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Everyone wants to protect their assets from possible future creditors. What's the point of working to build up savings if you could lose it all in a lawsuit?
There are all sorts of reasons why nearly everyone should give at least some thought towards protecting what they have. An honest law abiding citizen who has spent years paying off their home and saving up for retirement could suddenly be slapped with a lawsuit because of one bad decision - or even be falsely accused. We live in a society where six and seven figure personal injury awards sometimes occur without even making the news.
Fortunately, the law recognizes people are not perfect, and that sometimes bad things happen to good people. The law therefore allows certain kinds of assets and income to be protected from most though not all creditors even when a person does not have any kind of special asset protection trust. The Nevada Legislature has laid out numerous items which are exempted from execution (court-ordered collection) in Nevada, the list is contained in NRS 21.090. Notably, certain kinds of creditors may be able to go after assets that are protected from most other creditors, in the law there are often exceptions to the general rule.
Many middle-class people own only two assets of really significant value: (1) Their home; and (2) Their retirement accounts. If a Nevada resident owns a home in Nevada they may be able to "homestead" it and protect up to $550,000 in the home's equity from most creditors. Since home equity is determined by subtracting the amounts owed on the home from the home's fair market value, most Nevadans have much less than $550,000 in home equity.
However, any debt secured by the home will generally not be stopped by a homestead exemption. For example, if you do not pay the mortgage on the home, the bank can still foreclose on you regardless of whether you file a homestead. If you do not pay your taxes or HOA dues, you can still lose the home. A homestead exemption will also be ineffective against an IRS lien, mechanics lien against the home, child support payments, spousal support payments, and certain other kinds of debt.
Many retirement accounts are protected under Nevada law for a cumulative amount of $500,000, see NRS 21.090(15). Further, under federal law some retirement accounts enjoy additional protection. Importantly, once money is taken out of a retirement account, or when a retirement account is borrowed against, the money may then be exposed to creditors. You should consult with a bankruptcy attorney before using money in a retirement account to pay off debt if you may be declaring bankruptcy at some point in the future.
Filing a homestead declaration for your own home if it is located in Clark County is fairly easy and consists of filling out a form available on the Clark County Recorder's website, getting it notarized, and then filing it. Clark County will charge a filing fee of at least $17. Many people can easily figure out how to file their own homestead declaration. However, if you would like us to help you file a homestead exemption for your primary residence if it is located in Clark County, we can help for a nominal fee ($100 if you are a client of our firm for another matter, and $150 if you are not).
What about assets that are not protected? What about the risk of getting wages garnished? What if you own more than one home or you have more than $550,000 in equity in your home?
At Reed & Mansfield we believe that your first line of asset protection should be adequate liability insurance. In other words, if you get sued, make it the insurance company's problem, not yours. We also sue on behalf of people who have been injured by other people's negligence so we know a bit about liability insurance. In one of our cases a toddler living in an apartment "escaped" from his ground floor apartment during the night and fell into the apartment's swimming pool because the latching mechanism of the gate was broken. He was revived, but with permanent and severe brain damage. The apartment complex owner had a $6,000,000 liability policy limit. We sued and although the insurance company provided the owner with a defense lawyer, the apartment owner also hired her own attorney at her own expense to beat on the insurance company to settle within policy limits so that she would not be out of pocket. The insurance company knew that if they had a chance to settle for $6,000,000 or less and didn't and a jury awarded more, the apartment owner and her private attorney would sue the insurance company in bad faith to make them pay the full settlement. In this particular case we went to mediation and made a one time offer to settle for $5,750,000. The insurance company quickly agreed. What if we had not settled but had insisted on going to trial? In that case the insurance company would not have paid out any money until the trial was over or possibly until all appeals were exhausted, a process that could take years. The parents of the child wanted immediate money for top care of their child and since the $5,750,000 settlement would provide that the case settled.
We will discuss other asset protection devices in a moment. But nothing beats having adequate insurance. Some of us at Reed & Mansfield get our insurance from Bernadette Horn in Las Vegas at 702-545-9618, a conscientious insurance agent we like.
At least three additional techniques are used in asset protection:
1) Limited Liability Corporations (LLC)-Many small businesses are organized as an LLC while bigger business are in the form of regular corporations. In both cases, the protection is the "corporate shield." This means the business owner is not liable for the negligence of an employee, only their own personal negligence. So the CEO of Walmart can't be sued if a Walmart truck goes out of control and runs over a bunch of cars. The problem with small businesses is that the owner usually has his or her fingerprints all over the operation. So, for example, you own two rental homes and you hire a guy off the Home Depot lot to fix a staircase and your tenant is hurt when the staircase collapses, you are liable for personally hiring a non-licensed contractor who did an inadequate job. This is why we think insurance is the better answer. Also, the LLC requires annual filings which is either a hassle for you or an annual legal expense.
