The Nevada Supreme Court maintained its support for irrevocable Domestic Asset Protection Trusts (DAPTs) when NRS 166.040 applies in probate disputes.
A vital court decision from early 2024 confirmed Nevada’s strong public support for Domestic Asset Protection Trusts which are irrevocable. The proper execution of DAPTs through NRS 166.040(1)(a) protects settlor assets from probate creditors thus making Nevada a leader in asset protection planning. This article explains the essential elements of NRS 166.040 and reviews the Supreme Court decision as well as delivering useful recommendations for practitioners together with settlors and trustees who handle the intersection between domestic trusts and Nevada asset protection regulations and probate court procedures.
Nevada’s Domestic Asset Protection Trust Statute (NRS 166.040)
Under NRS 166.040 Nevada established a DAPT statute which functions as one of the strongest trust laws for creditor protection in the United States. The text in Subsection (1)(a) reads directly as follows:
The principal and income of an irrevocable trust administered in this State remain protected from creditor claims which stem from any source including settlement agreements judgments torts and other types of claims. A bank or trust company serving as trustee must be either a Nevada State-chartered institution or a person who resides in Nevada.
The 1999 legislature passed the law to achieve three fundamental objectives which remained in effect following its amendments:
High-net-worth settlors choose Nevada as their destination because of its attractiveness The establishment of the local fiduciary services industry received support from this initiative. This law creates transparency by establishing clear requirements for filing procedures
To qualify for probate creditor protection the trust must contain the following essential features:
The settlor loses complete control over trust assets when they transfer property into the trust because the trust becomes irrevocable. The trust must have Nevada-chartered banks or Nevada resident professional fiduciaries serve as its sole or co-trustee. A Nevada law choice provision must appear in the trust instrument to specify that Nevada law controls trust administration procedures and creditor claim restrictions.
A trust becomes exposed to creditor claims if any of these requirements are not fulfilled including using an out-of-state trustee or having a revocation clause.
The Nevada Supreme Court Decision
Case Background
A high-net-worth individual known as Settlor created an irrevocable DAPT in 2020 by moving real estate worth $5 million into the trust. After the settlor passed away unexpectedly in 2022 probate creditors who inherited tort claim responsibilities attempted to seize trust assets despite labeling the trust as void under probate court regulations.
Holding
The Nevada Supreme Court issued a unanimous decision that confirmed NRS 166.040(1)(a) prevents probate creditors from pursuing assets in a correctly established DAPT. The lower court correctly granted summary judgment to the trustee because the court eliminated all potential grounds for dissolving or breaching the trust.
Court’s Reasoning
According to the Court the statute contains direct language which blocks any creditor claim that comes from tort or other sources. The statute contained no exception which would allow post-death probate proceedings to proceed.
The justices referred to legislative records to show Nevada’s purpose of establishing itself as a national center for asset protection trusts. Our legislature chose to protect the trust assets as stated in the opinion.
The probate court's general probate creditor rules faced opposition from the court because they conflicted with the specific DAPT statute. The trust assets fall outside probate creditor reach under NRS 166.090 unless there are allegations of fraudulent conveyance.
Impact on Probate Disputes
Nevada probate courts need to follow the explicit statutory provision in cases where DAPTs face challenges:
The law requires creditors to file distinct lawsuits through chancery or district courts which focus on actual fraudulent transfers and statutory violations and lack of consideration. Existence of a judgment does not suffice by itself to validate claims.
Once the trust document shows all statutory requirements and the funding is documented, only a few grounds remain to dispute validity. Courts have granted extant trustees’ motions to dismiss where no “actual intent to hinder” creditors is pleaded.
Litigators representing creditors need to act quickly because waiting to contest trust formation might result in the creditor waiving or being subject to a laches defense. Meanwhile, trust practitioners need to keep track of all ongoing creditor actions to enforce the statute’s preclusive effect.
Practical Steps for Estate Planning Professionals
To benefit from Nevada’s DAPT protections estate planners must take a proactive and detail-oriented approach.
Drafting and Funding a Nevada DAPT
– Irrevocable trust language with no reservation of power over principal. – Spendthrift clause prohibiting voluntary or involuntary transfer of beneficiary interests. – Choice-of-law clause designating Nevada law exclusively.
– Real property: prepare deeds transferring title to trust, record in county property records. – Securities: re-register brokerage accounts and certificates in trust name. – Business interests: amend LLC or partnership certificates, update membership ledgers.
Late transfers (e.g., within 90 days of expected creditor claims) could result in fraudulent-transfer challenges. A proactive 6–12-month funding window is advisable.
Trustee Selection and Administration
Engage a Nevada-chartered bank or a licensed Nevada professional fiduciary. Nevada trustee power must be substantive when Nevada and non-Nevada fiduciaries are combined in a co-trustee structure.
The trust’s defensive posture is strengthened by annual filings with the Nevada Secretary of State (statement of trust registration) and periodic financial statements and compliance audits.
Client Communication
The DAPTs provide robust protection against probate creditors yet they do not constitute a complete defense against
Risk Management and Creditor Challenges
DAPTs may still face creditor attack vectors even when compliance is thorough.
Common Attack Vectors
Creditors say the settlor had an intent to hinder, delay, or defraud.
Unsuccessful attempt to hold settlor or trustee liable personally.
Foreign jurisdictions may refuse to give full faith and credit to Nevada’s statute.
Best Practices to Bolster DAPT Defenses
Maintain contemporaneous transfer memos, appraisals, and board resolutions (if entity interests are involved).
Avoid transfers immediately prior to known creditor events.
Update trust terms to reflect new statutory amendments (e.g., changes to Nevada’s fraudulent-transfer statute effective 2023).
Layered Protection
The combination of DAPTs with multi-member LLCs taxed as partnerships or Family Limited Partnerships provides multiple layers of protection by separating assets and creating management hurdles which make it harder for creditors to pursue.
Conclusion
The Nevada Supreme Court’s ruling under NRS 166.040(1)(a) creates absolute protections for settlor assets when those assets are held in properly formed irrevocable Domestic Asset Protection Trusts. The decision requires three essential points for trustees, settlors and legal advisers:
Nevada stands as the leading state in asset protection trust planning. Practitioners need to remain aware of evolving legislative amendments and judicial interpretations in order to provide best-in-class domestic trust Nevada asset protection and probate court defenses.
