Michigan’s New Law to Allow Domestic Asset Protection Trusts

Asset protection has been has been a driving force in wealth generation and estate planning for as long as there has been a division between the “haves” and the “have-nots.” From fortified treasuries with armed guards in ancient times to secretive offshore banks and trust companies in Switzerland and the Caribbean, individuals and families have gone to great lengths to protect their monetary fortunes from discovery and recovery by creditors, criminals and even governments.

Although hiding money offshore provides the greatest protection for assets, there are many disadvantages: Cost, difficulty in retrieving and repatriating assets, and jurisdiction over the owner. Going to such great lengths to hide money is only cost-effective for very large sums.

Trustees in asset havens charge high fees. They have a favored position with regard to their local governments and can limit competition. Once an offshore trustee is in control of a hoard, the owner may be a captive client. It may be impractical or impossible to move the assets to a different repository.

The flip side to making assets hard for others to reach is that they may become hard for the owner to recover. Also, the assets are subject to a set of foreign laws that may become less favorable over time. Finally, ensuring that the owner’s intended beneficiaries will have access to the funds after the death of the present owner is problematic.

Placing assets outside the jurisdiction of domestic courts is not failsafe as long as the owner remains subject to the jurisdiction of those courts. One who refuses to provide information about offshore assets may be held in contempt of court. He or she may have to choose between keeping the assets or keeping his or her freedom.

In 1997, the Revised Alaska Trust Company Act, Alaska Stat. Ann. § 06.26.010, et seq. (West), was signed into law. It was developed to create a more accessible and less expensive alternative to foreign trust companies and to provide a business opportunity for trust companies. The Alaska statute was copied by similar laws in Delaware, Rhode Island, Nevada and 12 other states. Michigan is the 17th state to legalize domestic asset protection trusts when it enacted the Qualified Dispositions in Trust Act (QDTA), 2016 Pub. Act 330; MCLA 700.1041, et seq.

A domestic asset protection trust (DAPT) allows the settlor to fund an irrevocable trust with a completed gift that is removed from the settlor’s estate, despite the independent trustee’s power to make discretionary distributions of income and principal to the settlor. The trust also insulates the assets from the claims of most creditors. To receive this protection, the transfer into the trust must be a “qualified disposition” to a “qualified trustee.”

An individual, other than the settlor, who is a Michigan resident would be a qualified trustee. A nonresident or institutional trustee must be subject to supervision by the Department of Insurance and Financial Services, the Federal Deposit Insurance Corporation, the Comptroller of the Currency, or the Office of Thrift Supervision. Furthermore, at least some of the trust estate must be sited in Michigan and the nonresident trustee must have a place of business and maintain at least some of the records in Michigan. MCLA 700.1042(r).

A disposition is not qualified unless the trust is irrevocable and the settlor’s authority over the trust is limited to a list of permissible powers. The permissible powers include various items of administrative control, the right to receive income and annuity distributions and distributions to cover taxes on trust income, the right to receive up to 5% of the trust principal annually, the right to use real property in a qualified personal residence trust, and the right to direct post-mortem distributions to cover the settlor’s debts, expenses of estate administration and estate or inheritance taxes. A disposition is also not qualified if the settlor owes more than 30 days of child support or if an advisor who is related to the settlor is granted authority that the settlor may not exercise. MCLA 700.1042(p).

The settlor must sign a qualified affidavit affirming that the settlor has full title to the property, that the transfer will not make the settlor insolvent and the settlor does not intend to file for bankruptcy nor defraud a creditor, that if the settlor is involved in any pending court or administrative proceeding it is identified in an attachment to the affidavit, that the settlor is not 30 days in arrears on child support, and that the property is not the proceeds of illegal activity. MCLA 700.1046(1).

A creditor has two years from the date of the qualified disposition to file suit to void the disposition, or one year from when the creditor discovered or should have discovered a qualified disposition that was concealed. MCLA 700.1045(3). If the claim arose after the qualified disposition, the creditor must show “actual intent to defraud the creditor.” MCLA 700.1045(2)(b). The QDTA was accompanied by a revision of the Michigan Uniform Voidable Transactions Act, MCLA 566.31, et seq., to make it compatible with the new restrictions on the ability of creditors to attack asset protection trusts. 2016 Publ. Act 552.

A creditor who sues to cancel a qualified disposition is waging an uphill battle. Even if the creditor succeeds in voiding some or all of the disposition, unless the trustee was acting in bad faith, the recovery is diminished by the trustee’s costs in defending the disposition and the beneficiary may retain any distribution received before the creditor filed its action. MCLA 700.1047(2)(c). Furthermore, except for a distribution to a beneficiary who is also the settlor, the creditor must prove bad faith by clear and convincing evidence. MCLA 700.1047(3).

