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

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

Debtor and Attorney Burned in Asset Protection Scheme

This blog recently touched on the problems presented by asset protection promoters. Jay Adkisson describes a case where an attempt to move assets into offshore trusts blew up in the debtor’s face. Debtor and Attorney Burned. The debtor’s attorney was also burned.

The indictment breeze is blowing for Peter G. Rogan and his attorney, Frederick M. Cuppy, in the Windy City. Chicago-area U.S. Attorney, Patrick Fitzgerald–yes, the pit bull in sharkskin who persecuted the Clinton administration–lambasted Rogan and Cuppy in a 29-page indictment which can be found here.

Fitzgerald seems to have turned his attention to some actual malefactors, for a change. Rogan allegedly tried to duck a $55 million-plus Medicare fraud judgment by siphoning cash into offshore trusts for his children. Cuppy is accused of being his eager accomplice. It seems likely that both will spend substantial periods of time in federal prison.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2011 John B. Payne, Attorney
 
 

Alaska Trust Fails to Protect Assets

Jay Adkisson, blogging for Forbes, today describes a bankruptcy case illustrating one of the points in my column yesterday on the ineffectiveness of most asset-protection gimmicks, “Do Not Get Suckered by the Asset Protection Racket.” His column, “Mortensen: Alaska Asset Protection Trust Funded By Solvent Settlor Completely Fails To Protect Assets In Bankruptcy Against Future Creditors,” http://goo.gl/9SPZt, demonstrates why foreign and domestic asset protection trusts are often ineffective at defending against creditors. The case, Battley v. Mortensen, Adv. D.Alaska, No. A09-90036-DMD, May 26, 2011, permitted the invasion of the corpus of an Alaska asset protection trust for the benefit of creditors.

In 2005, Thomas Mortensen put assets into a trust that was advertised to protect against creditors. Shortly after he funded the trust, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which established a 10-year clawback rule for self-settled asset protection trusts. It was this 10-year clawback rule that the court was interpreting.

The bankruptcy court held that the bankruptcy trustee could claim the trust corpus since Mortensen funded the trust less than 10 years earlier, intending it as a barrier to protect his assets from the claims of creditors. As Mortensen learned to his chagrin, bankruptcy judges are better at defeating asset protection than creditors are at creating them.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2011 John B. Payne, Attorney
 
 

Do Not Get Suckered by the Asset Protection Racket

Clients frequently ask about “asset protection” strategies. These plans may include offshore trusts, Nevada or Alaska trusts, irrevocable trusts or various insurance products. Many of the clients expressing concern about exposure to tort or business liability are reacting to investment pamphlets or seminar presentations trying to scare people into signing up for services. Except for obstetricians and drill-rig operators, asset protection should not be a major goal in estate planning. Companies promoting asset protection products are generally trying to take advantage of their targets’ fears and insecurities.

When clients start talking about asset protection from law suits, the first question should be whether the client has a significant risk of being sued for a large uninsured liability. Some doctors and other professionals in high-risk activities could be sued for millions, but that risk is too small for most clients to make it a planning objective. A truck driver has a high risk of being involved in an accident that could leave one or more others dead or severely injured. However, adequate insurance is a better way to address that risk than trying to high assets.

An offshore trust is often touted as a way to safeguard assets from attachment after a lawsuit. Although assets held by a trustee in the Caymen Islands or on Nauru would be difficult for a creditor to grab, they might also be difficult for the owner who put them there to retrieve. The question the client has to consider is how much trust he or she wants to put in a stranger in a strange land. Furthermore, a U.S. judge may not have jurisdiction over assets in the Caymens, but the judgment debtor who put them there would be under the judge’s control. The debtor who ignores the judge’s order to repatriate and pay over the assets will be held in contempt and might even be put in jail.

Trusts in debtor-friendly states are subject to the same limitations. They may be hard to get at, but if the debtor is subjected to questioning under oath by the creditor, it would be unwise to commit perjury or refuse to answer questions about what happened to significant property.

The best asset protection does not require exotic financial vehicles or foreign bankers. Adequate liability insurance works far better than trying to hide wealth and allows the estate to be enjoyed, rather than secreted.

Revocable living trusts, powers of attorney, and wills are highly cost-effective and can be used to transfer wealth from generation to generation efficiently and with conformity to the testator’s desires. Leave offshore accounts and money laundering to the criminal element. Minimizing court supervision and tax burden can be achieved very reliably and at reasonable expense. What is important is to choose a competent, experienced attorney with a good reputation.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2011 John B. Payne, Attorney
 
 

Charitable Trust FAQs

What Does a Charitable Trust Do?

A charitable trust helps to reduce estate and other taxes. Certain assets carry a heavy capital gains tax or income tax burden. They cannot be liquidated without paying a large portion of the proceeds to the government. A charitable trust may allow these assets to be liquidated and placed in trust, without paying the tax. It may also generate charitable deductions to shelter other income.

What is a Charitable Remainder Trust?

A Charitable Remainder Trust (CRT) holds assets in trust for the lives of the beneficiaries, paying income on the corpus to the beneficiaries. At the end of a specified period, or on death of the beneficiaries, a charity receives the corpus. Because the gross value of the assets generates income for many years, the CRT gives you more money back than you would receive by liquidating the assets and then investing the proceeds. The large charitable deduction on the donor’s Form 1040 when the trust is established also results in tax savings that may be invested to generate even more return on investment.

