How is the Nevada Onshore Trust Affected by the New Bankruptcy Law?
By: Robert D. Johnson, Esq.*
2575 So. Cimarron Rd., Suite 202
Las Vegas, Nevada 89117
*Licensed to practice law in Nevada and Utah
Recently the new Bankruptcy law went into effect. Thus there has been some concern that the new Bankruptcy law might affect some of the protection that otherwise might be afforded through a Nevada Spendthrift Trust (aka: Nevada Onshore Trust).
The new Bankruptcy code specifically addresses "self-settled trusts" (the Nevada Spendthrift Trust or "Nevada Onshore Trust", as it is most commonly known, is such a self-settled trust within the meaning of the new bankruptcy law). The new Bankruptcy code issue with regard to
self-settled trusts has to do with the "transfer" of property prior to filing a bankruptcy petition.
Specifically, under the new bankruptcy code provision [11 U.S.C. 548(e)], the bankruptcy trustee has the power to "avoid" (aka: undo or nullify) a transfer of assets to a self-settled trust (Nevada Onshore Trust or Nevada Spendthrift Trust) that is made within 10 years prior to the date of filing
of the bankruptcy petition if:
(a) the transfer was made to a self-settled trust or similar device;
(b) the transfer was made by the debtor (the debtor is term for the person filing bankruptcy);
(c) the debtor is a beneficiary of the trust; and
(d) the debtor made the transfer "with actual intend to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date of such transfer was made, indebted."
So, in other words, this new provision in the bankruptcy code is basically a "fraudulent transfer" issue with an extended lifetime of 10 years. Hence, the "intent to defraud" would be the key issue if a bankruptcy trustee attempted to utilize this provision. If there were no existing creditor issues
at the time of the transfer of the assets to the Nevada Onshore Trust, proving the intent to defraud would be very difficult, at best, for the bankruptcy trustee to do.
Also, the issue would concern the asset "transferred" to the Trust and it would not be an action for invalidation of the Trust itself (although the Nevada law itself requires that there be no intent to defraud creditors at the time of formation of the trust and a trust created with fraudulent intent
could theoretically be invalidated by a court). Other trust assets that are in the trust (such as assets received for another source, pre-existing assets in the trust, etc.) would not be the subject of the bankruptcy "transfer" issue. Thus, property funded to the trust from a source other than from
the debtor would, under the plain terms of this law, not be subject to a bankruptcy trustee's control or ability to reach such assets.
The information contained in this document is not intended as legal advice. You should consult an attorney for individual advice regarding your own specific situation. Unauthorized duplication, distribution or publication of this copyrighted material is prohibited. Used with permision.