A Conversation with Steven J. Oshins, Part II
On Nevada Asset Protection and Trust Planning: A Conversation with Steven J. Oshins, Esq., AEP (Distinguished) Part II
Steven J. Oshins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC (www.oshins.com) in Las Vegas, Nevada, with clients throughout the United States. He was inducted into the NAEPC Estate Planning Hall of Fame® in 2011 and was named one of the 24 Elite Estate Planning Attorneys in America by the Trust Advisor. He is listed in The Best Lawyers in America® and has been named The Best Lawyers’ Las Vegas Trusts and Estates “Lawyer of the Year” twice.
Mr. Oshins kindly agreed to an in-depth, four-part interview on Nevada asset protection and trust planning. Part I of this conversation focuses on the Nevada Asset Protection Trust; Part II on the Hybrid Nevada Asset Protection Trust and the NAPT plus LLC(s) Structure; Part III on the NING Trust; and Part IV on Nevada Dynasty and Directed Trusts as well as recent developments.
Part II: The Hybrid Nevada Asset Protection Trust and the NAPT plus LLC(s) Structure
(Published: June 15, 2015)
Schoenblum: Thanks for joining me, again, Steve. In part I of this interview, we discussed the traditional Nevada Asset Protection Trust (NAPT) where the settlor is named as an initial discretionary beneficiary. Now, let’s turn our attention to the Hybrid NAPT. Can you explain the Hybrid NAPT, its genesis, and how it differs from the traditional NAPT?
Oshins: Sure. The Hybrid NAPT is a thirty-party trust where the settlor sets it up for the benefit of beneficiaries other than the settlor. However, a trust protector is given the power to add additional beneficiaries from a class that includes the settlor. Thus, it’s technically not even a NAPT. It’s a third-party trust than can be converted by a third-party into a NAPT. The rationale for this strategy is that, in my opinion, there is no good reason to take any chance that the trust assets may not be protected. Since every jurisdiction has laws that protect a third-party trust, there is no question that the Hybrid NAPT is protected. We situs it under Nevada law so the option to turn it into a regular NAPT exists at all times. Although most cases settle anyway, so I do think a regular NAPT works, let’s increase the odds as much as possible to put our client in a stronger negotiating position in a settlement and a stronger litigation position if there’s a court battle.
Schoenblum: If not the settlor, then who are some of the parties that you frequently include as the initial Hybrid NAPT beneficiaries?
Oshins: If the settlor is putting separate property in the trust, then the beneficiaries generally are the settlor’s spouse and descendants. If the settlors are married to one another and setting up a joint Hybrid NAPT with community property, then the beneficiaries generally are their descendants. This, of course, is fact-specific. In some cases, we include the settlor’s siblings and/or parents. Regardless of who we include, if the Hybrid NAPT is drafted as an incomplete gift for gift tax purposes, the settlor retains a power of appointment that will allow the settlor to appoint assets to anyone but himself, his estate, his creditors or the creditors of his estate.
Schoenblum: What about if the settlor’s spouse is included as the primary beneficiary of the Hybrid NAPT but they later divorce? Do you typically use floating spouse provisions?
Oshins: Yes, we do. A floating spouse is a provision that defines the settlor’s spouse as the person the settlor is married to from time to time. So if the settlor’s spouse predeceases the settlor or they get divorced, the settlor can remarry and therefore have a new spouse as a discretionary beneficiary under the document.
Schoenblum: Who is generally given the right to subsequently add the settlor as a Hybrid NAPT beneficiary?
Oshins: We generally give this power to a trust protector. This is generally a close friend of the settlor who will likely do as the settlor requests. However, the trust protector does not legally have to do as the settlor suggests.
Schoenblum: Should a NAPT be contested, two of the likely grounds that would be used to challenge it are Section 548(e) of the Bankruptcy Code and its ten-year claw-back, or the Full Faith and Credit Clause. In your view, the Hybrid NAPT would be harder to attack under these grounds than a traditional asset protection trust?
