Nevada has been known as one of the better states for asset protection planning, with its courts routinely refusing to allow creditors to reach assets held by Nevada situs LLCs, LPs, and Corporations. However, with the passage of legislative bill, SB405, Nevada will now provide even greater protection against frivolous lawsuits by creditors by further limiting the remedies available to judgment creditors.
Asset Protection Alert: Effective October 1, 2011, the new statute expressly limits the remedies of a judgment creditor for Nevada situs LLCs, LPs, and Corporations to that of a “Charging Order.” A charging order is a court-ordered lien over a debtor’s interest in a business entity. A Charging Order does not allow a judgment creditor to compel distributions from an entity; rather the creditor is forced to wait for future distributions to the debtor/member, and under Rev. Rul. 77-137, will shift the taxable income to the judgement creditor while it waits for a distribution, whether or not such distribution is actually made, i.e., phantom income.
Owners of single member NV LLCs and owners of single shareholder NV corporations are the biggest beneficiaries of this new law, as the new law will apply as the exclusive Charging Order remedy, an issue that has created a great deal of past litigation and has yet to be resolved in other states.
Another new addition to the Nevada LLC, LP, and Corporation statutes is specific prohibition of a creditor’s use of equitable remedies to collect a judgment. Other states that similarly limit creditors to the exclusive remedy of a charging order, still allow creditors to pursue equitable remedies such as constructive and resulting trust theories and reverse veil piercing. Nevada, on the other hand, has expressly designated the charging order as the one and only remedy available to judgment creditors.
Because the chances of the creditor collecting on his judgment (if obtained) are remote, creditors of Nevada entities are often forced to settle their lawsuits for pennies on the dollar.
How To Take Advantage of the New Nevada Laws: The current state of economic affairs presents a substantial threat of lawsuits to the sanctity of your wealth. Fortunately, there are multiple ways in which to reorganize ownership of your assets to provide them with the appropriate protection under Nevada law:
- Create a Single Member LLC domiciled in Nevada;
- Dissolve your existing entity(s) and form a new Nevada LLC, LP, or Corporation;
- Use a statutory conversion to convert your existing entity(s) to Nevada law;
- Merge your existing entity(s) into a Nevada entity.
If your existing LLC or corporation is not domiciled in NV, even if your business or rental activities are based elsewhere, you are missing out on one of the most basic forms of asset protection planning.
If you are interested in pursuing the options described above to insulate your valuable holdings from future unforeseen creditors, please call our office and we would be happy to speak with you.
For more information about any of the information discussed in this Client Alert, or any other income or estate tax planning or asset protection planning assistance, please contact Jeffrey M. Verdon Law Group, LLP at firstname.lastname@example.org or (800) 521-0464.