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Domestic Asset Protection – Why State Legislation Is Not Set In Stone

Author: James F. McDonough

Date: June 19, 2013

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The State of Nevada spent considerable time and effort in crafting its asset protection and dynasty trust statute. Nevada worked hard to attract trust business to the state in an effort to broaden its economic base and decrease its reliance upon tourism and mining. Yet, one amendment to a piece of legislation nearly upset years of work.

Nevada Assembly Bill 378 (Bill 378) acquired an amendment after introduction that would have neutralized Nevada’s ironclad asset protection. Specifically, the amendment would have opened up Nevada trusts to claims of a future class of creditors consisting of spouses, domestic partners and children. Up to now, future creditors had been barred from piercing Nevada trusts to pay judgments.

Although local attorneys, accountants and trust companies responded to defeat Bill 378, this episode points out the pressures that state legislators may be subject to satisfy particular constituencies. The amendment was appended to Bill 378 in response to the urging of certain interest groups. The mere fact that this amendment was accepted is enough to give one pause when choosing an asset protection jurisdiction.

This type of legislation is less likely to be introduced in an offshore jurisdiction because of the economics. These jurisdictions rely heavily on its statutes, reputation and stability to attract trust business. Any threat to a foreign jurisdiction’s trust business would have greater economic impact upon a typically smaller economy heavily that is heavily dependent upon trust and financial business. Foreign trusts, with a flight clause as standard feature, would have fled a foreign jurisdiction before the ink was dry on legislation similar to Bill 378.

The same questions must be asked in selecting a jurisdiction, foreign or domestic. Bill 378 reminds us that we are only a pen stroke away from a reversal of fortune.  A trust fleeing one state for another may subject the trust to a new statute of limitations, claims of a fraudulent conveyance and other tax issues. Foreign jurisdictions are less likely to raise issues that would discourage new business.

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