The Statute Means What It Says.

Nevada has faced that test. It passed. The decision is Klabacka v. Nelson, 133 Nev. 164, 394 P.3d 940 (2017) (Nev. Adv. Op. 24), Docket No. 66772, decided May 25, 2017, and nearly a decade after it was handed down it remains the most instructive thing an American court has said about the durability of a self-settled spendthrift trust. The case is the subject of a recent note by the Law Firm of Jeffrey Burr, Nevada Supreme Court Upholds Public Policy of Domestic Asset Protection Trusts, which prompted these remarks.

But Klabacka is also a lesson in reading cases carefully — because what it decided and what it is often said to have decided are not quite the same thing. For clients weighing a Nevada structure, both halves of that sentence matter.

The facts were not the facts of a bankruptcy or a commercial judgment. They were domestic. Eric and Lynita Nelson, while married, executed a separate property agreement that transmuted their community property into separate property, and then funded two separate self-settled spendthrift trusts — one for each of them — under Nevada’s spendthrift trust statute, NRS Chapter 166. The appellant was Matt Klabacka, distribution trustee of the Eric L. Nelson Nevada Trust dated May 30, 2001.

When the marriage ended, the family court did what family courts are institutionally inclined to do: it looked at two unequal pots and reached for the larger one. It equalized the trust assets, ordering property out of the husband’s trust and into the wife’s, and it treated the trust assets as available for support obligations.

The Nevada Supreme Court reversed the parts that mattered. Its holdings, in substance:

The trusts were valid. The court found these were “validly created self-settled spendthrift trusts,” formed in compliance with the statutory requisites — a writing, irrevocability, no requirement that income or principal be distributed to the settlor, and no intent to hinder, delay or defraud known creditors. See NRS 166.040.

A court may not equalize between trusts. The order moving assets from one spendthrift trust to another was improper, because Nevada’s statute protects against court orders that transfer assets out of a spendthrift trust and against transfers that do not benefit the trust’s beneficiaries.

And — the holding that made the case famous — Nevada recognizes no “exception creditors.” The court concluded that Nevada self-settled spendthrift trusts are protected against court-ordered child support or spousal support obligations of the settlor-beneficiary that are not known at the time the trust is created. See also NRS 166.090.

That third holding is the one to sit with. In most of American trust law, support claimants are the paradigm exception creditor — the class of claimant that pierces a spendthrift clause almost everywhere, on the theory that no policy favors letting a person shelter wealth from their own children. Nevada’s legislature declined to write that exception. And Nevada’s Supreme Court declined to write it in judicially. The court read the statute, found no exception, and refused to manufacture one out of general equitable instinct.

It is tempting to read Klabacka as a case about divorce. It is not, or not principally. It is a case about judicial discipline — about whether a protective statute survives contact with a court that would rather not apply it.

This is the single most important variable in choosing a jurisdiction, and it is the one that marketing materials never address. Any legislature can enact a domestic asset protection trust statute. Roughly twenty states have. What distinguishes them is not the elegance of the drafting but the answer to a harder question: when a real claimant stands in front of a real judge with a genuine grievance, does the statute hold?

Nevada now has an answer on the record from its court of last resort. That is a materially different thing from a statute that has never been tested, and it is why practitioners treat the Nevada regime as among the more settled of the domestic options rather than merely among the more attractively drafted ones.

The statutory architecture behind that result is worth naming, because it maps precisely onto the themes we return to in these pages. Under Chapter 166, a self-settled spendthrift trust must be in writing and irrevocable; it must not require that any part of income or principal be distributed to the settlor; and it must not be intended to hinder, delay or defraud known creditors — NRS 166.040. If the settlor is a beneficiary, at least one trustee must be a Nevada resident, a trust company qualified in Nevada, or a bank maintaining an office in Nevada — NRS 166.015. The spendthrift restraint itself prohibits the assignment, alienation, acceleration and anticipation of the beneficiary’s interest, and requires that payments be made only to or for the benefit of the beneficiary, not by assignment and not through legal process — NRS 166.120.

Read that list again and notice what it is describing. It is describing a transfer that is complete, a benefit that is discretionary rather than guaranteed, and administration that is genuinely in someone else’s hands. Those are not Nevada peculiarities. They are the structural preconditions of protection anywhere in the world, and Nevada has simply codified them with unusual clarity.

The doctrinal headline is the no-exception-creditor rule. The practical headline is the limitations period.

Nevada requires a creditor attacking a transfer to a spendthrift trust to act within two years after the transfer, or within six months after the creditor discovers or reasonably should have discovered the transfer, whichever is later — and to carry the burden by clear and convincing evidence that the transfer was fraudulent under Nevada law or violated a legal obligation owed to the creditor. NRS 166.170. Readers should consult the current text of the statute, which has been amended over time.

