Asset Protection Trusts in Michigan

On March 8, 2017, Michigan became the latest state to offer asset protection trusts as a tool for its residents. The Qualified Dispositions in Trust Act (the “Act”) creates a framework under which a specific form of trust can be created and can be used to shield assets from creditors, known as a Domestic Asset Protection Trust (“DAPT”). Previously, Michigan residents who wanted this type of protection had to transfer assets out of Michigan to a jurisdiction that allowed the use of DAPTs.

Under the Act, Michigan DAPTs must be irrevocable. A person creating a DAPT cannot be the trustee of a DAPT. In order to act as the trustee of a DAPT, a person must (a) reside in Michigan or be authorized by Michigan law to act as trustee and be subject to oversight by certain state or local financial regulators and (b) maintain or arrange for custody in Michigan of some or all of the property that is included within the DAPT.

The person creating the DAPT can be a beneficiary of the DAPT, and can retain the right to:

  • Direct the investment decisions of the DAPT;
  • Veto a distribution from the DAPT;
  • Direct how the assets of the DAPT are distributed upon the death (so long as the assets are not distributed to the transferor, the transferor’s creditors, the transferor’s estate, or the creditors of the transferor’s estate);
  • Receive income from the DAPT;
  • Receive income or principal from a charitable remainder unitrust or charitable remainder annuity trust;
  • Receive income or principal from a grantor retained annuity trust;
  • Receive discretionary distributions of principal from the DAPT;
  • Use real property owned by a qualified personal residence trust;
  • Receive income or principal from the DAPT to pay income tax, to pay expenses of administration of the person’s estate or any estate taxes which become due upon death; and
  • Receive minimum required distributions from certain retirement benefits.

If a Michigan DAPT is properly created and funded, creditors seeking to recover the assets held in the DAPT have very limited rights. For claims which arise after the transfer of assets to a DAPT, creditors can only recover from the DAPT if clear and convincing evidence can be proven to show that the transferor acted with actual intent to defraud the creditor and the creditor can show a violation of Section 4 or Section 5 of Michigan’s Uniform Fraudulent Transfer Act. Further, these claims must be brought within two years after the transfer to the DAPT was made. If the claim existed at the time of the transfer, the time for a creditor to bring such a claim can be extended to 1 year after the transfer was or could reasonably have been discovered by the creditor, if the debtor fraudulently concealed information about the transfer.

In addition to protecting from general creditors, a DAPT can be used to protect assets from division in a divorce action in certain circumstances. If the party to a divorce action did not transfer assets to the DAPT, assets held in the DAPT cannot be considered marital property and cannot be awarded in a divorce action to the spouse of the beneficiary. If the party to a divorce action did transfer assets to the DAPT, the assets will not be considered marital property if either the transfer to the DAPT was made at least 30 days prior to the marriage being dissolved, or the parties to the marriage agree that assets transferred to the DAPT are not marital property.

When creating a DAPT in Michigan, there are some specific requirements to comply with to ensure that the DAPT is valid and will protect assets, including a requirement to sign documentation indicating that any transfer to a DAPT is not going to render the transferor insolvent and that there are no pending claims against the transferor.

The new Michigan DAPTs will not be for everyone, and will not serve as a vehicle to completely protect all assets from creditors. However, these trusts are a valuable tool for individuals with significant assets and significant risks of creditors’ claims. These trusts can also be used to protect assets for future generations from potential division in the event of divorce, and, in some circumstances, might be a vehicle to protect vacation homes from creditors’ claims.

If you would like to learn more about Michigan’s DAPT legislation, contact us to schedule an appointment today.

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