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Domestic Asset Protection Trusts

by | Jan 20, 2017

One question I get asked fairly often is: “Can I put my assets in a trust and shelter them from my creditors”?   Until recently, my response has been “probably not” unless you want to put them in an “off-shore” entity or place them in trust in another state (such as Alaska) that has certain types of these “self-settled” trusts that are insulated from creditors’ claims.  (Alaska was the first state to come up with these self-settled trusts in 1997, and was shortly followed by Delaware, Nevada, South Dakota, and others, so that there are now at least 16 states with laws that provide for such trusts).  Usually, under the laws of these states, you have to make the trust irrevocable, transfer certain assets into the trust, and appoint and engage the services of a local (e.g. Alaska) Trustee, and pay him/her, as well as that state, an annual fee.   You would also have to pay a local attorney in that state to set up the trust.

All of this has recently changed, as the Michigan legislature must have thought it was losing a lot of money to these out-of-state trusts, and wanted to keep the assets here, under local control.  Thus, about a month ago. It jumped on the proverbial band wagon and passed the Qualified Dispositions in Trust Act (2016 PA 330).   Under this new act, a person can now create a trust, called a Domestic Asset Protection Trust (DAPT), retain an interest in that trust, and prevent his or her creditors from reaching the assets held in such trust.

In conjunction with such statute, the legislature also enacted certain changes to the Uniform Fraudulent Transfer Act (UFTA), found under 2016 PA 331.  This was necessary as such transfers would have, historically, been subject to possible challenge under the UFTA.            Some limitations to that ability, under the UFTA, are set forth in the latter act; i.e., a transfer of property into a DAPT is not allowed if the transfer is fraudulent and can be set aside if the disposition (the transfer into the trust) was made with actual intent to hinder, delay, or defraud any creditor.  However, this is up to the harmed creditor to enforce and there is typically a 2 year statute of limitations on such actions, computed from the time such qualified disposition (transfer of property into the DAPT) was made.

In addition, if you are more than 30 days behind on your child support payments, the transfer of property into such a trust will not be a qualified disposition and could be set aside.  Thus, putting your assets in a DAPT to avoid your child support obligation is generally not going to work.

Finally, if assets are placed into a DAPT within 30 days or less before marriage, they are not protected.  (To potentially get around this problem, particularly in a second marriage situation, either wait more than 30 days to get married or, otherwise, have  a Pre-Nuptial Agreement prepared by  knowledgeable, competent legal counsel, making full disclosure of all assets and liabilities of both parties, and after both individuals have had an opportunity for their own separate attorney to review the same,  have it property executed).

Under a DAPT, the trust that is established must be irrevocable (you cannot alter it) and have a qualified third party independent trustee, who is generally a financial advisor, operating under the auspices and control of various governmental insurance and financial entities.  The assets, again, must be titled in the name of the trust, so that they are no longer held by, or property of, the settlor (the trust-maker).  Thus, while the upside is that your creditors can not reach the assets properly transferred into a DAPT, the downside is that the settlor has to be prepared to give up control over these assets, which may be quite difficult for most individuals.

There are certain powers that the settlor can retain in a DAPT. These include the power to direct investment decisions; the power to veto a distribution from the trust; the potential or actual receipt of income; a special power of appointment effective on the settlor’s death; and the right to remove a Trustee or an advisor and to appoint a new party to assume these roles.

For most individuals, DAPTs would have limited value.  As this is a new and highly technical area of the law, covering multiple practice areas (including creditors rights, probate and estate planning, divorce, and family law, among others), specific compliance is absolutely necessary.   The typical individual who may benefit from a DAPT has a high net worth with excess funds they want to protect.  They also have a high degree of exposure to creditors’ claims, and may include physicians (esp. those with high malpractice insurance premiums, with quite a bit of potential exposure to medical malpractice claims that may exceed policy limits), certain executives and business owners, celebrities, high worth/high profile individuals, and even real estate developers.  However, for these “high risk” individuals, a DAPT may be just the type of vehicle they are looking for to shelter assets without having to look at the bankruptcy option, should they get hit with a large judgment.

For most individuals, if you are thinking about setting up a trust, this is usually done as a means of transferring your assets at death, outside of probate, in accordance with your desires.  Revocable trusts are usually established in order to expedite the transfer of assets, to keep matters private, and to avoid the time, costs, and delays of a probate proceeding.   Again, most of these are grantor trusts and are revocable as the assets therein are titled in the name of the trust, with the Trustee(s) being the settlors themselves (typically a husband and a wife).  Since they can transfer such asses into and out of the trust, at will, as they need or desire, and they have not given up ultimate control of such assets, these trust assets remain reachable by their creditors, even though titled in the name of their trust.

If you are in need of a Will, Trust, Durable Power of Attorney, or need to nominate someone to act as your Patient Advocate (in order to be able to make medical decisions for you, if and only if you are unable to make them yourself), please contact the estate planning professions at Damon, Ver Merris, Boyko & Witte, PLC.  We are here to help and put your mind at ease. – Attorney Larry A. Ver Merris

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.

While this posting originates from a law office, none of the contents should, in any way, be considered legal advice. If you have not signed a retention letter describing the legal services to be provided and the amount to be paid for such services, you are not a client of this firm.

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