KLABACKA VS. NELSON C/W 66772

Statutes cited

Key holdings

Practitioner summary

**Subject-matter jurisdiction.** Reviewing de novo (Ogawa v. Ogawa, 125 Nev. 660, 667, 221 P.3d 699, 704 (2009); Landreth v. Malik, 127 Nev. 175, 179, 251 P.3d 163, 166 (2011)), the court rejected Eric's Trust's argument that the trust-related claims fell within the exclusive probate jurisdiction of NRS 166.120 and NRS 164.015(1). The court held the action was initiated as a divorce under NRS Chapter 125, not as a proceeding to enforce a spendthrift beneficiary's rights or to adjudicate a nontestamentary trust's internal affairs. Relying on Landreth, the court held that a district court judge sitting in the family court division does not lack authority to dispose of a case merely because it involves subject matter outside the scope of NRS 3.223. **Validity of the SPA and SSSTs.** Because the operative facts were undisputed, contract interpretation was reviewed de novo (Lehrer McGovern Bovis, Inc. v. Bullock Insulation, Inc., 124 Nev. 1102, 1115, 197 P.3d 1032, 1041 (2008)). The court held the SPA was a valid transmutation agreement under NRS 123.220(1), converting community property into separate property, and that its plain terms — "to split the community estate into the sole and separate property of each spouse" — controlled. Applying the parol evidence rule (Kaldi v. Farmers Ins. Exch., 117 Nev. 273, 281, 21 P.3d 16, 21 (2001); Frei v. Goodsell, 129 Nev. 403, 409, 305 P.3d 70, 73 (2013)), the court rejected Lynita's reliance on extraneous evidence of a contrary intent. As to the SSSTs, the court set out the statutory requirements: no specific language is necessary (NRS 166.050); a Nevada-resident trustee (NRS 166.015(2)(a)); and that the trust be in writing, irrevocable, not require distribution to the settlor, and not be intended to hinder, delay, or defraud known creditors (NRS 166.040(1)(b)). Applying these, and consulting trust-construction authority (76 Am. Jur. 2d Trusts §§ 29, 30; Restatement (Third) of Trusts § 21 cmt. a), the court held both trusts valid. It further held that breaching trust formalities of a validly created SSST does not invalidate the trust; the remedy is a civil suit against the trustee (NRS 163.115). **Tracing.** The court held the district court must trace trust assets to determine whether community property exists within the trusts, because separate property receives statutory protection against court-ordered distribution while community property is subject to equal distribution under NRS 125.150(1)(b). Deferring to the district court's credibility determination discrediting Eric's Trust's CPA expert (In re Parental Rights as to J.D.N., 128 Nev. 462, 477, 283 P.3d 842, 852 (2012)), the court nonetheless held tracing must still be performed (Schmanski v. Schmanski, 115 Nev. 247, 984 P.2d 752 (1999)), because absent tracing the court is left only with the parties' testimony, which carries no weight (Peters v. Peters, 92 Nev. 687, 692, 557 P.2d 713, 716 (1976)). **Parol evidence in fashioning remedies.** Reviewing for abuse of discretion (Frei, 129 Nev. at 408-09, 305 P.3d at 73), the court held the district court abused its discretion by considering the parties' testimony regarding intent, because the valid SSSTs were clear and unambiguous (76 Am. Jur. 2d Trusts § 30; Peters). **Equalization of trust assets.** Reviewing findings of fact for substantial evidence and questions of law de novo (Ogawa, 125 Nev. at 668, 221 P.3d at 704; Waldman v. Maini, 124 Nev. 1121, 1136, 195 P.3d 850, 860 (2008)), the court held NRS Chapters 163 and 166 protect spendthrift trust assets against court order. NRS 163.417(1)(c)(1) bars a court from ordering the exercise of a trustee's discretion to distribute a discretionary interest; NRS 166.120(2) bars payments made pursuant to any legal process; and NRS 166.120(3) uses mandatory language denying the beneficiary power to make dispositions upon court order. The court held equalization between the two SSSTs was therefore error. The court noted the protections do not apply where a court order enforces a judgment on a fraudulent transfer under Chapter 112 of NRS or a transfer violating a legal obligation enforceable by a creditor (NRS 166.170(3)), and observed the record showed no such fraudulent transfer. **Payment of Eric's personal obligations from Eric's Trust.** The court rejected the district court's reliance on out-of-state authority permitting SSST assets to be reached for support (Gilbert v. Gilbert, 447 So. 2d 299, 301 (Fla. Dist. Ct. App. 1984); S.D. Codified Laws § 55-16-15(1); Wyo. Stat. Ann. § 4-10-503(b); Restatement (Third) of Trusts § 59). The court held NRS 166.090(1) protects spendthrift assets for the beneficiary alone, and relied on the legislative history of NRS Chapter 166 (Hearing on A.B. 469, 70th Leg. (Nev., Mar. 26, 1999); Hearing on A.B. 378, 77th Leg. (Nev., May 8, 2013)) and secondary commentary (Michael Sjuggerud, Defeating the Self-Settled Spendthrift Trust in Bankruptcy, 28 Fla. St. U. L. Rev. 977, 986 (2001)) to conclude that Nevada SSSTs are protected against court-ordered child- or spousal-support obligations of the settlor/beneficiary that were not known at the time the trust was created. The court expressly rejected the Restatement § 59 exception as inconsistent with Nevada's statutory framework. **Alimony.** Reviewing the alimony award for abuse of discretion (Gardner v. Gardner, 110 Nev. 1053, 1055-56, 881 P.2d 645, 646 (1994); Williams v. Waldman, 108 Nev. 466, 471, 836 P.2d 614, 617 (1992)), the court held the district court properly considered the NRS 125.150(9) factors and did not abuse its discretion in awarding an $800,000 lump sum (NRS 125.150(1)(a); Sargeant v. Sargeant, 88 Nev. 223, 228, 495 P.2d 618, 622 (1972)). The only error was ordering the award paid by Eric's Trust rather than by Eric personally; the award was vacated for reassessment against Eric individually. **Unjust enrichment and constructive trusts.** Applying the substantial-evidence and de novo standards (Ogawa; Waldman), the court held the district court erred by granting relief on a dismissed unjust enrichment claim never repleaded and not tried by express or implied consent. Eric's Trust's motion to dismiss the claim evinced a lack of express consent, and the implied-consent standard (Schwartz v. Schwartz, 95 Nev. 202, 205, 591 P.2d 1137, 1140 (1979)) was not met, as the phrase "unjust enrichment" was not used at trial. The court vacated the constructive trusts over the Russell Road and Lindell properties, holding that a constructive trust (Locken v. Locken, 98 Nev. 369, 372, 650 P.2d 803, 804-05 (1982); Restatement (Third) of Trusts § 1 cmt. e) violates spendthrift protections against assignment or alienation (NRS 166.120; NRS 163.417(1)(c)(1); Guidry v. Sheet Metal Workers Nat'l Pension Fund, 493 U.S. 365, 376-77 (1990)). **The June 8, 2015, order.** The court held the district court retained jurisdiction to enforce an order during the pendency of an appeal over collateral and independent matters such as attorney fees (Foster v. Dingwall, 126 Nev. 49, 52, 228 P.3d 453, 455 (2010)). It vacated the order to the extent it enforced or implemented portions of the decree relating to assets in the trusts being reversed, but affirmed it as to directives regarding health care costs of the son, Lynita's insurance costs, Eric's payment of costs to remove the security gate, and attorney fees for contempt. **Community-property qualifier.** The court clarified that because a non-beneficiary spouse retains a property interest in community property held within a spendthrift trust, the restraints on court-ordered alienation of SSST assets do not apply to the non-beneficiary spouse's community-property share, so the equal distribution of community property upon dissolution does not implicate the Chapter 163 and 166 protections.