A Michigan DAPT provides protection equal to those established in other states, with two main advanteges: If the settlor has a trusted family member or friend who is a Michigan resident, it is not necessary to use an institutional trustee, saving substantial trustee fees. The settlor may choose an institutional trustee whose office is around the corner, instead of an unknown trust officer the settlor has never met in person.

Relatively few clients will find it cost-effective to establish a DAPT, but this type of planning could develope into a lucrative trust and estate sub-specialty. However, the practitioner must apply the statute meticulously, particularly in the early stages when many aspects of the law have not been interpreted and explained by the courts. The explanation above is only a starting point for drafting this specialized trust.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2017 John B. Payne, Attorney

Sad End for Penn Treaty Insurance — Reblog

Jeff Marshall, a highly-respected colleague in Williamsport, Pennsylvania, documented the failure of Penn Treaty Insurance’s long-term care insurance products in “Sad End for Penn Treaty Insurance.”  The column is interesting and informative in describing the problems of the LTCI industry as the costs of long-term care steeply increased, while interest rates plunged and customers held on to their policies at much higher rates than expected.  Jeff’s column is also an excellent backgrounder to my post, “Long-Term Care Insurance — Smart Buy or Not?

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2017 John B. Payne, Attorney

 

 

Michigan Designated Funeral Representative

A new law, 2016 Publ. Act 57, effective June 27, 2016, authorizes a person identified as the declarant, to designate a funeral representative to make decisions about postmortem funeral arrangements and the handling, cremation, disposition, or disinterment of the declarant’s body. MCLA 700.3206(2)(a).  The Act includes authority for cremation and determination of the right to possess the cremains, which is an important change. Under prior law, all persons with equal priority as next of kin had to approve cremation.

The Act revises the priority of persons who may decide on final arrangements and inserts a “designated funeral representative” ahead of spouses, family members and others. MCLA 700.3206(3). The only authority with higher priority is a person designated to direct the disposition of a service member’s remains under federal law or Department of Defense regulation, when the decedent was a service member at the time of death. Id

Historic reenactor Les Scott, dressed as the town mortician at the door of his funeral parlor at South Park City Museum, a collection of historic buildings in Fairplay, Colorado

Historic reenactor Les Scott, dressed as the town mortician at the door of his funeral parlor at South Park City Museum, a collection of historic buildings in Fairplay, Colorado

 

A funeral representative designation may be included in another estate-planning document, such as a will or designation of patient advocate, but it must be executed with two witnesses or be notarized. MCLA 700.3206(2)(b). Like a designation of patient advocate, a funeral representative designation may not appoint or be witnessed by a person associated with a declarant’s medical provider, and persons associated with a funeral establishment, cemetery, or crematory that would provide services for the declarant are also excluded. MCLA 700.3206(2)(c).

A funeral representative designation may be revoked by the declarant, or by the representative’s resignation, absence despite reasonable efforts to locate, or refusal act within 48 hours of receiving notice of the decedent’s death. Revocation by the declarant must be in writing and signed with the formalities of the original designation. MCLA 700.3206b.

The declarant may appoint a contingent representative. MCLA 700.3206a(1). The represtentative accepts the appointment by signing an acceptance or by acting as the funeral representative. MCLA 700.3206a(2).

mortuaryCircumstances that would bar an individual from inheriting from the declarant, such as divorce or annulment of marriage to the declarant, desertion disqualify the individual. MCLA 700.2801(2).  Being convicted of abuse or killing of the declarant, disqualifies the individual, MCLA 700.2802(2)(c), and being charged with the abuse or killing of the declarante bars the individual from acting as the designated funeral representative while the charges are pending. MCLA 700.3206(12).

A major concern for an individual nominated to act as designated funeral representative is personal liability for the declarant’s final arrangements. Unless he or she is a special fiduciary, the medical examiner, or the director of corrections in the case of a prisoner, a person who acts as designated funeral representative is personally liable for the costs of disposition to the extent that payment is not covered under a trust, prepaid funeral contract, or other “effective and binding means.” MCLA 700.3206(13). This is alarming because the statute includes no requirement for the funeral director or other provider of funeral or burial services to advise the nominated funeral representative that if he or she accepts the appointment and makes the necessary dispositions that there could be personal liability. The representative is not even required to sign an acceptance of appointment, if he or she accepts by performance.

Adapted with editorial changes from John B. Payne, “Michigan Probate, 2016-17 ed.,” Chapter 13, 125-27 (Thomson Reuters 2016).

