Effective March 8, 2017, Domestic Asset Protection Trusts (DAPTs) are legal in Michigan. This complete reversal of previous law is the result of two laws enacted by the Michigan legislature at the end of 2016. The change is an important new development in Michigan trust law.
What Is a Domestic Asset Protection Trust (DAPT)?
A domestic asset protection trust or DAPT is an irrevocable trust that allows the person creating the trust to benefit from the trust but protect the trust assets from creditors. Without specific laws allowing a DAPT, the assets of the trust would not be shielded from creditors.
With passage of the Qualified Dispositions in Trust Act, 2016 PA 330, Michigan became one of just 17 states that permit DAPTs. Legalization means that an asset protection trust can now be set up in Michigan and administered by a Michigan-based trustee, such as a family member, a professional trustee or a corporate trustee. Previously, the only option for a Michigan resident was to establish a DAPT in another state where they are permitted, but attempting to do so could give rise to significant legal issues if the trust were challenged.
A companion law, 2016 PA 331, amends the Uniform Fraudulent Transfer Act to protect creditors against fraudulent creation of DAPTs.
Requirements for an Asset Protection Trust
The rules that apply to creating an asset protection trust are complex. There are protections in the laws that guard against the trusts being used to defraud creditors or shield assets from a divorce property settlement.
The most important requirement for an asset protection trust is that it involves an irrevocable transfer of assets to the trust. The person creating the trust has to give up control over the assets permanently. For that reason, individuals who set up a DAPT generally have high net worth and excess funds. Since the goal of creating the trust is to protect the assets from creditors, the individual likely also will have high exposure to creditors. Doctors, business executives and owners, and celebrities are examples of individuals who consider this type of trust.
Even though the person creating the trust gives up the assets permanently, the new Michigan law permits that person to be the beneficiary of the trust. The document that creates the trust specifies how it will be administered. In the trust document, the person creating the trust may retain some rights involving the assets, including the power to:
- direct investment decisions of the trust
- veto a distribution from the trust
- receive income from the trust as beneficiary
- receive discretionary distributions of income and/or principal
- receive a limited annuity payment from the trust
- remove a trustee or advisor and appoint a new trustee or advisor
- direct how the trust assets are distributed after the creator’s death, with limitations
The new laws provide a means for a creditor to challenge a qualified trust on the basis that it was set up or concealed fraudulently. A person who creates a DAPT must sign an affidavit asserting that the trust is not an effort to defraud or avoid creditors and is not fraudulent as to creditors. An asset protection trust is a proactive tool. Individuals who already have problems with creditor likely cannot meet the requirements to establish one.
Marital Rights in an Asset Protection Trust
The Michigan law addresses how a qualified protection trust affects marital property rights in the event of divorce or death. If the trust was created more than 30 days before a marriage or the parties agree (for example, in a prenuptial agreement), the trust assets are not considered to be marital property, nor can the assets be awarded to the beneficiary’s spouse in a divorce. In contrast, the assets are not protected in a divorce action if they were transferred less than 30 days before the marriage.
If You Have Questions about Asset Protection Trusts in Michigan
For Michigan residents, an asset protection trust is a tool that should be considered as part of an overall trust and estate plan. Our experienced trust administration attorneys at Barron, Rosenberg, Mayoras & Mayoras will discuss your needs and concerns and help you determine the course that is best for you and your family. We are recognized nationally and our firm has helped many out-of-state clients handle trusts and estates in Michigan.
Call us at (248) 213-9514 or complete our online form to set up a free initial consultation.