Michigan Enacts Domestic Asset Protection Law

For those of us attorneys who have devoted substantial time to and assisted clients with asset protection planning over the years it is welcome news that Michigan has adopted the Qualified Dispositions in Trust Act, effective February 5, 2017.

Michigan estate planners traditionally employed Delaware, Nevada or Alaska domestic asset protection trusts (“DAPT”) to obtain the benefits of those states’ laws. However, decisions in bankruptcy cases over the last few years brought into question whether a trust established by a resident of a non-DAPT state in a jurisdiction authorizing such trusts is governed by the law of the DAPT state or the law of the settlor’s state of residence. The courts considered the fact that a Michigan settlor, for example, is a resident of a state that fundamentally opposes self-settled spendthrift trusts. Therefore, a conflict of law exists—does Michigan law apply or does Delaware or Alaska law apply. Various criteria would be examined such as the residency of the settlor, the beneficiaries and the trustee. The court would also consider where the majority of the assets are located and where does any businesses operate. It frequently turns out in these cases  that the bulk of the people and the activities involving the trust assets take place in the state where the settlor resides. The court then applies the law of the settlor’s residence, which does not recognize self-settled spendthrift trusts, thereby exposing the assets of the trust to the settlor’s creditors.

However, this problem has now been solved with the enactment of Michigan’s own DAPT law. Michigan legislators and draftspersons have had the luxury of reviewing the laws of other jurisdictions and the problems those jurisdictions have experienced in the past to come up with a law that anticipates many of these issues.

If the rules are met a settlor can now (i) establish a trust with himself or herself as an income and principal beneficiary, (ii) control investment decisions, (iii) veto distributions, (iv) change the trustee, and (v) reserve a testamentary special power of appointment.

A creditor must be timely in bringing claims against a qualified trust. Generally, the creditor must bring the action within the greater of 2 years from the date the disposition was made or 1 year from date of discovery. If the claim is brought under Michigan’s Fraudulent Transfer Act, the FTA’s 6 year statute applies or, if later, 2 years from date of discovery of the claim if it had been fraudulently concealed.

Special attention was paid to dispositions that affect marital rights. The new law makes it clear that if the disposition occurs more than 30 days prior to the marriage or the parties agree, such as in a prenuptial agreement, that this provision of the law applies to the transferred property, (i) no part of the transferred property is to be considered marital property, (ii) such property cannot be considered part of the trust beneficiary’s real or personal estate and (iii) the transferred property shall not be awarded to the trust beneficiary’s spouse in a judgment for divorce.

Any individual resident of Michigan can serve as trustee provided he/she is not related or subordinate to the settlor as defined in the Internal Revenue Code. This creates great flexibility in choosing a non-institutional trustee—something many clients prefer.

A transferor making a qualified disposition must sign an affidavit which includes a list of statements geared to establishing that the transfer is not an attempt to hinder, delay or defraud creditors and is not fraudulent as to his or her creditors.

If you are trying to determine whether a Michigan domestic asset protection trust would be beneficial for you, please feel free to contact me.