Michigan’s New Law to Allow Domestic Asset Protection Trusts

Asset protection has been has been a driving force in wealth generation and estate planning for as long as there has been a division between the “haves” and the “have-nots.” From fortified treasuries with armed guards in ancient times to secretive offshore banks and trust companies in Switzerland and the Caribbean, individuals and families have gone to great lengths to protect their monetary fortunes from discovery and recovery by creditors, criminals and even governments.

Although hiding money offshore provides the greatest protection for assets, there are many disadvantages: Cost, difficulty in retrieving and repatriating assets, and jurisdiction over the owner. Going to such great lengths to hide money is only cost-effective for very large sums.

Trustees in asset havens charge high fees. They have a favored position with regard to their local governments and can limit competition. Once an offshore trustee is in control of a hoard, the owner may be a captive client. It may be impractical or impossible to move the assets to a different repository.

The flip side to making assets hard for others to reach is that they may become hard for the owner to recover. Also, the assets are subject to a set of foreign laws that may become less favorable over time. Finally, ensuring that the owner’s intended beneficiaries will have access to the funds after the death of the present owner is problematic.

Placing assets outside the jurisdiction of domestic courts is not failsafe as long as the owner remains subject to the jurisdiction of those courts. One who refuses to provide information about offshore assets may be held in contempt of court. He or she may have to choose between keeping the assets or keeping his or her freedom.

In 1997, the Revised Alaska Trust Company Act, Alaska Stat. Ann. § 06.26.010, et seq. (West), was signed into law. It was developed to create a more accessible and less expensive alternative to foreign trust companies and to provide a business opportunity for trust companies. The Alaska statute was copied by similar laws in Delaware, Rhode Island, Nevada and 12 other states. Michigan is the 17th state to legalize domestic asset protection trusts when it enacted the Qualified Dispositions in Trust Act (QDTA), 2016 Pub. Act 330; MCLA 700.1041, et seq.

A domestic asset protection trust (DAPT) allows the settlor to fund an irrevocable trust with a completed gift that is removed from the settlor’s estate, despite the independent trustee’s power to make discretionary distributions of income and principal to the settlor. The trust also insulates the assets from the claims of most creditors. To receive this protection, the transfer into the trust must be a “qualified disposition” to a “qualified trustee.”

An individual, other than the settlor, who is a Michigan resident would be a qualified trustee. A nonresident or institutional trustee must be subject to supervision by the Department of Insurance and Financial Services, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, or the Office of Thrift Supervision. Furthermore, at least some of the trust estate must be sited in Michigan and the nonresident trustee must have a place of business and maintain at least some of the records in Michigan. MCLA 700.1042(r).

A disposition is not qualified unless the trust is irrevocable and the settlor’s authority over the trust is limited to a list of permissible powers. The permissible powers include various items of administrative control, the right to receive income and annuity distributions and distributions to cover taxes on trust income, the right to receive up to 5% of the trust principal annually, the right to use real property in a qualified personal residence trust, and the right to direct post-mortem distributions to cover the settlor’s debts, expenses of estate administration and estate or inheritance taxes. A disposition is also not qualified if the settlor owes more than 30 days of child support or if an advisor who is related to the settlor is granted authority that the settlor may not exercise. MCLA 700.1042(p).

The settlor must sign a qualified affidavit affirming that the settlor has full title to the property, that the transfer will not make the settlor insolvent and the settlor does not intend to file for bankruptcy nor defraud a creditor, that if the settlor is involved in any pending court or administrative proceeding it is identified in an attachment to the affidavit, that the settlor is not 30 days in arrears on child support, and that the property is not the proceeds of illegal activity. MCLA 700.1046(1).

A creditor has two years from the date of the qualified disposition to file suit to void the disposition, or one year from when the creditor discovered or should have discovered a qualified disposition that was concealed. MCLA 700.1045(3). If the claim arose after the qualified disposition, the creditor must show “actual intent to defraud the creditor.” MCLA 700.1045(2)(b). The QDTA was accompanied by a revision of the Michigan Uniform Voidable Transactions Act, MCLA 566.31, et seq., to make it compatible with the new restrictions on the ability of creditors to attack asset protection trusts. 2016 Publ. Act 552.

A creditor who sues to cancel a qualified disposition is waging an uphill battle. Even if the creditor succeeds in voiding some or all of the disposition, unless the trustee was acting in bad faith, the recovery is diminished by the trustee’s costs in defending the disposition and the beneficiary may retain any distribution received before the creditor filed its action. MCLA 700.1047(2)(c). Furthermore, except for a distribution to a beneficiary who is also the settlor, the creditor must prove bad faith by clear and convincing evidence. MCLA 700.1047(3).

A Michigan DAPT provides protection equal to those established in other states, with two main advanteges: If the settlor has a trusted family member or friend who is a Michigan resident, it is not necessary to use an institutional trustee, saving substantial trustee fees. The settlor may choose an institutional trustee whose office is around the corner, instead of an unknown trust officer the settlor has never met in person.

Relatively few clients will find it cost-effective to establish a DAPT, but this type of planning could develope into a lucrative trust and estate sub-specialty. However, the practitioner must apply the statute meticulously, particularly in the early stages when many aspects of the law have not been interpreted and explained by the courts. The explanation above is only a starting point for drafting this specialized trust.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200

©2017 John B. Payne, Attorney