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Domestic asset protection trusts: Shield assets from creditors

March 9, 2023 Article 4 min read
Drew Hayes Wealth Management
Are you concerned about protecting your wealth? Domestic asset protection trusts can be an effective planning tool. Here’s what you need to know. 
Person folding their hands in consideration.Often, people have concerns about their personal assets being taken by creditors. Whether it’s through a divorce, a business deal that goes badly, or being sued as the result of an accident, it’s always best to be prepared. Fortunately, as of 2017, Michigan law allows for asset protection planning via the Qualified Dispositions in Trusts Act (the act).

The act permits people to transfer some or all of their money and property to an irrevocable trust that can protect those assets from future creditors during their lifetime. These trusts are called domestic asset protection trusts or DAPTs. While there are several states that allow DAPTs, this article covers Michigan legislation in particular.

What is DAPT legislation?

DAPT legislation allows a person, the transferor, to create an irrevocable trust for their own benefit and to shield those assets from creditors. If this sounds like it might be too good to be true, that’s because, prior to this type of legislation, it was. Previously, under common law, if a person created a trust for their own benefit, that person’s creditors could basically ignore the trust and still make a valid claim against those assets. Now, if the legal requirements are met, the transferor is able to retain certain rights and interests in the trust, while also protecting those assets from their creditors.

DAPT legislation allows a person, the transferor, to create an irrevocable trust for their own benefit and to shield those assets from creditors.

Qualified Dispositions in Trusts Act 

The main features of the act are:

  1. The trustee of the DAPT must be a “qualified trustee.” That is, a corporate trustee or an individual, other than the transferor, residing in Michigan. (The transferor doesn’t have to be a Michigan resident.)
  2. The transferor can retain certain rights and interests in the trust.
  3. The transferor must execute an affidavit stating, among other things, that the transfer won’t render the transferor insolvent, the transfer isn’t being completed with the intent to defraud a creditor, and the transferor isn’t aware of any pending or threatened litigation, other than that which is disclosed in the affidavit.
  4. If properly created, the transferor’s creditors will have two years in which to challenge the creation of the DAPT as a fraudulent transfer.

Rights of the transferor

The transferor can retain certain rights, interests, and powers, including:

  • The right to veto distributions from the trust.
  • The power to direct the investment decisions of the trust.
  • The power to remove a trustee or advisor and appoint a new trustee or advisor.

The transferor can receive income and/or principal distributions from the trust at the discretion of the trustee or advisor under a discretionary or support provision.

The transferor can have a special power of appointment exercisable via their Will, effective at their death, to appoint the assets of the trust to anyone but the transferor, their estate, creditors, or the creditors of their estate.

It should be noted that the transferor cannot retain the right to amend or revoke the trust or direct that the assets of the DAPT be returned to them.

Claims by creditors

The primary reason an individual would create a DAPT is to protect their assets from creditors. While creditors still have the ability to make a claim against property that was transferred to a DAPT under the act, there are significant restrictions on those claims.

The act limits claims by a creditor against property that was the subject of a “qualified disposition” and establishes the requirements for a qualified disposition. It also states that a creditor wouldn’t have a claim or cause of action against the trustee and others related to a trust that was the subject of a qualified disposition.

The act limits claims by a creditor against property that was the subject of a “qualified disposition”.

So what is a qualified disposition? It’s a disposition, or transfer, after which both of the following apply to the subject property:

  1. The property is owned by one or more trustees, at least one of whom is a qualified trustee.
  2. The property is governed by a trust instrument under which the transferor has only rights, powers, and interests that are permitted under the act.

One caveat to this is that a disposition isn’t considered qualified if, at the time of the disposition, the transferor was behind on a child support payment by more than 30 days.

If a qualified disposition is made to the DAPT, and a creditor subsequently files a claim after the qualified disposition is made, then the action by the creditor is limited to a claim involving actual intent to hinder, delay, or defraud the creditor. Furthermore, once the qualified disposition is made, the action by the creditor must commence within two years after the qualified disposition was completed.

Ensuring that a transfer is a qualified disposition when creating a DAPT is essential. If the transfer is not a qualified disposition, it could be void, and creditor claims against the subject property wouldn’t have the protections under the act.

DAPTs are a valuable planning method for high-net-worth individuals, and with proper planning can be an effective tool to protect wealth from creditors.

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