Spendthrift Trusts Provide Excellent Asset Protection

The spendthrift trust is an excellent device for individuals who may be subject to claims in the future, such as professionals and owners of companies. Several states, including Alaska and Nevada, have created statutory law that allows a trustor to transfer assets to an irrevocable trust for the benefit of the trustor, those assets designed to be out of a creditor's reach within six months to four years of the transfer.

A spendthrift trust is an irrevocable trust created for the benefit of the trustor. The trustor may not be the trustee and the distributions from the trust must be in the trustee's discretion, not mandatory. The trust is used to provide some protection from potential creditors. The trustor's creditors may not seize the assets after a certain amount of time from the transfer of the assets to the trust.

Several states, including Alaska and Nevada, have created statutory law that allows a trustor to transfer assets to an irrevocable trust for the benefit of the trustor, those assets designed to be out of a creditor's reach within six months to four years of the transfer.

There are several statutory requirements that must be met to effectively form a spendthrift trust. Both Alaska and Nevada have substantially the same requirements to form a spendthrift trust. The requirements are that (a) the seller must not retain the right to revoke or terminate the trust; (b) the seller has not been in default by thirty (30) days or more in making a child support payment; (c) the settlor's ability to receive distributions from the trust is within the discretion of the trustees rather than mandatory; (d) the transfer of property to the trust has not been intended to hinder, delay or defraud creditors; and (e) the settlor is not the sole trustee.

These requirements are necessary so that an individual may not use a trust as a vehicle to escape creditors, especially creditors of the individual at the time of the transfer.

Additionally, Nevada and Alaska require that the settlor of the trust have some minimal contact with the jurisdiction. Both jurisdictions require that at least one trustee of the trust be either a trust company or a bank with trust powers, with its principal place of business in the jurisdiction. Further, some of the trust assets must be deposited in either a checking, brokerage, or other similar account located in the jurisdiction. Trust records are to be maintained in the jurisdiction and the preparation and arrangement of trust income tax returns must be done in the jurisdiction. Finally, trust administration must occur in the jurisdiction,including the physical maintenance of trust records.

The most important area of statutory trust law for a spendthrift trust is how long a creditor can wait before he brings an action to recover debts against the settlor trustor. If a creditor delays and does not bring a claim against the settlor within the prescribed period, the claim is barred by the statute of limitations.

Nevada has a substantially shorter period than Alaska and provides much more creditor protection. In Nevada, a creditor who was a creditor at the time of a transfer to a spendthrift trust must commence an action to challenge the transfer within the later of (a) two years after the transfer, or (b) six months after he discovers or reasonably should have discovered the transfer. A creditor who is not a creditor at the time of the transfer to a spendthrift trust must commence an action to challenge the transfer within two years.

Alaska Trust Law provides that a creditor existing at the time the trust is created must bring suit within the later of four years from the transfer or one year after the transfer is, or reasonably could have been, discovered. A creditor arising after the transfer to trust must bring suit within four years from the transfer.

Nevada provides better protection because creditors must bring actions against the settlor in a much shorter period of time. Besides this shortened statute of limitations period, Alaska and Nevada have substantially similar requirements for spendthrift trusts. The spendthrift trust is an excellent device for individuals who may be subject to claims in the future, such as professionals and owners of companies.