Michigan Asset Protection Lawyer Blog

While the new Michigan Trust Code is effective April 1, 2010, it will apply to trusts created on, after or before the effective date. Thus, with limited exceptions, after April 1, 2010, all Michigan trusts will be subject to the new provisions.

We often use trusts as part of an overall strategy to provide asset protection for our clients. For example, assume we have a husband and wife and the wife has significant debts and/or contingent liabilities. We will typically have the husband create a discretionary spendthrift trust so that, upon the husband's death, the debtor wife will be the beneficiary of a trust fund which will be outside the reach of creditors. Similarly, the wealthy parents of a debtor child will not want to simply leave the debtor child's share to him outright knowing the inheritance may very well be grabbed by the child's creditors. Instead the well advised couple will set up a discretionary spendthrift trust for the child.

Until the final rules were resolved, lawyers had questions regarding the differences between support and discretionary trusts and how spendthrift provisions are applied. This was particularly troublesome in planning for asset protection and being able to provide assurances to your client that their child's creditors could not reach the assets of the trust they created. With the passage of the new Michigan Trust Code, certainty reigns.

Best practices for this asset protection strategy is for the debtor beneficiary to be a beneficiary of a discretionary trust rather than a support trust. Even though a support trust has some protections; i.e., the interest of the beneficiary is not subject to the enforcement of a judgment, the beneficiary's creditors can reach the income or principal after there has been a direct distribution to the beneficiary (but then only to the extent that income or principal is not necessary for the health, education support or maintenance of the beneficiary). One issue of concern is that the support trust requires the trustee to distribute funds for support. This provides an opportunity for creditors to reach those funds upon receipt by the debtor beneficiary. Another problem with support trusts is that there are several additional opportunities for creditors to access the trust. In the case of support and spendtrhift provisions (but notably not discretionary trust provisions) the interest of the beneficiary in the trust can be reached to pay (i) child or spousal support awarded by a court, (ii) a judgment creditor who has provided services that relates to the preservation of the beneficiary's trust interest and (iii) an enforceable claim by a state or the United States.

The discretionary trust is a much tighter structure for asset protection. With this type of trust, the trustee is not obligated to make a distribution to the beneficiary and trust property is not subject to the reach of the beneficiary's creditors. Thus, the trustee has the ability to carefully plan distributions to avoid creditor problems in many cases paying expenses of the debtor beneficiary directly.

The new Michigan Trust Code specifically recognizes spendthrift trust provisions. It restrains both voluntary and involuntary transfers and is not subject to enforcement of a judgment until actually distributed. This continues long-standing law in Michigan on spendthrift trusts.

The rule is simple. No creditor (other than the IRS) can seize your social security benefits for payment of debts. But does this mean your benefits are asset protected in all events? The good news is that for the most part your benefits are protected. A notice of levy served on the government to intercept the payments will be given no effect. However, what are the creditor's rights if the benefits are direct deposited into a bank account? Social Security law states that the benefits cannot be reached by creditors...which is interpreted to mean the creditor cannot access the funds even after they are deposited in the recipient's bank account. To insure maximum creditor protection, dedicate the bank account solely for receipt of social security benefits and do not commingle assets.

Unfortunately, there is a hidden danger lurking. Creditors will routinely garnish bank accounts as part of their collection procedure having no knowledge of whether the bank account contains social security benefits. When the account holder is given notice of the garnishment and advises the bank that the account consists solely of social security benefits, the bank will not turn over the assets. Indeed, if this was the end of it the system would appear to work. However, it is not the end...far from it. When the banks receive the garnishment order they immediately freeze the account.The bank often charges a processing fee for freezing the account as well as overdraft fees on checks that are bounced because the funds are frozen. The episode can add up to hundreds of dollars being taken by the bank even though the garnishment itself is ineffective.

The good news is that the US Treasury is promulgating rules to limit the fees a bank can charge under the circumstances described. Also, the banks will now be obligated to investigate whether the account has been the recipient of social security benefits within the last 45 days and, if so, will be prohibited from freezing the entire account. Perhaps something like $2,200 will remain available to the accountholder to pay her bills. While the rules will certainly improve things for debtors receiving social security, it remains an imperfect system when garnishments are ordered.

I am meeting more and more clients who are in the business of acquiring, repairing and renting out single family homes. Usually these clients specialize in either inner city properties, midlevel or highend. They learn their markets well and do not invest outside their comfort zone. I have found them to be hardworking, knowledgeable about their business and street savvy in that they have figured out how to minimize the risk of tenant defaults. They are generally successful. Even in this harsh economic environment most are thriving. I attribute this to 3 primary factors: (1) they were not highly leveraged and the cash flow easily covers operating income and debt service, (2) intense management and (3) their tenant application review procedures weed out the weaker applicants. Typically they have not engaged in any asset protection planning.

These clients come to see me because they know that without the proper structure, one catastrophic fire resulting in severe personal injuries can wipe out their entire empire. But they also know that as they have accumulated wealth they have become more vulnerable to other creditors...ones not necessarily related to the operation of the business. So they want to protect their assets from internal disasters as well as external unrelated creditor claims.

One of the recommended approaches is to segregate groups of houses aggregating to a certain value and have each group owned by a limited liability company. Depending on the extent of the client's holdings perhaps the client ends up with 5 limited liability companies each owning 5 or 6 properties. The 5 LLC's are all owned 100% by a multimember LLC, often owned by husband and wife, which has the strongest possible language in its operating agreement to protect against creditors including a trustee in bankruptcy. The operating LLC's are all single member LLC's but the parent LLC must be multimember otherwise the creditor protection sought, i.e., creditors being limited to a charging order remedy, may not be available.

If the client's assets are large enough, we suggest that the client consider a domestic asset protection trust to be the owner of the parent LLC. We believe these DAPT's have enormous power as an asset protection vehicle while, at the same time, retain the flexibility to allow our clients to continue to manage their properties as they have in the past. It can also be structured in a way to give our clients the comfort that they will be able to access the assets contributed to the trust when needed.

Many of you bloggers are very entrepreneurial and will want to implement structures that appear advantageous for your business.. While the above structures may sound fairly straightforward, they can be quite complex from a legal documentation standpoint. You are strongly advised to retain an experienced asset protection/business lawyer to answer your questions and help you with the legal work involved.