As you know, Michigan’s Legislature adopted its first version of an asset protection trust last December. The technical name for the statute is the Qualified Dispositions In Trust Act. This Act is highly relevant to us at Greenleaf Trust since it requires as a statutory condition the use of a corporate trustee which conducts business in Michigan.

Earlier this week nationally known estate planner Steve Oshins published his annual rankings of state asset protection trusts. With the adoption of the Qualified Dispositions in Trust Act, Michigan’s statute now ranks 5th out of about 17 or 18 states that have some form of an asset protection trust. Sitting in fourth place in these rankings is Ohio’s asset protection trust statute- always one step ahead of Michigan it seems!.

Some of the features of Michigan’s asset protection trust that entitled it a high national ranking include the following:

  • Michigan will not impose a state income tax on the trust, unless Michigan residents are trust beneficiaries [in contrast, for example, to Nevada and South Dakota which impose no state income taxes;]
  • Family law exception creditors, i.e. those whose claims can be satisfied in some manner from the trust, is limited solely to a divorcing spouse, and if the qualified dispositions trust is created at least 30 days prior to the marriage, then the divorce court is directed to not consider, directly or indirectly, the assets held in the qualified dispositions trust as part of the marital estate [in contrast both alimony,  child support and a divorcing spouse are considered exception creditors who can access assets held in an Ohio asset protection trust;]
  • While some states also exclude from the asset protection trust’s protection preexisting tort judgment creditors, e.g. a personal injury plaintiff who holds a judgment against the trust beneficiary, Michigan’s statute makes no exception for preexisting tort judgment creditors [this is in contrast to several other state statutes where preexisting tort claimants can proceed against the beneficiary’s interest in the trust, states like Delaware;]
  • Michigan’s statute has a relatively short statute of limitations to bar future creditor claims against the trust who assert that a Fraudulent Transfer of an asset went into the trust of 2 years; [in contrast, and probably why Ohio received a slightly higher ranking is that its statute of limitations that precludes a creditor from setting aside a transfer into its asset protection trust is 1.5 years;]
  • Michigan’s statute uses a slightly different statute of limitations period to challenge transfers into a qualified dispositions trust for existing or preexisting creditor claims- the later of 2 years or 1 year after discovery of the transfer into the qualified dispositions trust [compared to Ohio’s shorter 1.5 years or 6 months from the date of discovery, whichever comes later;]

A feature that probably caused a lower ranking for Michigan’s statute is that it requires that a person who creates a qualified dispositions trust to sign an Affidavit of Solvency for just about each transfer into the trust, can become a bit of a hassle if several assets are transferred to the qualified dispositions trust, since each time there is a transfer, a new Affidavit of Solvency must be created and signed; [neither Nevada nor  South Dakota require any Affidavit of Solvency, which is probably why they are ranked #1 and #2.]

A few other features of Michigan’s Qualified Dispositions in Trust Act that were not part of the ranking criteria but which I think make it pretty powerful as an asset protection tool include:

  1. If a creditor  challenges a transfer into the qualified dispositions trust, the creditor carries the burden of proof that the transfer was in violation of Michigan’s Fraudulent Transfer Act;
  2. The Fraudulent Transfer Act is the sole basis or remedy where the transfer into the qualified dispositions trust can be set aside, meaning a judge with equitable powers cannot ‘free-lance’ a remedy that is not authorized by the Fraudulent Transfer Act;
  3. The creditor must prove actual fraud by the beneficiary, meaning the creditor cannot use indirect proof, often called badges of fraud, to prove its case-  the creditor must prove an actual intent to defraud;
  4. The creditor’s burden of proof must be by clear and convincing evidence, which is the highest civil burden of proof standard in court cases;
  5. If the creditor is successful, the entire qualified dispositions trust does not collapse, only just enough assets will become available to be taken from the trust to satisfy that creditor’s claim, but no other creditors can ‘coat-tail’ onto the initial creditor’s success;
  6. If one creditor is successfully  attacks the qualified dispositions trust, any other creditor cannot ‘coat-tail’ onto that success, which means that the second creditor must prove that there was an intent to defraud that second creditor. This provision was put into the statute to stop a practice in other states where if one creditor was able to show actual intent to defraud, other creditors were able to bootstrap onto that one creditor’s showing of intend to defraud  and thus avoid having to show that there was an actual intent to defraud all other creditors- this is intended to address a judge’s inclination to use the ‘where there is smoke there must be fire’ to find an intent to defraud all creditors; and
  7. All other participants involved with the establishment of a qualified dispositions trust, e.g. the drafting attorney, the corporate trustee, a trust protector, are in general exonerated from any liability, even when a creditor later successfully attacks the qualified dispositions trust. This provision is added to the Act  to entice a corporate trustee to be willing to become involved with administering a trust that might later invite acrimonious litigation by unhappy creditors.

The Qualified Dispositions in Trust Act is new and obviously it has not yet been tested in the courts. It is admittedly a very difficult statute to read, and it is riddled with several technical definitions that are key to obtaining the asset protection that a funded qualified disposition trust is intended to achieve. But it is important to have at least a working knowledge of this new statute and how it can effectively protect the beneficiary’s financial interest in the trust from most creditor claims.