Wednesday, February 15, 2017

Domestic Asset Protection Trusts

Michigan Trust Law has remained fairly static in recent years with little change since the adoption of the Estates and Protected Individuals Code and the Michigan Trust Code. That changed recently with the passing of bills which allow the creation of Michigan based, self-settled, asset protection trusts. 

     February 2017 brings us an exciting change in Michigan Trust Law. As of Sunday, February 5, 2017, Michigan becomes the 16th state to permit Domestic Asset Protection Trusts (DAPT). A DAPT allows an individual (the “Grantor”) to create and fund an irrevocable trust which, subject to certain legal requirements, allows the Grantor to shield assets from the claims of a creditor.
     There are number of rules that a Grantor must follow in order to establish a valid DAPT, including the prohibition on the trust Grantor acting as the Trustee. However if properly drafted and funded, a DAPT will provide significant creditor protection while still allowing the Grantor to retain substantial rights with respect to the Trust property, including the ability:
  • to receive all of the income produced by the trust’s assets as well as to receive discretionary distributions of the Trust’s principal; 
  • to direct the investment of Trust assets 
  • to remove and replace trustees; and 
  • direct the distribution of assets following the Grant’s death.
While the Grantor cannot act as the Trustee of their own Trust, they do have broad discretion over who to appoint and can even appoint family members to serve in that role. 
     While a DAPT is incredibly powerful tool for creditor protection, it does have limitations. Most prominently, there is a two-year period from the date assets are transferred to the trust before creditor protection is achieved. Additionally, in situations related to bankruptcy or fraudulent concealment, protection takes longer to be applicable or may be completely unavailable. Due to these limitations, it is important to create and fund a DAPT well in advance of any claim arising. 
     DAPTs have the potential to become a very important part of estate planning, especially for those individuals such as doctors and business owners who face higher than average creditor exposure. However in order for them to provide the intended protection it is vital to ensure the DAPT comports with the governing statute. As always, before attempting to include a DAPT in your planning, or the planning of your clients, it is important to consult an experienced estate planning attorney.

Alan and Matt

Wednesday, February 8, 2017

Michigan Law Update

The last few months have brought us some significant changes in Michigan law that deals with estate planning. Our next two blogs will address those changes and the impact that they are likely to have on existing and future estate plans.

     Clients who have specific wishes for funeral arrangements, but worry that family members may disagree with them and go against their wishes, whether for religious or personal reasons, now have a specific statute that gives them the right to designate a "Funeral Representative" to make decisions about postmortem funeral arrangements and the handling, cremation, disposition or disinterment of the person's body. 
     The new law allows the client to appoint a "designated federal representative", who then has priority over spouses, family members and others with respect to making arrangements for the client's remains. The funeral representative designation can be included in another estate planning document, including a will or patient advocate designation, but it must be executed before two witnesses and/or be notarized. The representative accepts the appointment by signing an acceptance or by acting as the funeral representative. 
     One important caveat is that the funeral representative is personally liable for the costs of final arrangements, so it is important that the person who has made the declaration insures payment for the costs of the disposition through a trust, insurance, a prepaid funeral contract or some other means.

     Recently signed legislation eliminates a wife's "Dower" right. Prior to the legislation, Michigan law assigned a married woman a one third ownership right in any property owned by her husband during the marriage. The effect of this law was that the husband could not attempt to sell property purchased during marriage without obtaining his wife's signature on any legal documents.  The Dower rights were claimed after the husband died, and the widow was entitled to a portion of the property even if it had been transferred to another party without her consent, for the rest of her life. She could not, however, pass those Dower rights on to anyone else and the right was extinguished when the wife died.
     The new legislation abolishes Michigan Dower, and transfers of real estate in Michigan will no longer be subject to a potential Dower claim. The husband will no longer be required to obtain his wife's signature in order to extinguish her Dower rights when transferring property to another.

In addition to these two changes the state of Michigan has also now provided statutory authority for the creation of a Domestic Asset protection Trust (DAPT). A DAPT allows an individual to create and fund an irrevocable trust, which, subject to certain legal requirements, allows the rantor to shield their assets from the claims of a creditor. Our next blog will discuss this new development in greater details.

Alan and Matt