Governor Snyder recently signed legislation that creates new and significant asset protection arrangements in Michigan. The Qualified Dispositions in Trust Act (Act), which became effective on March 8, 2017, makes Michigan the 16th state to legislatively authorize the creation, funding and administration of a domestic asset protection trust (DAPT).
The purpose of this article is to very generally explain:
- Why the Act is a big deal;
- Why this is not appropriate for everyone;
- The intended purpose of the Act;
- What you have to give up for the new protection; and
- What always trumps the protection offered.
Why This Is a Big Deal
Generally, if you control the use and enjoyment of an asset, that asset is subject to the valid claims of your creditors (whether arising under judgments from loans, malpractice, car accidents or otherwise). In other words, if you own it or control it (e.g., through rights under a trust), your creditors can get it; at least until now. Under the Act you can now create and fund a specific Irrevocable Trust that allows you to retain "certain" rights, while restricting your creditors’ access to the assets transferred into the trust.
Why This Is Not Appropriate for Everyone
DAPTs (including Michigan's new version) are irrevocable (meaning you generally cannot terminate or change them) and they significantly restrict the rights the Settlor can retain (i.e. the person creating and funding the trust). Because of that, and the fact that most of us are not willing to give up significant control over the assets we have worked hard to accumulate, this is unlikely to revolutionize how estate planning is done in our state. That said, when DAPTs are used under the proper circumstances and for their intended purpose, they can provide supplemental protection that will significantly enhance your overall estate plan.
The Act's Purpose and Balance Factor
DAPTs are not intended to make you judgment proof. That would be a grave policy error. They are intended, however, to allow you to surrender significant rights over a reasonable portion of your assets, in order to protect those assets from your creditors, while reserving certain limited rights regarding the use and control of those assets. The secret to appropriate use of a DAPT is to strike the right balance between the assets over which you retain complete control (and leave exposed to creditors’ claims) and those over which you retain limited control (and protect from creditors’ claims). That balance obviously changes upon your own facts and circumstances, including how much risk exposure you have from your choice of career and lifestyle, how much you value unfettered control of your assets, how insurable your risks are, etc.
What You Must Give up for the New Protection
Although the Act is very technical and detailed, it generally allows you to establish a DAPT that shields its assets from your creditors so long as the DAPT: (1) has a Qualified Trustee (a person, other than you, as Settlor, with significant ties to Michigan); (2) does not make you or a related or subordinate party an advisor (generally anyone controlling investment, distribution and trustee removal and replacement decisions); and (3) prevents you from benefitting under or controlling the trust and its assets EXCEPT as follows (and this is what makes DAPTs so powerful, where the exception may be greater than the rule). You may retain: (a) a power to direct investments, veto distributions, remove or replace trustees and advisors and appoint assets upon your death; (b) a right to receive income; (c) a right to receive principal under specific discretionary or directive provisions or to pay income taxes; (d) a right to receive minimum required distributions; and (e) a few other very limited rights.
What Trumps All of These Benefits
The Uniform Fraudulent Transfers Act (UFTA) trumps all protection provided under the Act. UFTA will generally apply to any transfer made after a claim arises, when equivalent value is not received in exchange and insolvency results. UFTA can also apply to fraud-related transfers made before an anticipated or foreseeable claim arises. In other words, it is usually too late to use the Act if your creditor's claim has ripened or already arisen. There are a few other items that also trump the creditor protection afforded under the Act (related to child-support, spouses, bankruptcy limitations and anticipated actions of lenders), but proper planning, while you remain solvent, will afford you the intended protections.
The Bottom Line
The Act, while clearly not intended to make you judgment proof, provides a very powerful tool to supplement your estate plan. Under the right circumstances you may be well-served to protect an appropriate portion of your assets under arrangements that are compliant with the Act. See your favorite Warner estate planning attorney for more details.