What is a Charitable Lead Trust?

A Charitable Lead Trust (CLT) holds assets in trust for a period of time, often the life of the grantor, paying income on the corpus to a charity. At the end of the period, the corpus is given to specified trust beneficiaries. If you want to benefit your descendants, but do not need the income from the assets, this type of trust is very useful. The Charitable Lead Trust shelters current income, saving income tax. At the end of the trust period, the corpus is received by the beneficiaries, free of estate or other tax.

How Does a Charitable Remainder Trust Work?

Assume that you have a $750,000 parcel of vacant land with a very low tax basis. You want to sell it and invest the funds to generate a steady income. If you sold the land, you would incur capital gains tax of over $100,000, leaving you with less than $650,000 of principal to generate income. Establishing a charitable remainder trust would spawn a large charitable deduction. It would also produce a higher income stream because the entire $750,000 would remain as principal. Apart from the satisfaction of giving a large sum to a worthy cause, it makes financial sense to establish the trust. The $25,000 or more saved due to the charitable tax deduction can also be invested for additional yield.

Are There Other Benefits to Having a Trust Hold Property to Be Distributed after You Die?

Yes. If you name an individual as beneficiary of an insurance policy or of your will, and that person is incapacitated when you die, the court will probably take control of the proceeds. That is because most benefits to be paid to an incompetent person are subject to court supervision. But if the assets are in trust, and the trust instructs the trustee to do so, the trustee can use the proceeds to provide for this person, without court interference.

You can also create a more complex plan to benefit your family in a trust than you can in a will. If you have a large number of beneficiaries and you want each to have a customized plan, using a trust makes sense. For example, if you want your son to receive distributions only if he maintains sobriety, marries, wears a pony tail, or becomes a plumber, such conditions can be included in a trust. A court might refuse to enforce such limitations.

Who Can Be Beneficiaries of the Trust?

You can name any person or organization you wish, but most people name their children and/or spouse.

Can I Make Any Changes to the Trust?

A Charitable Trust is generally irrevocable, so you cannot make changes after the Trust has been set up. Read yours carefully and be sure it is exactly what you want before you sign.

When Should I Set up a Charitable Trust?

You can set one up any time, but because the Trust is irrevocable, many people wait until they are in their 50s or 60s. By then, family relationships have usually settled – and you know whom you want to include as a beneficiary.

Should I Seek Professional Assistance?

If you think a charitable trust would be of value to you and your family, talk with a competent estate planning attorney. If you are not sure whether the attorney with whom you are talking has the background you need, do not be afraid to ask about the attorney’s training and professional affiliations. A well-qualified estate planning attorney should have a tax or accounting degree or at least 15 years of experience drafting wills and trusts. The attorney should also have appropriate professional affiliations. These could include active involvement in ABA or state bar sections related to estate planning. They could also include membership in the National Association of Elder Law Attorneys and other professional groups concerned with estate planning. A well-qualified attorney will be happy to explain his credentials.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2011 John B. Payne, Attorney
 
 

Estate Planning and Probate

I once had a 14-year-old client whose 42-year-old father had died suddenly. Her parents were divorced and relations between them were very hostile. My client was disinherited by her father; he made his sister the beneficiary of his life insurance and put her on his bank account. The father may have intended that his sister use the money for his daughter’s benefit, but that did not happen. This young girl’s sad case clearly illustrates the importance of making plans for death or incapacity.

We never know when we will be taken or struck down, so advance planning is crucial. Random violence, a devastating accident, or a natural catastrophe can happen at any time to anyone. Unexpected is implied by “random” and “accident.” People do not make plans for a fatal car crash or a tornado. They just happen.

You cannot assume that your surviving family will carry out your wishes if they are not in writing and properly signed. There is no such thing as “simple” in estate planning. Even a document as common as a will or a deed can have far-reaching consequences. I am often asked how much a “simple will” or a “quit-claim deed” would cost. Such documents are inexpensive to prepare–many times they are prepared without the assistance of an attorney–but the cost can be horrendous if they are not used appropriately. Even a very small estate can turn into a nightmare if the wrong documents are used.

As an example, it used to be quite common for an attorney to prepare a quit-claim deed from a parent to children, to be filed after the parent’s death. This seemed to be an easy, cheap, and fool-proof way to pass the house without going to probate court. However, city assessors started treating such deeds as transfers when signed, not when recorded. In Michigan this can result in retroactive property tax increases and penalties amounting to tens of thousands of dollars. The cost in such cases far exceeds what the parent would have spent on a will and a trust at a silk-stocking law firm, or what it would have cost to have the house go through probate.

Even as simple and common a document as a will can have pitfalls that only an experience attorney knows how to avoid. Some judges take delight in using arcane legal principles to produce unexpected results, as was described in “Frustrating the Intent of the Testator.”

An estate plan need not be expensive, even if prepared by an expert in the field. However, there are pitfalls in small estates as well as in larger ones. Whether to use a will or a trust, and whether to plan on probating the estate are crucial considerations that require a knowledgeable legal advisor, not just a document preparer. Look for an attorney with a tax or accounting background and experience in probate court. Attorneys who do not practice in probate court may not understand the importance of careful drafting and making documents self-proving.

 

John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
law-business.com
 
©2011 John B. Payne, Attorney