2) Asseet Protection Trusts-We don't offer these. Lawyers who do generally charge at least $5,000 to set them up and you cannot be your own trustee. So this is a very complicated way of doing business.
3) Corporate Maze-A whole bunch of different corporations are set up within corporations so that it is a legal maze for a plaintiff's lawyer to try and get to assets. We don't offer this service.
First Line of Defense: Good Insurance Where Possible
The best thing you can do is make a lawsuit against you someone else's problem: Ideally it can become your insurance company's problem, not yours.
Insurance will not cover every claim against you. It generally will not protect you from choosing to go into debt via gambling markers, student loans or credit card spending, etc., or suffering from a failure of your business, or having to pay child support, etc. Insurance also almost always excludes intentional bad acts. With respect to auto collisions it almost always excludes any extra damages allowed for drunk driving, and in a minority of cases may even exclude any coverage if drunk driving is involved.
But, the right insurance will protect you from most negligence claims not involving spending choices or deliberate bad behavior. (The decision to drink and drive can be considered an intentional bad act.)
The best general rule is to have insurance coverage limits substantially larger than your assets. We will explain below why this almost always works to protect against negligence claims. But, even lower limits of liability insurance often ultimately protect you in a lawsuit. For now, let's look at what insurance you can get.
Most people, of course, have a home owner's policy and auto coverage. Usually the home owner's policy protects you against lawsuits for negligence not involving commercial activities. Thus, for example, it might protect you if you ski into another skiier and injure him and he sues you because at the time of the collision, while you were skiing downhill you were yakking on your cell phone instead of watching where you were going. It would almost certainly cover you if you invited a guest over who slipped on marbles your young son left on the floor. Exactly what is covered depends on the particular policy.
But often the home owner's policy has a liability of $100,000 and the minimum auto coverage required in Nevada is only $15,000/$30,000 which is a limit of $15,000 for injury to any one person and a limit of $30,000 for injury in one accident. You should speak to your insurance agent about getting larger limits for your home and auto policies, you may find that increasing your limits will not raise your premiums as much as you may fear.
You should also consider obtaining an umbrella policy. Typically, the umbrella policy extends coverage on the home owner's policy and the auto coverage to a million dollars or more. The umbrella policy requires certain larger limits on the home owner's and auto policies. If you own a boat, the umbrella policy may cover the boat as well, be sure to check with your agent to make sure you have insurance on every kind of vehicle you operate.
If you own rental property the umbrella policy, for an extra premium, may cover lawsuits against you for negligence arising out of the rental property depending on how much rental property you have. If you have a lot of rental property you may need to buy a commercial policy.
Why Even "Inadequate Insurance Coverage" Sometimes Gives Complete Protection:
Suppose you have a $1,000,000 insurance policy and you are liable to a catastrophically injured Plaintiff. Let's say the Plaintiff's attorney figures the case has a value of $1,500,000 to $2,000,000. Your insurance company hires an attorney who also figues the case is easily worth more than the $1,000,000 insurance limit. At this point your insurance company offers the $1,000,000 to the Plaintiff and their attorney in exchange for a complete release of liability. Here's the choice facing the Plaintiff and their attorney:
- Agree to take the $1,000,000 and within a couple of weeks (or a few if the insurance company delays) get a big payday, or,
- Litigate in the hopes of getting a large judgment and then hope that they will actually be able to collect from you after they get a large judgment. Until they get the larger judgment you may legally be able to spend whatever money you have (although if you try to give money and assets away, or sell assets at below-market prices, such transactions could be deemed fraudulent conveyances, see Chapter 112 of the Nevada Revised Statutes). If the Plaintiff gets a judgment in excess of the $1,000,000 policy limit, the Plaintiff could possibly (with a lot of legal hassle) undo transfers of money you made in anticipation of the large judgment. But if you spent the money on a round the world trip, there may be the nothing the Plaintiff can do about that.
Our firm does a lot of personal injury work. In a situation such as the above it would be very rare for a client not to take the substantial bird in the hand.
Second Line of Defense: Legal Fences
Legal fences make it hard or impossible for a claimant to get your assets.
