Nevada Supreme Court: Creditor Of Settlor May Bring Claim Against Settlor’s Trust

In In re Christian Family Trust, the Nevada Supreme Court upheld a district court decision holding that a creditor of a settlor may bring a claim against the settlor’s trust, in this case a law firm that was not paid for its services before the settlor died.

The Facts Of In Re Christian Family Trust

Settlors Nancy and Raymond Christian, Sr., created the Christian Family Trust (the “Trust”).  Their three children were named as co-trustees.  Under the Trust, the settlors had a mandatory interest in all income and principal from their community property and a mandatory interest in the income and principal of his or her own separate property.

After the death of the first settlor, the Trust provided that the trustee had discretion to pay, among other things, “any debt owed by the decedent.”  The Trust did not have a similar provision governing the death of the second settlor.

Raymond died first.  After Raymond’s death, Nancy removed appellants as trustees and appointed her son from a different marriage, Monte, as trustee.  Appellants challenged their replacement as trustees, and Nancy hired the law firm of Anthony L. Barney, Ltd. to represent her.  Nancy then died.

The law firm requested payment of Nancy’s legal fees from the successor trustee.  The trustee approved the payment from the Trust, and the district court ordered payment of the legal fees from the frozen trust funds.  The appellants appealed the order of payment.

A Creditor May Bring a Claim Against a Settlor For the Assets Of a Trust

A creditor may bring a claim against a settlor for the assets of a trust, with limitations.  The claim can be brought so long as the settlor’s interest in the trust is not purely discretionary.  NRS 163.5559(1) states:

Except as otherwise provided in subsection 2, a creditor of a settlor may not seek to satisfy a claim against the settlor from the assets of a trust if the settlor’s sole interest in the trust is the existence of a discretionary power granted to a person other than the settlor by the terms of the trust or by operation of law or to reimburse the settlor for any tax on trust income or principal which is payable by the settlor under the law imposing such tax.

Nancy did not have a solely discretionary interest in the Trust.  Nancy was the surviving settlor, and had both a discretionary interest in receiving support from Trust assets and a mandatory interest as to her possession of the residence and personal property.

In addition, the spendthrift provision in the Trust explicitly did not apply to a settlor’s interest in the Trust estate, and therefore did not prevent Nancy’s creditors from reaching the Trust property.

Does a Nevada Creditor Claim Have To Be Filed Against the Settlor Of The Trust While Alive?

No.  Creditor claims against a settlor are filed after the death of the settlor as a matter of black letter Nevada law.  NRS 164.025 requires a creditor to file a claim against a settlor within 90 days from notice that the settlor has died.

The Nevada Supreme Court also rejected the argument that the law firm did not follow the applicable procedure to file a creditor’s claim, stating:

Upon the death of a settlor, a trustee of a nontestamentary trust may notify known or readily ascertainable creditors that the settlor has died. NRS 164.025(1). A creditor who has a claim against the trust estate must file a claim within 90 days after the first notice. NRS 164.025(2). NRS 164.025(3) reiterates that a person having a claim against a settlor must file a claim with the trustee within 90 days of notice. The record before us is unclear as to whether any trustee of the Trust provided formal notice of Nancy’s death to ascertainable creditors. Regardless, Barney, Ltd. sent letters to both Trustee Reason and Trustee Utkin within 90 days of Nancy’s death notifying them of its claim against her.  We conclude that this written notice satisfied the procedural requirements to file a creditor’s claim under NRS 164.025(3).

Finally, the Nevada Supreme Court concluded that the trustees had broad discretionary power to approve payment to the law firm as a creditor of the settlor.

Therefore, creditors of a settlor of a Nevada trust may bring a claim against a settlor’s trust, provided the claim is timely and the settlor’s interest in the trust is not purely discretionary.

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