Dingeman Dancer

Michigan's New Asset Protection Tool

Author: W. Dane Carey

Michigan has just taken a big step toward modernizing its trust laws. With the recent passage of the Qualified Dispositions in Trusts Act, Michigan is now one of a small group of states that allows individuals to create what is known as a “domestic asset protection trust” (DAPT), which is a flexible tool for transferring and protecting assets from creditors.

Trusts are created to hold, manage, and distribute property for the benefit of one or more people. There are various types of trusts and different reasons for creating them. Individuals often create trusts for purposes of disposing of their property upon death. A person might also set up a trust in order to manage his or her property while he or she is still alive.

One type of trust is called a self-settled trust, in which the settlor (the person who establishes the trust) transfers assets to a trust and retains the ability to benefit from it. Traditionally, an individual could not create a self-settled trust and, at the same time, protect the trust assets from claims by his or her creditors. Over time, some countries started to make this possible by permitting people to create asset protection trusts. And in the 1990s, other states eventually joined this trend and began permitting the creation of DAPTs.

In essence, a DAPT is an irrevocable trust that, subject to specific requirements and limitations, shields a person’s assets from his or her creditors, while simultaneously allowing that person to retain certain rights and beneficial interests in the trust. Previously, a person from Michigan could only take advantage of this type of asset protection by establishing a DAPT in another state, which typically required that person to transfer his or her assets to an out-of-state trustee. Effective February 5, 2017, this asset protection device is now available to Michigan residents without the cost and inconvenience of establishing a trust elsewhere.

To create and use a DAPT, a person must transfer assets to a qualified Michigan trustee (which cannot be the transferor) to be governed by a trust instrument under which the transferor has limited powers and rights. The transferor can be a beneficiary of the trust, but the trust instrument may only provide for one or more of the following rights, powers, or interests of the transferor:

  • The power to direct the investment decisions of the trust.
  • The power to veto a distribution from the trust.
  • The right to remove and replace trustees and advisors.
  • The right to receive income from the trust.
  • The right to receive discretionary or support distributions of principal (or income).
  • The right to receive an annuity from the trust of not more than 5 percent of the trust’s initial value.
  • The right to receive income or principal from either (1) a charitable remainder annuity or unitrust trust or (2) a grantor retained annuity or unitrust trust.
  • The right to direct how assets are to be distributed at death, other than to the transferor’s estate or creditors (as provided in section 2 of the powers of appointment act of 1967).

Before transferring assets to a trust, a transferor is required to execute a qualified affidavit in which the transferor must certify that several qualifying criterion are satisfied.

If properly established, a DAPT establishes a limitation on actions period, under which a transferor’s creditors are precluded from reaching trust assets after a certain point. Except in certain instances of fraudulent transfers or fraudulent concealment, a creditor may not bring a claim to recover the trust assets after the expiration of a two-year period, which commences on the date the assets are transferred to the trust. Thus, in order to completely protect assets from creditors, a DAPT must be created and funded at least two years before any claims arises.

The recent legislation represents an important development in the law. Many individuals should consider using a DAPT, especially those: (1) who have sufficient resources to be able to place assets in an irrevocable trust; and (2) who are concerned about possible credit exposure—such as business owners, executives, and physicians.

If you have questions regarding the new law or any other information in this article, feel free to contact any of the experienced wealth preservation and asset protection attorneys at Dingeman & Dancer.