In plain language

Eric and Lynita Nelson were married. Ten years into the marriage, in 1993, they signed a "separate property agreement" (the SPA) — a written contract dividing what had been shared marital property (community property) into each spouse's own separate property. That separate property was placed into two separate trusts. In 2001, they converted those trusts into "self-settled spendthrift trusts" (SSSTs) — a special kind of trust that, under Nevada law, is designed to shield the assets inside it from most creditors, even the person who created and benefits from the trust. Eric had his trust (the Eric L. Nelson Nevada Trust) and Lynita had hers (the Lynita S. Nelson Nevada Trust). In 2009, Eric filed for divorce. Because the couple's wealth was locked inside these trusts, the trusts were later added to the divorce case as necessary parties, and Lynita brought various claims against Eric's trust. The family court judge issued a detailed divorce decree. Among other things, the judge concluded that even though the SPA and the trusts were validly created, the real intent behind them was to protect assets from creditors — not to permanently split up the property in the event of divorce. Based largely on testimony from Eric and Lynita, the judge treated much of the trust property as if it were still shared, ordered the two trusts' assets "equalized" (roughly $8.7 million shifted around so each side ended up with a comparable amount), ordered Eric's trust to pay Lynita's spousal support, child support arrears, and legal and expert fees, and imposed "constructive trusts" (a court-created ownership arrangement used as a remedy) over two properties. The Nevada Supreme Court agreed with the family court on some points and disagreed on many others. It ruled that the family court did have the power (subject-matter jurisdiction) to hear the trust issues inside the divorce — the case was fundamentally a divorce, not a probate matter, so it did not have to be heard by a probate judge. It also ruled that both the SPA and both trusts were valid and clearly written. But the court held the family court made several errors. Because the SPA and the trusts were clear and unambiguous, the judge was not allowed to rely on the spouses' testimony about what they "really" intended (this is called "parol evidence" — outside evidence used to explain or contradict a written document). The court also held that Nevada's spendthrift-trust statutes do not let a court shuffle assets between two such trusts to equalize them, and do not let a court order one spouse's trust to pay that spouse's personal debts — including child support and spousal support — when those debts were not known at the time the trust was created. The court explained that Nevada, unlike states such as Florida, South Dakota, and Wyoming, has deliberately chosen not to allow child- and spousal-support claims to reach spendthrift trust assets, and that changing that policy is a job for the Legislature, not the courts. The court affirmed the actual dissolution of the marriage and affirmed the $800,000 lump-sum alimony award as an amount, but held it must be collected from Eric personally, not from his trust. It vacated the "unjust enrichment" findings because that claim had been dismissed and was never properly revived, and vacated the constructive trusts over the Russell Road and Lindell properties. It also directed that the family court must actually "trace" the trust assets — track where the money and property came from — to determine whether any true community property still exists inside the trusts, because only community property (not each spouse's separate property) can be divided by the court. Finally, the court noted one important qualifier: to the extent community property is found inside a trust, the non-beneficiary spouse's share of that community property is not shielded by the spendthrift protections, so the court can divide that community-property portion.