Nevada DAPT Creditor Protection Trust Fails Under Court Scrutiny
Every state has its own set of laws when it comes to what types of asset protection can be accomplished with a trust structure. For clients in some states, relying on more taxpayer-friendly trust laws that apply in other states has long been the key to accomplishing asset protection goals. That said, it's important for all clients to remember that there are always limits with respect to how effective a trust structure can be when it comes to shielding assets from creditors. A recently decided court case underscores the importance of understanding those limitations—and of considering all possible angles when it comes to structuring a trust to accomplish a client's goals and prevent future surprises.
U.S. v. Huckaby: The Facts and Trust Structure
The defendant in Huckaby had acquired real property in South Lake Tahoe, California with his partner, as joint tenants. Six years later, in 2011, they created a Nevada domestic asset protection trust, titled the Circle H Bar Trust, and designated the trust a Nevada Spendthrift Trust. The defendant and his partner were the trust's settlors, beneficiaries and trustees, making the trust a self-settled trust (a permissible structure in Nevada).
The defendant and his partner then transferred the California real property out of their individual names and into the trust.
In 2018, the IRS obtained a judgement in their favor against the defendant. By 2025, the defendant had failed to satisfy that judgment and owed the IRS roughly $88,000. The IRS filed a civil lawsuit asking the court for the following relief: (1) allowing the IRS to enforce its lien against the California property, (2) a finding that the defendant and his partner were the true owners of the property (as joint tenants), (3) a finding that the IRS' lien encumbered the defendant's one-half interest in the property and (4) allowing the IRS to foreclose on the property.
The key issue was whether a trust structured as the Circle H Bar Trust could prevent a creditor (the IRS in this case) from enforcing a judgment lien against the real property held by the trust.
The Court's Reasoning
The court initially found for the defendant in ruling that the trust should be construed under Nevada law. However, the court went further and found that trust interpretation itself wasn't the issue in this case. The issue was whether the trust assets (the real property) could be reached by the defendant's creditors.
On this issue, the court held that the law that applied where the land itself was located should control. Meaning, of course, that California law would be used to determine whether the IRS could foreclose on the land to satisfy the defendant's debt.
Unfortunately for the defendant, California law doesn't recognize the type of self-settled trust that the defendant and his partner created. In California, the settlor of a spendthrift trust cannot also be the trust beneficiary. In other words, California doesn't allow a trust that gives individuals the right to place their assets beyond creditors' reach while still benefitting from those assets. California law voids these types of trusts entirely.
The court also found that the defendant had both legal and equitable interests in the real property. That was sufficient to allow the IRS to attach their lien to the property. Equitable interests were present because the defendant was a trust beneficiary. Legal interests were present because the defendant was also a trustee.
The IRS was therefore able to foreclose on the defendant's one-half interest in the property.
Takeaways From the Huckaby Decision
The court's reasoning in Huckaby highlights the risks associated with using a domestic asset protection trust to shield real property. Questions governing real property are resolved by applying the law where the real property is located. The Nevada trust was entirely valid under Nevada law—it was simply ineffective in protecting real property assets located outside Nevada.
The "same person" problem also rendered the trust ineffective. Clients should always understand the risks associated with a self-settled trust. Asset protection trusts are simply not effective when the same person is the settlor, trustee and beneficiary.
The identity of the plaintiff in this case was important. Asset protection trusts are not effective in shielding assets from IRS tax liens. Courts can ignore a trust structure and allow the IRS to satisfy judgments by reaching trust assets. Even a trust that would be effective with respect to private creditors will likely be ineffective when it comes to the IRS.
Conclusion
Huckaby provides important reminders and warnings for clients who are set on using asset protection trusts to shield assets from creditors. Details matter when it comes to determining whether a trust will be effective. It's generally the case that courts will decline to respect the trust structure when the individual behind the trust retains complete control over the assets.