Oshins: Absolutely. Section 548(e) of the Bankruptcy Code is only applicable to a “self-settled trust or similar device”. The Hybrid NAPT is merely a third-party trust just like any other third-party trust. It only becomes a regular NAPT if and when the trust protector adds the settlor as a discretionary beneficiary. And that is extremely rare if the planner plans properly by not putting too much of the settlor’s wealth in the trust. My office has likely done about a thousand Hybrid NAPTs and only had one settlor actually added in as a beneficiary, so that scenario would be extremely rare. Regarding your question about the Full Faith and Credit Clause, that issue becomes irrelevant since the settlor isn’t a beneficiary. The assets in this type of trust are protected from the settlor’s creditors under the laws of all jurisdictions unless the settlor made a fraudulent conveyance.
Schoenblum: The Hybrid NAPT can be bifurcated into two separate trusts: the Dirty Hybrid NAPT and the Clean Hybrid NAPT. How does this work and what is the intent?
Oshins: Asset protection planning is a game of probabilities. Each separate maneuver should be done within what the law allows and should be designed to put the client in the strongest position possible if a creditor comes after the client’s assets. The goal behind the Dirty Hybrid NAPT and the Clean Hybrid NAPT is to only potentially “dirty up” part of the Hybrid NAPT. For example, if there are $2 million of assets in a Hybrid NAPT and the settlor runs out of money, the settlor isn’t married and therefore has no “floating spouse” who can receive distributions from the trust (and share them with the settlor), then we look at additional options. This option entails having the trustee divide the trust into the two separate trusts, so let’s assume the trustee splits off $500,000 into the Dirty Hybrid NAPT and $1,500,000 in the Clean Hybrid NAPT. The trust protector adds the settlor in as a discretionary beneficiary of the Dirty Hybrid NAPT, thereby potentially exposing it to the settlor’s creditors, but leaves the Clean Hybrid NAPT as a third-party trust. If a creditor is able to access the Dirty Hybrid NAPT, then at least we have not exposed the other $1,500,000. In that case, the settlor would either need to get married or would have to have distributions made to other family members who can help the settlor. Too much of this or any written agreement that the other beneficiaries will help the settlor may cause a court to rule against the settlor, so you need to be careful here. The bottom line is that this Dirty/Clean Hybrid NAPT structure has kept the settlor “in the game” and has left certain options open.
Schoenblum: How often are you using the Hybrid NAPT as opposed to the traditional NAPT?
Oshins: Nowadays I use the Hybrid NAPT nearly 100% of the time for residents of states outside of Nevada. For Nevada residents, I nearly always use the traditional NAPT. When I do use a traditional NAPT for a non-Nevada resident, I am always sure to combine it with a limited liability company or limited partnership so we have a second line of defense against creditors.
Schoenblum: As has been the case with the NAPT statute, the Nevada legislature has routinely and favorably updated the state’s LLC laws. What are some of the key features of Nevada’s LLC and charging order provisions?
Oshins: First off, let’s define a charging order. A charging order is simply a lien. It’s an order issued by the judge that says that the creditor has a lien on the debtor’s LLC (or LP) interest. Since most creditors prefer cash rather than a piece of paper, the threat of only receiving a charging order is often enough to force the creditor into a more favorable settlement for the debtor. Nevada is one of the small handful of states that has made the charging order the exclusive remedy of a judgment creditor and also has a statute that disallows any equitable remedies from applying. For example, equitable remedies include reverse veil-piercing, alter ego theories, resulting trusts and constructive trusts. Thus, the judge’s hands are tied and the creditor is often left with a charging order only.
Schoenblum: And, again, just to confirm, no other remedies, including equitable remedies, can apply vis-à-vis Nevada LLCs, or even Nevada single member LLCs as per part of Senate Bill 405 that you were instrumental in the drafting of?
