Klabacka v. Nelson: Nevada Supreme Court Makes Historically Significant DAPT Ruling

By Steven J. Oshins, Esq., AEP (Distinguished)

One of Nevada’s advantages has always been that it is the only top-tier Domestic Asset Protection Trust (“DAPT”) jurisdiction that has no statutory exception creditors, meaning classes of creditors that can bust through a DAPT despite the DAPT’s protection from creditors.  Practitioners from competing states have suggested that Nevada DAPT laws are “too protective” and therefore won’t work as advertised.

However, on May 25, 2017, the Supreme Court of the State of Nevada, in a unanimous opinion, issued a written ruling for Klabacka v. Nelson, 133 Nev. Advance Opinion 24 (May 25, 2017) leaving no doubt that Nevada Domestic Asset Protection Trusts are protected from spousal support and child support claims.

Divorce and District Court Order

The appeal to the Supreme Court of Nevada involved a divorce and a division of assets held in two separate Nevada DAPTs, one set up by the husband and the other set up by the wife.  In 2009, the parties began divorce proceedings and subsequently added the DAPTs as necessary parties.

As part of the divorce, the Nevada district court “ordered [husband’s] Trust to satisfy [husband’s] personal obligations—specifically, [husband’s] child- and spousal-support arrears.”

Public Policy of other DAPT Jurisdictions

The Supreme Court analyzed the issues by noting the public policy that many DAPT jurisdictions have against protecting assets from spousal and child support creditors.

There is nothing wrong with this position.  In fact, to most people it is the more easily-defensible position.  However, the State of Nevada is well-known as a debtor’s haven that has laws that go beyond the protections offered in other states, thus giving it a claim along with a few other states for the fictional title as top United States trust jurisdiction.

Specifically, the Court noted as follows:

“On the other hand, there is a strong public policy argument which favors subjecting the interest of the beneficiary of a trust to a claim for alimony…. [T]he obligation to pay alimony is a duty, not a debt.’ (internal quotation marks omitted)); see also S.D. Codified Laws § 55-16-15(1) (2016) (providing that many of South Dakota’s statutory spendthrift trust protections ‘do[ ] not apply in any respect to any person to whom at the time of transfer the transferor is indebted on account of an agreement or order of court for the payment of support or alimony in favor of the transferor’s spouse, former spouse, or children, or for a division or distribution of property in favor of the transferor’s spouse or former spouse, to the extent of the debt’); Wyo. Stat. Ann. § 4-10-503(b) (2015) (‘Even if a trust contains a spendthrift provision, a person who has a judgment or court order against the beneficiary for child support or maintenance may obtain from a court an order attaching present or future distributions to, or for the benefit of, the beneficiary.’).”

Legislative History

The Supreme Court concluded that an order made by the district court directing support payments to be made from the DAPT runs contrary to Nevada law.  The Supreme Court also added to this analysis by looking at the legislative history behind the Nevada DAPT statutes:

“The legislative history of SSSTs [self-settled spendthrift trusts] in Nevada supports this conclusion…When crafting the language to allow SSSTs, the Legislature contemplated a statutory framework that protected trust assets from unknown, future creditors, as opposed to debts known to the settlor at the time the trust was created. See id. The legislative history explicitly mentions child support as an example of a debt that would not be free from attachment if known at the time the trust was created. Id. However, the trust assets would be protected from attachment as to debts unknown at the time the trust was created—presumably, this protection extended to child- and spousal support obligations unknown at the time the trust was created.”

Family Law Attorneys’ Failed Attempt to Harm Nevada DAPTs in 2013 Legislative Session

The Court even went as far as to bring back memories of the 2013 legislative session when a small group of Nevada family law attorneys turned on the rest of the Nevada community and attempted to reduce the utility of Nevada trusts by adding exception creditors that would have knocked Nevada off of its perch as arguably the top DAPT jurisdiction.

It is rare for Supreme Court Justices to point out a failed legislative attempt to change the law in a court opinion.  But presumably this was done in order to make a very loud statement that the Court is in favor of Nevada maintaining its lofty status as a trust haven.

Specifically, the Court noted:

“Additionally, in 2013, the Legislature proposed changes to NRS Chapter 166 that would have allowed a spouse or child to collect spousal support or child support from otherwise-protected spendthrift trust assets. See Hearing on A.B. 378 Before the Senate Judiciary Comm., 77th Leg. (Nev., May 8, 2013) statement of Assemblywoman Marilyn Dondero Loop). However, the proposed changes to NRS Chapter 166 did not pass, and, as a result, the Nevada spendthrift trust statutes were not amended to allow for an exception for child- and spousal-support orders of a beneficiary to be enforced against a spendthrift trust.”

Conclusion

The Supreme Court of the State of Nevada has once again demonstrated its willingness to protect the State of Nevada as a leading trust jurisdiction.


RELATED EDUCATION

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ABOUT THE AUTHOR

Steven J. OshSteven-Oshins43721143ins, Esq., AEP (Distinguished) is an attorney at the Law Offices of Oshins & Associates, LLC in Las Vegas, Nevada, with clients throughout the United States. He is listed in The Best Lawyers in America®. 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 has authored many of the most valuable estate planning and asset protection laws that have been enacted in Nevada. He can be reached at 702-341-6000, ext. 2, at [email protected] or at his firm’s website, www.oshins.com.


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