trust. We like our settlors.”

So it seems. Candidate Nevada?

NV, scoffing: “In Nevada, the settlor may retain any right except the power to make distributions to himself without the consent of another person. [See N.R.S. § 166.040(3)]. We like our settlors more. And we have better casinos.”

DE, unfazed: “We have the Vice President and no sales tax.”

Don’t make me pull this car over, you two. Now, what general powers may the settlor retain? Candidate Delaware?

DE: “In the great state of Delaware, the settlor may retain: (1) the power to veto distributions; (2) non-general testamentary power of appointment; and (3) power to replace trustee/advisor. And we have beaches instead of just a desert.”

Candidate Nevada?

NV: “In the even greater state of Nevada, the settlor may retain any power except the power to make distributions to himself without the consent of another person, including: (1) power to veto distributions; and (2) special testamentary power of appointment or other similar power. Hey Delaware, how much revenue do you get from those beaches? Ever hear of Vegas? It’s a city whose total GDP surpasses that of your entire state.”

I don’t know why I volunteered to moderate this. Thankfully, that was our final question. Tune in next time for the clash between our final two domestic asset-protection trust candidates – Alaska and Wyoming – to be moderated by someone who can actually take the pressure: Jim Lehrer.

Editor’s Note: We apologize if it seems like we’ve been campaigning one way or another in our entries. Our policy is to keep things informative, interesting, and neutral – not always an easy balancing act – and the last thing we want to be is merely another voice shouting political spin at you. I approve my messages but I’ll be damned if I conclude them by confirming it.

Instead, good luck and good hunting.

Miss last week’s series on estate planning advantages remaining in 2012? Check out the first post: Why You Need to Plan Before Going Over the Fiscal Cliff. Or look into the next post in this debate series, Wyoming v. Alaska.

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If you’re interested in discussing the merits of the self-settled spendthrift trust, the nuances of the Full Faith and Credit clause, or the list of reasons why I’ll never get behind Tony Romo, find out how to get in touch with us at:  TheFisherLawOffice.com.

You can also contact us at Facebook.com/FisherLawOffice, on Twitter @thefisherlawoffice, or at LinkedIn.com/in/FisherLawOffice. If you’re here just because sometimes we have kittens on the blog, get your fix at the Arts and Cats Movement. Click image(s) for source.

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2 Responses to The Domestic Asset Protection Debates: Nevada or Delaware in 2012?

  1. Pingback: Wyoming, Alaska Pull No Punches in Asset Protection Debate | Planning for Your Wealth

  2. Pingback: Domestic Asset Protection: Is it Worth the Risk? | Planning for Your Wealth

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