The Nevada Homestead Exemption:
One very strong legal fence that is virtually free is Nevada's homestead exemption. This exempts $550,000 in equity in your Nevada residence assuming that you are a Nevada resident. Therefore, one asset protection plan is to pay down your mortgage if your equity is less than $550,000. We say that this is a very strong legal fence because there is a strong policy of generally not allowing creditors to chase people out of their homes. However, there are exceptions. A brief (not complete) list of exceptions are: 1) tax or HOA liens on the property, 2) claims from your lender that relate to their loan on the property, 3) possibly certain transfers of money into your homestead to avoid a specific debt, 4) IRS liens, and 5) Spousal/child support obligations. However, if the money is already in your homestead, you can record a homestead exemption even right after a creditor gets a judgment against you. Homestead exemption forms are available on the web and most people can figure out how to file their own.
As discussed above, a second strong legal fence is a tax sheltered retirement account such as a regular IRA, Roth IRA, 401K or other pension plan. Again, there is a strong public policy that creditors shouldn't take away peoples' retirement savings. Retirement savings are generally protected except when a person borrows against them or takes the money out of the protected account.
Limited Liability Corporations (LLC) and Other Corporations:
Limited Liability Corporations or other corporations are advisable for many business activities. We don't do corporate formations but recommend:
Jacqueline S. Ackerman
Law Officesof Jacqueline S. Ackerman LLC
2620 Regatta Drive, Suite 102
Las Vegas, NV 89128
website: www.ackerman-law.com for corporate formations, including LLCs and Series LLCs.
Using Trusts to Protect Assets:
NRS Chapter 166, http://www.leg.state.nv.us/NRs/NRS-166.html ,allows the creation of Spendthrift Trusts. The idea of a spendthrift trust is that money is set aside for a beneficiary that cannot be attacked by creditors. As a practical matter, the statute provides a fairly workable arrangement if the beneficiary is NOT the person funding the trust. In simple language, if Dad wants to leave money to his adult son, but wants to keep that money safe from his son's present or future creditors, the Nevada legislature is okay with that because Dad doesn't usually have a duty to pay his adult son's creditors.
But, if Dad wants to protect his own money from people or businesses he owes legitimate debts to, the Nevada legislature approaches that situation with great caution. As attorneys we don't feel that NRS Chapter 166 provides a way to avoid one's own debts that is attractive to most people and therefore limit our Spendthrift Trusts to situations in which the person funding the trust is not trying to avoid their own creditors.
However, you will find other reputable lawyers who will advise you that an NRS Chapter 166 Spendthrift Trust can be set up to protect your own assets provided numerous conditions are met. However, these other reputable attorneys will then caution that while this scheme should work, there is still some uncertainty as to whether other states will honor this Nevada law, and that this Nevada law is relatively new, and hasn't been that well tested in a lot of court cases. In other words, these attorneys suggest an NRS Chapter 166 Spendthrift Trust as a possible protective device that for high net worth individuals is worth the fees and inconvenience because it will probably work, especially in conjunction with other asset protection measures such as holding certain assets in LLC within the trust, etc.
The History behind NRS Chapter 166 Spendthrift Trusts is that some of the very rich have traditionally used "offshore trusts" in small countries to stash their assets. These countries, seeking trust business, make it very hard for creditors to execute on trust assets in their countries. Unfortunately, such offshore trusts are very expensive. Nevada decided to try and get into this business for the benefit of its legal and financial communities. However, because Nevada is part of the U.S., assets in Nevada are simply not as isolated from the American legal system as assets in a foreign country.
If you want to set up a Spendthrift Trust to protect your own assets we will be glad to refer you an attorney we respect who offers this service, and whom we may work with to help you.
Don't think for a minute that there is a trust you can set up to legally avoid paying what you owe the Internal Revenue Service (IRS), other government entities or fraud victims. The government and the courts can find ways to get you and/or your assets no matter what you do, and if you engage in illegal activities trying to hide assets, etc., you can find yourself in prison as well as broke.
We believe the ideal trustee to hold and pass out the money out is a strong bank or trust company. This is because we expect the bank or trust company to outlive the beneficiary and because the bank or trust company can be sued if it doesn't fulfill its responsibilities. Unfortunately, such services are expensive and are impractical for smaller estates.
Trusted family members can serve as trustees and often will do so for little or no pay. The problem with family members is we don't know how long they will live or how long they will enjoy good physical and mental health. Plus, conflict between family members can occur in the future, especially when money/assets are involved. But if you want such a trust, it is ultimately up to you to decide who to select.