Michigan recently enacted the “Qualified Dispositions in Trust Act (“Act”), effective March 8, 2017. Its purpose is to permit you to create a domestic asset protection trust (“DAPT”) to shelter assets from creditors while retaining a beneficial interest in the trust assets. The law is complex and this newsletter article is intended to give only a broad overview of the Act.
Probably the most important thing for you to know about a DAPT is that it is irrevocable. That means once you set it up, you have a very limited ability to control the trust. What powers and rights, if any, will you retain if you set up a DAPT? Under the Act, you may have any of the following rights, which must be spelled out in the terms of the trust agreement: (1) the right to the income from the trust, (2) the right to discretionary distributions of principal, (3) the right to veto trust distributions to yourself and other beneficiaries, (4) the right to remove an advisor or trustee and appoint replacements, and, (5) the right to appoint the trust assets via a testamentary limited power of appointment.
A DAPT must have a qualified trustee, which cannot be you. A qualified trustee must be an individual who is a resident or Michigan or an entity that has trust powers in Michigan. The trustee must maintain and administer at least a portion of the property in Michigan. If a trustee initially qualifies but later fails to meet these requirements, the trustee will be deemed to have resigned as trustee.
An advisor may have such powers as the power to remove or appoint a trustee and to direct or veto a trustee’s investment and distribution decisions.
You may be the sole beneficiary and you may include other family members as beneficiaries, too.
When you transfer funds to the trust, you must execute a “qualified affidavit” that essentially states that the transfer will not render you insolvent and is not made with fraudulent intent. You cannot set up and fund a DAPT (1) if you are more than 30 days behind in child support payments or (2) if you or any person “related or subordinate” to you is acting as an advisor. If you are the transferor, you cannot shield yourself from the collection for child support that is in arrears when the trust is funded and, in a divorce or annulment, your trust property is not protected from your spouse unless the property was transferred to the trust more than 30 days before your marriage took place or you both agree that the property is protected (good luck with that last one!) Additionally, it is unclear as to whether a DAPT would be protected if you subsequently filed for bankruptcy. Bankruptcy is governed by federal rather than state law and there is a ten-year statute of limitations in bankruptcy cases.
However, with those exceptions, if a DAPT is properly set up and funded, the assets are exempt from most creditor claims. To prevail, a creditor would have the burden of proof to establish by clear and convincing evidence that you engaged in actual or constructive fraud or were insolvent as a result of the transfer.