Oshins: That is correct. The Nevada statute even covers single member LLCs.
Schoenblum: What are some of the actions that the charging order precludes the judgment creditor from taking?
Oshins: A holder of a charging order can’t make any investment decisions nor any distribution decisions. Needless to say, it’s not a favorable remedy for a creditor.
Schoenblum: Now, let’s bring the NAPT back into the picture. You have proposed in the past the possibility of combining a NAPT with one or even two Nevada LLCs for enhanced asset protection. Can you describe the mechanics of this structure, including the interplay between the Rainy Day LLC and the Live Out Of LLC?
Oshins: Sure. One structure I have used many times is the Double LLC structure. The first LLC is the Rainy Day LLC which is owned 1% by the client’s Revocable Trust and 99% by the NAPT or Hybrid NAPT. We put rainy day assets in that LLC. This gives those assets two layers of protection. But what do we do with the client’s other assets? We form a second LLC which I call the Live Out Of LLC. The Live Out Of LLC is owned 99% by the client’s Revocable Trust and 1% by the Rainy Day LLC. The client can “live out of” this LLC in the sense that 99% of each distribution is made to the client’s Revocable Trust. The structure works well because there are so many walls around the assets that it is unlikely a creditor would be able to penetrate the walls, let alone obtain a reasonable settlement.
Schoenblum: Do you typically have the settlor serve as the operating manager of the LLC(s) and, if so, what are some of the advantages?
Oshins: Yes, I do. The primary advantage is that the settlor retains direct control.
Schoenblum: One tricky asset when it comes to NAPTs is real property located outside of Nevada—especially if situs is in a state that has not enacted an asset protection trust statute. How do you counsel clients when it comes to non-Nevada real property that they want to place in the NAPT and do you ever use Nevada LLCs owned by the NAPT to hold the real property, including if such property is in a non-asset protection trust state?
Oshins: Non-Nevada real property is the worst asset for a regular NAPT. That’s why the Hybrid NAPT becomes so valuable. But if you’re going to use a regular NAPT for non-Nevada real property, it should generally be owned by an LLC so there is a second wall of protection in case the NAPT doesn’t hold up, and secondly because there is a much better chance that the LLC will be considered personal property that has a better chance of Nevada law applying in a choice-of-law dispute. There’s no certainty, but it definitely doesn’t hurt to enhance the possibility of success.
Schoenblum: Steve, to wrap up Part I and II of our conversation centered on asset protection trusts, let me conclude with one final query: how you do you define whether the asset protection plan worked?
Oshins: It’s ironic that this is the final question given that this might be the most important question of all since it gets to the heart of the matter! The bottom line is that an asset protection plan worked if the client either wins in court or is able to settle the dispute for less than what the client otherwise would have owed had the plan not been in place. In most cases, these settle since the creditor has such an uphill battle. We strive to create a scenario where the client will be able to obtain quicker and cheaper settlements. There are never any guarantees, but nearly every structure ends up working since very few creditors go any further than the settlement phase, especially when faced with a tough uphill battle.
Steve Oshins was interviewed by Neil Schoenblum, Senior Vice President, Wealth Management at First American Trust of Nevada, LLC. Mr. Schoenblum specializes in asset protection and trust law, particularly the advantages offered by Nevada. He can be contacted at (702) 784-7611 or by e-mailing firstname.lastname@example.org.
Steven J. Oshins, Esq., AEP (Distinguished) and the Law Offices of Oshins & Associates, LLC are not affiliated with First American Trust of Nevada, LLC or its affiliates. The information provided above is intended for informational purposes only and should not be considered estate planning advice. Please consult an estate planning professional, financial advisor, and/or tax advisor for additional guidance.
First American Trust of Nevada, LLC is a wholly owned subsidiary of First American Trust, FSB which is a wholly owned subsidiary of First American Financial Corporation.