Should You Establish a New Michigan Domestic Asset Protection Trust?
Until recently, legitimate options for real estate developers and others in higher-risk occupations to protect their assets from the claims of creditors were limited and, in many cases, unappealing. Some foreign countries have long allowed the creation of asset protection trusts into which a person could transfer assets while retaining a beneficial interest, which creditors could not reach. However, the expense and impracticality of such trusts - including the need to have the trust assets managed by an offshore trustee - limited their usefulness. In response, a number of states began to enact laws that authorize the creation of domestic asset protection trusts called DAPTs. Frequently, however, the laws of other states proved to be less than ideal for Michigan residents who sought trust protection for real estate and other assets situated in Michigan and under the control of a Michigan trustee.
Michigan now has joined the states that allow DAPTs, through its Qualified Dispositions in Trust Act, which became effective on March 8, 2017. Some key provisions of this new legislation include:
- An individual can transfer assets into a DAPT, while retaining broad rights to make investment decisions, receive trust distributions, pay income taxes on DAPT income, remove and replace the trustee, and veto trust distributions.
- The time during which a creditor can challenge a qualifying transfer to a DAPT generally is limited to two years and, in order to be successful, a creditor must satisfy a rigorous “clear and convincing evidence” standard.
- A DAPT can generally be used to protect assets in the event of a divorce which could be a very valuable supplement to planning with a traditional premarital agreement.
- Transfers by trustees of existing trusts into DAPTs are authorized, allowing for a broad variety of planning options with respect to trusts that already have been established for family members.
- Asset protection is specifically afforded for some commonly-used estate planning trusts, such as grantor retained annuity trusts, charitable annuity trusts, and qualified personal residence trusts.These types of trusts could be enhanced by incorporating the asset protection available under the new statute.
Since DAPTS are irrevocable and the new statute includes certain restrictions on transfers that will qualify for protection, DAPTs are not suitable for everyone. However, for those who seek to incorporate asset protection into their estate, wealth transfer, and business succession planning, investigating the suitability of this approach might make sense. In particular, individuals who own interests in limited liability companies that hold real estate may be able to combine the use of DAPTs with the LLC structures in order to realize asset protection benefits while still retaining control of business operations.