A Nevada Business Holdings Trust is a Nevada Asset Protection Trust that is designed by RDJ LAW to hold the interest in your business, to shield and protect your income flow from the business.

All too often, business owners do not think about protecting the income from their business in the event that they get sued at some point. But what happens when a business owner gets sued outside of the business front and ends up with a judgment against him/her personally? The classic example is a car accident. Imagine that you are driving one day and you get into an accident. The other party is seriously injured, sues and ends up getting a judgment against you in an amount that far exceeds your car insurance policy limits. In such a case, your auto insurance carrier will payout the policy limit (probably $25,000) to the injured party and then the insurance company is out of the picture. Now the plaintiff with a judgment can go after you personally to recover the balance of their judgment (which could very well be a multi-million dollar judgment) from your personal assets. From the time that the court enters the judgment against you, the judgment creditor may then begin to take action to collect its judgment against you by force of law. They can garnish personal bank accounts and your wages, they can seize any personal assets that you own that are not specifically exempt under the law and they can foreclose against any real estate properties that are not covered by the homestead exemption.

RECOVERING AGAINST YOUR BUSINESS INTERESTS

With regard to any businesses that you own an interest in, there is potential risk to both the business ownership interest itself and to the income flow from that business. The different types of business entities and a full discussion of what protection there may be is a lengthy discussion for another time. But briefly, for our purposes here, an LLC membership interest is generally protected from outright seizure of the membership interest by a judgment creditor through what is commonly called “charging order protection”). But an LLC membership interest in some states may have various levels of limited protection or, effectively, none at all (for example, the Hawaii LLC statue specifically allows a judgment creditor to foreclose the “lien” that a charging order against an LLC member’s membership interest creates – which means the LLC member really has no protection in Hawaii). The Nevada LLC law specifically limits a judgment creditor’s remedy against a Nevada LLC member’s membership interest to the charging order (a charging order is an order from the court in favor of the judgment creditor to the company to deliver any profit distribution or payment that is being made by the company to the judgment debtor to the judgment creditor, instead. But, under the Nevada LLC law, the charging order only enables the judgment creditor to sit an wait and hope for a profit distribution from the LLC to the member whose membership interest they have charged (effectively they have a lien against the membership interest). Under the Nevada law, they cannot force a distribution of profit and they explicitly are not allowed to try to wiggle any other remedy out of the charging order or otherwise against the LLC membership interest. That’s the good news. The bad news is that, as long as there is a judgment and a charging order against your NV LLC membership interest, you are tied up and unable to get the money out of the LLC where you need it to pay your bills and to live on. (CLICK HERE FOR VIDEO ON THIS TOPIC)

A Nevada Corporation has the same “charging order” exclusive remedy protection as an LLC or partnership does, if the corporation is not publicly traded, is not a professional corporation and has 100 or fewer shareholders (NRS 78.746). However, this protection of your stock in a corporation only applies to a Nevada corporation. If you own stock in a corporation domesticated another state, you likely don’t have any charging order or other protection at all for your stock ownership interests. This means that the judgment creditor may seize your stock in the company and they will then own the stock in your company – a very bad outcome for you and your business.

SETTING UP A NEVADA BUSINESS HOLDINGS TRUST TO OWN YOUR INTEREST IN THE BUSINESS

If you had set up a Nevada Business Holdings Trust through RDJ LAW prior to that car accident happening, your interest in the business and your income flow from it would be safe and you would have the full benefit of the profits from your business. When a Nevada Business Holdings Trust owns the interest in the company, whether it is an LLC, a partnership or a corporation, the profits from that company may be distributed into the Trust that owns your interest in the company. If the judgment creditor cannot prove by clear and convincing evidence that there was a transfer of money or assets “from you” to the Nevada Business Holdings Trust that was fraudulent as to the judgment creditor specifically, they cannot reach into the trust to recover anything to satisfy their judgment against you personally.

Profits from the business can be held in the Trust for as long as you want. If you have a judgment against you personally, the Trustees may pay your bills for you directly from the Trust being sent directly to where it needs to be paid. So, you truly have full benefit of the income from the Trust and can continue to have all of your financial needs met from the profits of your company, even though there may be a personal judgment against you and the judgment creditor cannot seize either the money in the Trust or the ownership interest in the business.

ADDITIONAL BENEFITS OF THE NEVADA BUSINESS HOLDINGS TRUST

In addition to protecting your ownership interest in the business and protecting your income flow from the business, the Nevada Business Holdings Trust will also provide for avoidance of a probate of the business interest following your death, as the business ownership interest will pass to the beneficiaries that you’ve specified in the Trust following your death, without any court involvement.

The Nevada Business Holdings Trust can also provide some anonymity of your interest in the business as well, which can also be a plus.

The Nevada Business Holdings Trust is generally established as a “grantor trust” for federal taxation purposes which means that it is a “flow-through” tax entity and will not complicate your tax filings and situation.

If you have multiple businesses, the Nevada Business Holdings Trust can hold your ownership interests in all of the businesses or they can each be “compartmentalized” for maximum exposure minimization by establishing a separate Nevada Business Holdings Trust for each business.

Don’t get caught with your pants down and your business interests exposed. Contact RDJ LAW today to schedule a free consultation and evaluation of your protection and planning needs.

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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.

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