Lame Duck Legislature Lays Golden Egg – BIG TIME

Golden Egg

DAPT – learn it and love it. Soon it will be all the talk.  Domestic asset protection trusts.  The news is that the Michigan legislature has approved a pair of bills that would make Michigan one of fifteen states with such laws, and of those states, one of the most attractive for persons seeking this type of protection.

Specifically, there are two bills awaiting the Governor’s signature which is expected before year end. The meatier of the two, the “qualified disposition in trust act” can be read by clicking here.  A second bill modifies Michigan’s fraudulent conveyance laws so as to accommodate these trusts, to read that bill click here.

In summary, a DAPT allows people to create trusts funded with their own resources, have the resources in those trusts used for their own benefit, and yet have those trust resources unavailable to their own creditors. Nifty trick.  A complete reversal of prior law and common law.  That is, in states without these laws, and in Michigan historically, a person could not put their own assets in trust and then tell their creditors to take a hike.  In the future, they can.

There are limits. One limit is that the conveyance must be done in a manner that is not a fraud on creditors.  Specifically, the standard imposed by the new law is that the trust may not be funded with “actual intent to hinder, delay or defraud any creditor.”  Another limit is that the interest the settlor reserves is a discretionary or support interest.

Specifically the law defines this relationship as follows:

The potential or actual receipt or use of principal if the potential or actual receipt or use of principal is the result of (i) a trustee’s discretion, (ii) a trustee acting in accordance with a support provision, or a (iii) trustee acting at the direction of a trust protector who is acting in its discretion or in accordance with a support provision.

This sounds so great that the initial reaction is that everyone will want one – and expect the chicken dinner seminar crowd to echo that sentiment. In reality though, these trusts make sense for people who (1) have significant wealth, and (2) have significant risks of creditors.  Otherwise, why would anyone put their money in an irrevocable trust and limit their access to those assets to support or discretion?

This will bring trust work to Michigan. Michigan has become a favorable jurisdiction for trust planning, and now, self-settled asset protection trust planning. Michigan laid the groundwork for being a leader in this arena with the exceptional protections afforded beneficiaries of discretionary trusts when it adopted the Michigan Trust Code in 2010.  This legislation gives that work a whole new application.  Look for wealthy people in other states, both states that do not have these laws, and some states that have these laws but less favorable provisions, to look to Michigan as a place to locate their trusts.  To cloak oneself in these protections, it will be necessary to have a Michigan trustee.  Good news for the trust departments of Michigan’s banks, as well as Michigan’s estate planners.

Note, don’t confuse this change with self-settled asset protection trusts now used in the context of planning for government benefits – special needs trusts. Those rules are federal and this will not impact those rules.

These laws are a product of the Probate and Estate Planning Section of the State Bar. A committee of that group’s members has been working on this project for years, and deserves great credit for bringing this about. For ICLE partners, a good summary of the law provided was by Rob Tiplady at the May 2015 Probate Institute.  I suggest you look up his materials.

This is my first pass at discussing this important development. Expect more down the road.  This matters.

  • FrankieBeanPie

    Big time is right. I didn’t see this coming but it’s a good development. As this plays out it will be interesting to see where Michigan ranks among other states that have DAPTs in providing the most amount of protection against creditors.

  • Carol Sewell

    Thank you for this update, Doug. I look forward to future posts on this.