Governor Snyder recently signed Michigan’s Qualified Dispositions in Trusts Act, which takes effect on March 8, 2017.  In so doing, Michigan joins 16 other states that permit a particular form of trust commonly known as “domestic asset protection trust” (or DAPT).  A DAPT is an irrevocable trust whose assets the grantor’s creditors cannot reach if certain legal requirements are met.  Michigan residents who are concerned about possible creditor exposure, such as physicians, business owners and rental real estate owners (“At-Risk Clients”) should consider using a Michigan DAPT.

Prior to this legislation, an At-Risk Client in Michigan wishing to avail him/herself of DAPT protection needed to choose one of the other 16 other state’s laws under which to draft/form/plan a DAPT suitable for use in that state.  The At-Risk Client would hope he/she could establish sufficient “minimum contacts” with that state such that the arrangement would be respected if/when a creditor ever challenged it in court.  Now, an At-Risk Client will still need to conform to certain requirements of Michigan law, but without many of the uncertainties involved with other states’ DAPTs.

In order to qualify as a Michigan DAPT under the new law, the At-Risk Client would transfer-selected assets to a person (other than him/herself) residing in Michigan as Trustee, such as a family member or a Michigan-based corporate or professional trustee.  The At-Risk Client can name him/herself as a beneficiary of the DAPT, and may retain any/all of rights including:

  • receive discretionary distributions of net income and/or principal;
  • receive the net income or an annuity (up to 5%) from the DAPT;
  • remove and replace trustees;
  • direct DAPT investment decisions;
  • veto distributions from the DAPT; and
  • direct how the assets are to be distributed to third parties after his/her death.

If properly established and funded, Michigan’s new DAPT law provides that the At-Risk Client’s creditors may not reach assets transferred to the DAPT after expiration of a two-year period beginning with the date the assets are transferred to the DAPT (subject to limitation in the event of any fraudulent concealment, and subject further to any applicable exception under bankruptcy law).  A Michigan DAPT should be established as long before a creditor’s claim against the At-Risk Client might arise as possible.

For more information on this new legislation and guidance on asset protection, contact a member of the Rhoades McKee Estate Planning Team.

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