Three features of that rule deserve emphasis, because together they explain why seasoning is not a stylistic preference in this practice but the entire mechanism.

It is short. Two years is a narrow window by the standards of fraudulent-transfer law generally, where four-year and longer reach-back periods are common.

It runs from the transfer, not the claim. A structure funded on a clear day begins burning down its own exposure immediately, and every month that passes without a claimant surfacing is a month of protection accruing. A structure funded in the shadow of a dispute starts the clock at exactly the moment a creditor is most likely to be watching.

The burden is elevated. Clear and convincing evidence is a demanding standard, and it is demanding in a specific way: it favors the party whose conduct looks ordinary and disfavors the party whose conduct looks like a reaction. A transfer made years before anyone was on the horizon, for articulable estate-planning reasons, documented at the time, is very hard to characterize as fraudulent by clear and convincing evidence. A transfer made three weeks after a demand letter is not hard at all.

This is the recurring lesson of these pages stated in Nevada’s statutory language. Protection that is seasoned — set up years before any claim — is protection. Protection that is improvised after the claim arrives is not protection; it is evidence.

Here is where care is required, and where a good deal of secondary commentary overreaches.

Klabacka arose from a divorce. Its holding on exception creditors is expressly framed around obligations not known at the time the trust was created. It says nothing about a settlor who funds a trust while a known creditor is already in the picture — indeed the statute forecloses that directly. And it is not a decision about probate.

We note this because commentary circulating on the durability of Nevada trusts against estate and probate creditors — claimants who surface after a settlor’s death and seek to reach trust property to satisfy debts of the estate — is, in our reading, running ahead of the published authority. The general architecture points in a favorable direction: property properly transferred to an irrevocable self-settled spendthrift trust during life is not property of the settlor’s probate estate, and the spendthrift restraint operates against creditors of a beneficiary rather than being suspended by the settlor’s death. But that is an inference from structure, not a holding we can point to. Anyone told that a specific appellate decision has definitively resolved the probate-creditor question in Nevada should ask for the citation, and should read it before relying on it.

That caution is not a criticism of the Nevada regime. It is an application of the same discipline the regime itself rewards. A plan built on what a statute actually says and what a court actually held is durable. A plan built on what a newsletter said a court held is exposed at precisely the moment it is tested.

For clients evaluating a Nevada structure, the operative points are these.

• A tested statute is worth more than an untested one. The relevant question about any DAPT jurisdiction is not what the statute promises but whether the state’s highest court has enforced it against a sympathetic claimant. Nevada has a real answer here. Many states do not.
• The statutory conditions are conditions, not formalities. Irrevocability, no mandatory distributions to the settlor, a qualifying in-state trustee, and the absence of intent to defeat known creditors are the load-bearing elements. A trust that satisfies them on paper while the settlor continues in substance to direct the assets is inviting a sham or alter-ego argument that no statute prevents.
• Fund early, document contemporaneously. The two-year clock and the clear-and-convincing standard are generous to the planner who acted before trouble and unforgiving to the one who acted after it. The contemporaneous record — solvency at funding, the legitimate purposes for the transfer, the absence of any known claim — is what converts a favorable statute into a favorable outcome.
• Understand the interstate question. A Nevada statute binds Nevada courts. Whether a court in another state, applying its own conflict-of-laws and public-policy rules, will give the same effect to a Nevada trust holding assets or beneficiaries connected to that state is a separate and genuinely contested question — one that turns heavily on the facts, the situs of the assets, and the forum. Clients whose exposure sits outside Nevada should be counseled candidly about that, and should understand why some families choose to place the protective layer in a jurisdiction whose courts are not asked to defer to anyone else’s.

Klabacka is nine years old and has not lost its usefulness, because what it demonstrates is not a rule but a temperament. A court was handed a statute it could have narrowed, an equity it could have vindicated, and a claimant it could easily have preferred — and it applied the statute as written.

That is the quality clients are actually buying when they choose a jurisdiction. Not the brochure. Not the ranking table. The demonstrated willingness of a court to enforce the protection on the day it is inconvenient to do so.

And the corollary, as always: the statute rewards the person who built early. Two years, clear and convincing evidence, no known creditors at funding — every one of those conditions is a condition about time. They can only be satisfied by someone who did the work before there was any reason to. This note is general information about developments in trust and creditor law, not legal, tax, or investment advice; whether any structure is appropriate, and how it will be treated in a particular forum, turns entirely on the individual facts, the jurisdictions involved, and current law, and should be assessed with qualified counsel.