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2017 John B. Payne, Attorney

Judicial OCD in Tennessee

In Frustrating the Intent of the Testator, I observed that many appellate courts seem to delight in invalidating wills that were clearly executed by the testator.  If judges take pleasure in destroying the estate plans of the recently departed, Hon. Kenny Armstrong of the Tennessee Court of Appeals should be rapturous to the point of wetting his pants in having pulled the rug out from under an unfortunate deceased testator, his attorney, and two well-meaning, but displaced, witnesses.  It is the epitome of formalism over substance. morris bill 1

On October 10, 2008, Bill Morris (“Decedent”) executed his Last Will and Testament.  In re Estate of Morris, 2015 WL 557970, 1 (Tenn. Ct. App. February 9, 2015).  The last two pages of the document show that the drafting attorney went to great lengths to establish that the testator intended to sign his will and, in fact, signed it.  However, the Tennessee Court of Appeals managed to find grounds to throw out the will as out of conformity with the Tennessee wills statute.

As is typical in these cases, the court first said that it would “endeavor to effectuate a testator’s intent.”  Id. at 4.  The court then invalidated the will because the word “affidavit” appears between the testator’s signature and the witnesses’ attestation.  According to the court, by signing below the “affidavit,” but not above it, the witnesses signed the affidavit, which, of course, was part of the document, but not the will, itself.

It is particularly ironic that the court stated, “There is no dispute that the testator properly signed his will at the end of the document.”  Id. at 2.  Thus, in a paroxysm of perversity, the court vitiated the testator’s signature by finding a hyper-technical error in the witnesses’ signatures intended to verify the testator’s signature.morris bill 2

In Frustrating the Intent of the Testator, I said:

An attorney should spend at least an hour gathering the facts for even the simplest estate, and at least an hour going over the documents with the client, before they are executed. Attorneys who rush through will executions do not serve their clients properly.

If only it were that simple.  It is clear that Bill Morris’s attorney, the witnesses, and Bill, himself, did their very best to execute his will correctly.  Sadly, best efforts are never enough when there is a judge determined to screw up the testator’s estate plan.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2015 John B. Payne, Attorney

Revocation of Powers of Attorney

Powers of attorney have been mentioned or discussed in this blog several times.  “Powers of Attorney
and “Weaknesses in Powers of Attorney,” in particular, explained the importance of a well-drafted power of attorney.  An aspect that has not been discussed is revocation.

The ability to revoke a power of attorney is a major advantage over court-ordered guardianship or conservatorship (guardianship of the person’s worldly estate).  A principal who signs a power of attorney may revoke it at any time.  A legally-incapacitated person, and even a person who consented to guardianship, cannot revoke the guardian’s appointment.  He or she must file a petition with the court to terminate the guardianship.  It can be very difficult to persuade the court to terminate a guardianship.  Many judges are very paternalistic and in many courts persons who are subject to the authority of a guardian or conservator have very few rights.

As long as the principal is competent, he or she may revoke the power of attorney at any time.  Whether or not the principal retains sufficient mental capacity may be a matter of dispute, but unless the principal has clearly lost the ability to make decisions the agent must immediately stop acting for the principal when notified that the power of attorney has been revoked.

A written revocation is not necessary, but it is important to communicate the revocation to the principal’s banks and other third parties with whom the agent may have been in contact.  Innocent third parties who continue to deal with the agent are not in the wrong if they have not been notified of the revocation.  Therefore, it is helpful to put the revocation in writing and distribute copies to persons and institutions the agent might transact business with.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

©2015 John B. Payne, Attorney

Vital Legislation for Persons with Disabilities

The Special Needs Trust Fairness Act has been re-introduced in this Congress as Senate Bill 349.  Please urge your federal legislators to vote for this bill.  Read about it here.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com

Retirement of Mental Faculties

Jeff Marshall’s latest blog column, “Aging and Financial Decision Making – How to Protect Yourself,” is a well-written and enlightening discussion of the relationship between aging and cognition. Anyone who is aging or knows someone who is aging (not a vampire, werewolf or ghost) should read Jeff’s column. To summarize Jeff’s thesis in 25 words, he explains that everyone’s ability to process complicated concepts and understand sophisticated investments declines with age, but few recognize this progressive loss of cognitive ability.

In other words, our faculties may be retired and we think they are still on the job. Jeff recommends sound estate planning and sound relationships with trusted advisers. This helps to curb making risky decisions or falling prey to sharp dealers as our cognitive abilities inevitably go into eclipse.  Jeff’s column is well worth reading, as is the report on which it is based. Click here for the report summary.

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com