A RECENT NEVADA APPELLATE CASE SPECIFICALLY UPHOLDS THE VALIDITY OF THE NEVADA ASSET PROTECTION TRUST
Klabacka v. Nelson, 133 Nev., Advance Opinion 24 (Nev. May 25, 2017)
Since 1999, Nevada Statutory law (Chapter 166 of the Nevada Revised Statutes – “the Nevada Spendthrift Trust Act”) has enabled a person to establish their own spendthrift trust (also commonly known as a Nevada Asset Protection Trust, Nevada Domestic Asset Protection Trust, Nevada Wealth Protection Trust and a few other nicknames) that is designed to protect the assets of the Trust from future judgment creditors and other claimants.
The Nevada Spendthrift Trust law was designed by the Nevada legislature to carefully balance the necessary provisions for true protection of the assets in the Trust from an outside attack with the legislature’s clear intent of enabling the person creating the trust (traditionally referred to as: “the Settlor”, “the Grantor” or “the Trustor”) to have control of both the trust and the assets in the Trust. While the Nevada Spendthrift Trust statute is binding law in Nevada that governs the establishment and validity of the Nevada Self-Settled Spendthrift Trust (hereinafter referred to as “Nevada Asset Protection Trust”), until recently there was no binding case law precedent in Nevada that dealt with a challenge to a Nevada Asset Protection Trust or the Nevada Spendthrift Trust Act. That void was filled in May of 2017, when the Nevada appellate court issued an opinion in the case of Klabacka v. Nelson.
“until recently there was no binding case law precedent in Nevada that dealt with a challenge to a Nevada Asset Protection Trust or the Nevada Spendthrift Trust Act.”
While the Klabacka case addresses a number of issues, the important issue of the case for those other than the parties to that specific case was whether the Nevada Asset Protection Trust that was established by the husband in the case was protected from the husband’s personal obligation to pay child support and alimony. On those issues, the Court held that the District Court had erred in awarding child support and alimony obligations against the husband’s Nevada Asset Protection Trust, in addition to him personally. While that is the main thrust of the case, there were several other very important issues that the Court addressed and made statements of opinion on. A few of those items are as follows:
“Breaching trust formalities of an otherwise validly created SSST does not invalidate a spendthrift trust; rather, it creates liability upon the trustee(s) for that breach. Indeed, if, after an SSST is validly formed, the trust formalities are breached by a trustee, the proper remedy is a civil suit against the trustee – not an invalidation of the trust itself” (referencing NRS 163.115). (“SSST” is short for Self-Settled Spendthrift Trust).
The court also, interestingly, held that it was error for the district court to allow parol evidence (evidence this from outside of the trust document itself) to determine the Settlors’ intent with regard to the respective trusts (this will serve as a legal basis to establish that parol evidence should be excluded if it is attempted to be introduced to demonstrate that the Settlor intended to “hinder, delay or defraud” a creditor).
Also, of significant note, the Klabacka case was a situation where the settlors were their own trustees and their Trusts each had a third party “distribution trustee” – which gives added credence to that set up which the statute has always specifically provided for (for years some attorneys and others have continued to assert that the Trust must have an independent trustee that is someone other than a settlor – I believe that the Nevada appellate court has now effectively put that question to rest).
All in all, the Klabacka case will serve as very good and solid legal precedent for the Nevada Asset Protection Trust.