16 December 2016

Michigan Getting With the Times on Domestic Asset Protection Trusts: The New Qualified Dispositions in Trust Act

In addition to wealth management and tax planning, protecting assets from creditors and predators can be an important part of a holistic estate plan. Risks that warrant proper asset protection planning may include professional malpractice, business lawsuits, incapacity and susceptibility to exploitation, divorce, bankruptcy, property and casualty claims, civil judgments and overall vulnerability to legal proceedings. Multiple strategies can be employed to reduce creditor exposure and enhance asset protection. Some of the most sophisticated asset protection techniques typically involve the use of irrevocable trusts. However, until recently, Michigan law did not provide any protection for self-settled trusts containing the assets of a person who was also a beneficiary of the trust. Instead, the steep price for asset protection was that the client had to give up control and could not be a beneficiary of a trust holding protected assets.

Over the last few years, states have developed a special type of irrevocable trust, known as the Domestic Asset Protection Trust (DAPT). The person who creates the trust, called a “Settlor”, and whose assets are protected by the trust is typically a lifetime beneficiary of the trust and also retains other decision-making authority in the administration of the trust. Under DAPT legislation, if the trust is properly drafted, its assets are not subject to the Settlor’s creditors even though the Settlor has an interest as a beneficiary. Moreover, under recent IRS rulings, if drafted properly, the assets of a DAPT are not included in the Settlor’s gross estate for federal estate tax purposes. This is the best of both worlds.

Until a recent change in Michigan law, you would have to go jurisdiction shopping—one of fifteen states outside of Michigan—to take advantage of a self-settled DAPT. But now Michigan has gotten with the times. On December 8, 2016, Governor Snyder signed into law two bills that now allow a DAPT to be created in Michigan. The legislation was set forth in Public Act 330, which is the main piece of legislation and establishes the Qualified Dispositions in Trust Act (the “Act”). Public Act 331, which amends the Uniform Fraudulent Transfer Act, supplements Public Act 330. The Act becomes effective on March 8, 2017.

The Act sets forth several statutory requirements that need to be met before a self-settled trust can qualify as a Michigan DAPT. If a Michigan DAPT is properly drafted, it can be funded with a Settlor’s assets, provide the Settlor with accessibility to those assets as a beneficiary and give the Settlor a voice on certain fiduciary and administrative decisions, all while protecting the assets from the Settlor’s future creditors. The creditor protection component is also generous. The Act provides that the Settlor’s creditors may not reach assets transferred to the Michigan DAPT upon expiration of a two-year period beginning with the date the assets are transferred to the trust. There are only a few exceptions to this protection, including instances of fraudulent concealment and in the bankruptcy context.

The Michigan DAPT can be an extremely powerful tool in both the estate planning and asset protection planning toolbox. Like any planning, considering whether a Michigan DAPT is the right tool to include in your toolbox involves many considerations. Miller Johnson’s experts can help you decide whether a DAPT is the best way to address your unique family, business and tax goals.