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

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