Take-Away: Michigan is one of 17 states that permit self-settled spendthrift asset protection trusts. Michigan’s 2017 version is called the Qualified Dispositions in Trust Act. Unsettled is whether an individual who is not a resident of Michigan can establish an asset protection trust in Michigan.

Background: Michigan’s Qualified Dispositions in Trust Act permits an individual who resides in Michigan to transfer their assets to an irrevocable trust, continue to be a potential income or principal beneficiary of that trust, and control the trust’s assets on their death, all without exposing those transferred assets to the claims of the individual’s judgment creditors. If the trust is created more than 30 days before the settlor-beneficiary’s marriage, the assets held in the trust are not to be considered marital property in a divorce, nor are the assets to be considered directly or indirectly to be a part of the trust beneficiary’s real or personal property. Finally, none of the trust’s assets can be awarded to the trust beneficiary’s spouse in a subsequent divorce.  [MCL 7001045(4)(b).] These are all good reasons to establish a Michigan asset protection trust if creditors or future divorces are a major concern. But what if  individuals who are not  Michigan residents nonetheless wants to establish a Michigan asset protection for themselves? Can they do that? Maybe is about the only good answer at this time.

Public Policy Exception: There are a handful of reported cases where a non-resident unsuccessfully tried to make use of another state’s asset protection trust legislation. In those reported cases the non-resident’s home state had a strong public policy that prohibited a self-settled asset protection trust; thus, ‘borrowing’ the asset protection trust laws of another state was unsuccessful to protect the trust’s assets from the trust settlor’s judgment creditors, divorce courts, or in bankruptcy.  See for examples:  In re Huber, 493 B.R. 798 (W.D. Wash, May 17, 2013) [bankruptcy]; Dahl v Dahl, 2015 WL 5098249, 794 Utah Adv. Rep. 5, 2015 UT 79 (August 27, 2015.)[divorce].

Uniform Voidable Transfers Act: Adding to the uncertainty of the effectiveness of an asset protection trust caused by the strong public policy exception  are the Comments to the recently updated Uniform Voidable Transfers Act (formerly called the Uniform Fraudulent Transfer Act) which has been adopted in Michigan and most other states. Section 4, Comment 8 to that Uniform Voidable Transfer Act provides that a transfer of assets to a self-settled domestic asset protection trust, like Michigan’s, is voidable if the transferor’s home state does not have a domestic asset protection trust statute. The Comment offers the following example:

“By contrast, if the debtor’s principal residence is in jurisdiction Y, which has also enacted this Act, but has no legislation validating such trusts, and if the debtor establishes such a trust under the law of X and transfers assets to it, then the result would be different. Under Section 10 of this Act, the voidable transfer law of Y would apply to the transfer. If Y follows the historical interpretation referred to in Comment 2, the transfer would be voidable under Section 4(a)(1) as in force in Y.”

In short, if the resident state does not respect asset protection trust (with a presumption that they are against public policy of that state if there is no express statute endorsing them) then going to another state that does have an asset protection trust statute to create such a trust still will not work to protect the assets from creditor claims.

Example: A Michigan trust is about ready to terminate and the Michigan trustee is getting ready to distribute trust assets to the remainder beneficiaries of the trust. One of the trust remainder beneficiaries, who resides in Seattle, where assets protection trusts are against the State of Washington’s announced public policy,  tells the trustee of the terminating  Michigan trust that the beneficiary has just created a trust under the Michigan Qualified Dispositions in Trust Act, and he directs the trustee to make his distribution from the terminating trust into his self-settled Michigan Qualified Dispositions in Trust that he just created for his own benefit.  According to the Uniform Voidable Transfers Act, as adopted in Washington and most other states, such a transfer into the trust created under the Michigan Qualified Dispositions in Trust Act would be voidable, i.e. the assets would be subject to levy and attachment by future judgment creditors of the beneficiary.

Formalities: Most asset protection trusts, likes those created under the Michigan Qualified Dispositions in Trust Act, specify that certain formalities must be followed before the asset protection features of the trust will be respected. But what if those formalities are not expressly followed? That was the question in a recent Nevada decision dealing with the enforceability of an asset protection trust in the context of a divorce. Like Michigan, Nevada’s asset protection trust exempts claims of spouses for transfers to asset protection trusts created prior to the marriage, or for transfers to such trusts which are consented to by the settlor’s spouse. In Klabacka v. Nelson, 394 P. 3d 940 (May 25, 2017) the wife claimed that she had the right to invalidate her husband’s Nevada asset protection trust because all of the statute’s formalities were not followed when creating and funding the trust and in the trust’s administration. The court rejected that argument, finding that breaching trust formalities of an otherwise validly created domestic asset protection trust did not cause a loss of creditor protection. Rather, those failures created a cause of action for a civil suit against the trustee for whatever costs and damages that were  occurred. In short, the trustee’s failure to properly administer and follow the formalities of the asset protection trust did not give rise to the spouse’s ability to treat the trust as her husband’s alter ego and bring the assets into the marital estate for division. This somewhat surprising conclusion may have been predicated on the appellate court’s finding that Nevada’s asset protection trust legislation was a strong statement of Nevada public policy in favor of such trusts “in an effort to attract trust business of those individuals seeking maximum asset protection ..”

Conclusion: It seems that it is a pretty big leap in logic for the Uniform Voidable Transfer Act Comments to conclude that if a state does not have asset protection trust legislation, then by default there must be a strong state public policy against asset protection trusts. Which is why there is a national dialogue among estate planning attorneys that if states adopt the most recent version of the Uniform Voidable Transfers Act, that its companion Comments not be adopted by the state at the same time. While we now have the ability to establish an asset protection trust in Michigan, apparently not everyone can take advantage of the asset protection that was intended by the Michigan Legislature, if the Comments to the Uniform Voidable Transfers Act are followed, and the settlor’s home-state does not have comparable legislation.