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Klabacka vs. Nelson sets precedent for Asset Protection in Nevada

The recent Nevada Supreme Court case of Klabacka vs. Nelson has had an unprecedented impact on protective trust laws. Not only did the case defy similar rulings passed down in other states such as South Dakota, Wyoming, and Florida but it also firmly established Nevada as having the strongest asset protection laws in the United States.

The case remarkably upheld the obligation of the defendant to follow through on his court-mandated alimony and child support while maintaining protection of his assets within the trust. This ruling is the first of its kind among the 17 states that allow asset protections trusts to exist.

Klabacka vs. Nelson in a Nutshell

When Lynita Sue Nelson and Eric L. Nelson divorced, the court rejected her request that alimony and child support be taken out of his self-settled spendthrift trust account. This ruling protected the trust and mandated that the $800,000 in alimony, back child support and private school tuition support for his daughter be paid out of his liquid assets instead.

The Nelson’s had their assets divided by a considerable amount of time before the court ruling last May. The Nelson’s initially divided their property in 1993, and in 2001 they opened two separate self-settled spendthrift trusts.

Official divorce proceedings for the couple began in 2009, and the district court ruled that the alimony and child support that Lynita Sue Nelson was seeking should be taken out of Eric L. Nelson’s trust. Precedents supporting this ruling include similar cases in South Dakota, Wyoming, and Florida. The Supreme Court of Nevada overturned this ruling in May of this year.

What is a Self-Settled Spendthrift Trust (SSST)?

Nevada Self-Settled Spendthrift Trusts (Domestic Asset Protection Trusts) permit a grantor to secure assets into an irrevocable trust while remaining a beneficiary of that trust. The state statutes necessitate the use of an independent trustee before making distributions to the grantor.

The assets are secure from the claims of creditors after the statute of limitations, and as Klabacka vs. Nelson has proved, they are also secure from alimony and child support. However, Eric is still required to pay spousal support from liquid assets or other investments.

The Nevada Self-Settled Spendthrift Trust is one of the most robust and effective asset protection and estate planning strategies available in the United States.

How Klabacka vs. Nelson Affects Other States

Only 17 states allow asset protection trusts and the ones that do have varying degrees of protection. So the question becomes, will other states follow Nevada’s lead?

Because the Klabacka vs. Nelson case has set a new precedent, it’s certainly possible that other states will follow suit. However, Nevada remains the only state to have ruled in favor of supporting their established trust laws in this manner, and the only state where you can be sure that your assets in trust are truly protected.

As far as protecting those who live outside of Nevada but have a trust established in Nevada, there is no existing precedent set to know how the courts will respond. It’s possible that other states will defer to Nevada’s ruling, but that’s not necessarily the case, and it’s something to consider.

Florida is another state that allows asset protection and attorneys in the state have paid close attention to the Klabacka decision. Respected private client attorney in the state of Florida and managing member of Chodos & Associates, Adam Chodos anticipates that this decision will be a benchmark for other states.

“The recent Klabacka decision reaffirms Nevada’s strength in the self-settled spendthrift trust world. While statutes are a foundational component of trusts, when they are interpreted and enforced is when their true efficacy can be seen.” said Chodos, “Residents of states that do not have statutes or case law as well developed will look to Nevada as an attractive option.»

Are Obligations Fulfilled When Trusts Are Protected?

A good attorney will ensure that there are significant assets outside of a self-settled spendthrift trust (domestic asset protection trust). Domestic asset protection trusts are utilized as part of an estate planning strategy leaving a bulk of assets outside of the trust. By design, Nevada Asset Protection laws are not in place to shield grantors from their financial responsibilities created by divorce.

Thus, even though Nevada has the best asset protection laws in the country, child support, alimony and other court mandated financial obligations are nearly always paid.

The self-settled spendthrift trust is not a workaround when it comes to fulfilling child support and alimony mandates, those who can pay will still have to pay.

Nevada Paves The Way

Residents of Nevada can now rest assured that their assets in trust are safe, and the courts won’t allow them to be tapped. Nevada now has the most current and strongest precedent when it comes to asset protection and other states would be wise to follow suit.

Alliance Trust Company of Nevada is proud to support asset protection trusts and may serve as an independent trustee if the grantor is out of state. Now is the time to take advantage of the strongest asset protection laws in the country. Need help creating a Nevada Asset Protection Trust? We work with a network of attorneys that specialize in Nevada Asset Protection.

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