Nevada happens to be one of only a few states in the union that permits the creation of domestic asset protection trusts. While this is an obvious advantage to those who are concerned with estate planning within the state, there are some disadvantages that should be taken into account when setting up such a trust. In order to better educate the public about the potential disadvantages of a domestic asset protection trust, we thought that we’d share a few.
State-by-State Laws
As we’ve already mentioned, domestic asset protection trusts do not exist in every state. Because of this, it’s possible to run into problems when the parties that might be challenging the trust are from different states. In these instances, certain state courts may not be willing to honor the terms of the domestic asset protection trust, which rather obviously negates its purpose. For this reason, any litigation concerning a domestic asset protection trust will begin with an evaluation of which state’s laws should apply to the trust.
The Constitution’s Full Faith and Credit Clause
Even if a ruling is made in the favor of the domestic asset protection trust’s home state, there are more issues. While the “full faith and credit clause” of the constitution may provide protection for the domestic asset protection trust, that’s not a sure bet. In fact, the case law surrounding these kinds of conflicts is scant at best, so it’s impossible to say for certain what the outcome of such a circumstance might be.
Potential Exceptions
The ability of a domestic asset protection trust to protect the assets contained within it is not ironclad. In fact, there are more than a few exceptions that might allow creditors to get at the assets contained within the trust. Most importantly, if a court determines that assets placed into the trust were moved with the intent to avoid paying those creditors, it will be considered ‘fraudulent conveyance’. This means that the creditor will be permitted to take the money they’re seeking from the domestic asset protection trust, which negates the trust’s purpose.
The Federal Government
Even though the state of Nevada provides for these kinds of trusts, that doesn’t mean that they’re not subject to the laws of the federal government. In fact, the laws of the federal government trump those at the state level. For this reason, if litigation surrounding a domestic asset protection trust makes it into the federal court system, the trust could become quite vulnerable.
Even So…
Despite these potential problems with a domestic asset protection trust in Nevada, they still remain a strong way for protecting assets from creditors. If you believe that you’re in a position where this could be a concern, then it simply makes sense to consult with an experienced estate planning lawyer in Nevada, one who can help you craft a domestic asset protection trust that will hold up should the worst come to pass.