Nevada Supreme Court Affirms Creditor Protection Benefits of Nevada LLCs

Dear Clients, Colleagues, and Friends,

One of the most often asked questions by our clients is “Where is the best place to establish my LLC?” There are many formidable choices to select from, but the recent Nevada Supreme Court case of Weddell vs. H2O, Inc. appears to have answered that question once and for all.

Limited Liability Companies (LLCs) and Family Limited Partnerships (FLPs) have long been used both for effective wealth transfer planning and as a vehicle for asset protection; the latter because both entities limit a creditor’s collection options to the Charging Order (CO). The CO was introduced into law by the states to prevent the personal creditors of one partner or LLC member from taking assets owned by the FLP or LLC, potentially dissrupting the ongoing business operations of the entity. Instead, the creditor of one of the partners or members would have to petition to charge the debtor/member’s LLC share and wait for distributions to be made to the debtor/member or debtor/limited partner which only then would the creditor have a claim to the distribution to satisfy its legal claims. With regard to LLCs, in only 5 states is the CO the “sole remedy” available to a creditor. The other states allow the court to fashion other remedies to assist in satisfying the creditor’s claims. Nevada is one of the 5 “sole remedy” states. California is not. What wasn’t clear was whether the judgment creditor, who obtains a CO against the member, could succeed to the management of the LLC’s business affairs, thereby potentially disrupting the business and adversely affecting the innocent members.

Earlier this year, the Nevada Supreme Court, the state’s highest court, in Weddell, in reversing the lower court held that despite the judgment creditor obtaining the CO, a creditor will not be permitted to exercise the debtor/member’s managerial rights, consistent with the concept that LLC members should be able to choose the members with whom they wish to be in business with. This is a case of first impression and a very important decision.

Nevada has been one of the more progressive states in creating a legal framework for business to be conducted and avoid the ravages of an unforeseen financially ruinous lawsuit not resulting from the business itself. Nevada is also a leading jurisdiction for domestic asset protection trusts and other important rule changes, making it arguably the best state in which to establish your business entities and trusts, even if you are not a resident of Nevada. A great deal of credit goes to the Oshins & Associates law firm for stewarding through important legislation in these areas. If you currently have LLCs or FLPs and they are not domiciled in Nevada, speak to your legal advisor or call us to discuss the many advantages of redomiciling your LLC or FLP to Nevada.

EXTREMELY IMPORTANT: Finally, as a reminder, in less than 4 months, the law allowing each taxpayer to make “tax free” gifts up to $5,120,000 will sunset and revert back to $1 million on January 1, 2013. If you have been reluctant to make such large gifts to capture the larger gift exclusion because you might develop a case of “donor’s remorse”, consider creating the “Have Your Cake and Eat it Too Trust” (HYCET TrustSM) as an effective solution. The HYCET Trust allows you to make a gift to an irrevocable trust, established in a qualified jurisdiction, using an independent but friendly trustee, and name yourself as a discretionary beneficiary of the trust, while the IRS recognizes this gift as completed for “gift tax” purposes. In the future, if your financial needs dictate that you need assets in the HYCET Trust, the trustee will have the legal basis to be able to allow you to recapture all or part of the gift. Of course, if you don’t need the asset from the HYCET Trust, the assets will escape taxation at your death. The HYCET Trust is a multipurpose trust providing estate freezing, generation skipping opportunities, and asset protection from future lawsuits.

For further information on the Nevada LLC, the Nevada FLP, or the HYCET Trust, give us a call or write to me at Jeff@jmvlaw.com.

Jeffrey M. Verdon, Esq.

Jeffrey M. Verdon Law Group, LLP