Take-Away:  When dealing with asset protection trusts, plan on strictly complying with all of the statute’s requirements, otherwise a court will ignore the trust when the settlor’s creditors appear.

Context: We are starting to get a few more inquiries with regard to asset protection trusts, now that Michigan has adopted its own version of a self-settled trust that provides creditor protection. The public policy of a state is reflected in its legislation; consequently,  now that Michigan has its Qualified Dispositions in Trust Act, it has effectively declared that a trust which satisfies the Qualified Dispositions in Trust Act’s requirements will be protected from the settlor’s creditors. But complying with that statutory scheme probably requires strict compliance with all of its conditions, since the creditor protection the statute affords departs from the common law which essentially holds that a person cannot transfer their assets to a trust and benefit from those assets held in trust to the exclusion of their creditors. [See Restatement (Second) of Trusts, Section 156; Restatement (Third) of Trusts, Section 58(2) for the common law.] MCL 700.1040 et seq.

Statutory Affidavit Requirement:  One of the statutory requirements under the Michigan Qualified Dispositions in Trust Act is that the settlor/transferor must sign a qualified affidavit in which the transferor states that at the time of the transfer of property to the trust all of the following apply: The transferor-

  1. Has full right, title and authority to transfer the property to the trust;
  2. Does not intend to defraud a creditor by transferring the property to the trust;
  3. Does not know of or have reason to know of any pending or threatened court actions against the transferor, except for those actions that are identified by the transferor in an attachment to the affidavit;
  4. Is not involved in any administrative proceedings, except for those identified by the transferor that are identified in an attachment to the affidavit;
  5. Is not currently in arrears in any child support obligation by more than 30 days; and
  6. Does not contemplate filing for relief in bankruptcy.

In addition, the affidavit must also state that the property that is being transferred to the trust will not render the transferor insolvent and that the transferred property was not derived from unlawful activities.

Each time a transfer of property is made to the trust, a qualified affidavit must be filed. You will recall that this was one of the drawbacks identified to Michigan’s asset protection trust that was highlighted in a recent national ranking of state asset protection trust statutes.

A qualified affidavit is defective if it materially fails to meet all of the reporting conditions just summarized. However, the qualified affidavit may still be valid and comply with the statute because of (i) ‘nonsubstantive variations’ [I expect lots of litigation in the coming years to tell us what the heck that exception means!]; (ii) additional statements or representations in the affidavit that do not contradict the required representations [which makes me wonder why a lawyer would  put something in the affidavit to begin with that is not required?- just asking]; and (iii) technical errors that occur in administering the oath to the affiant-transferor that were not the transferor’s fault  [the statute apparently is willing to throw the notary under the bus on this screw up.]

If the transferor fails to timely file the affidavit or signs a defective affidavit, that failure or defect can be considered as evidence in an action filed by a creditor to set aside the transfer into the qualified dispositions trust. But the statute then goes on to say: “ but the validity of the qualified disposition is not affected in any other way because of the failure or defect.” In addition to this confusing exception the statute does not define what timely signing the affidavit means- does timely mean hours, days, or weeks associated with the transfer. Example: I direct my former trustee in Chicago to transfer my stock portfolio to my Michigan qualified trustee. From recent experience, it could take weeks for my Chicago trustee to get around to physically transferring the assets to the Michigan trustee. Do I sign the affidavit when my Michigan trustee receives the assets, or when I directed my Chicago trustee to transfer the assets to Michigan? I get uncomfortable when a Michigan statute makes the validity of the qualified dispositions trust hang on when an affidavit is timely.

One other omission in the statute is the simple question: Who gets the transferor’s qualified affidavit? A reasonable assumption is that the qualified trustee gets a copy of the qualified affidavit, but the statute makes no provision to confirm that the affidavit was delivered to a third party, like the qualified trustee. Does a non-delivered albeit technically compliant qualified affidavit suffice?

Strict Compliance: So why is the prior discussion of a qualified affidavit remotely relevant? Take the case In re Erskine, 550 Barkr. WD Tenn, 2016. Tennessee has an asset protection trust statute much like Michigan’s. That Tennessee statute required Erskine to declare that the transfer of assets to his trust ‘will not render the transferor insolvent, … does not intend to defraud a creditor,.. and [t]the asset being transferred to the trust were not derived from unlawful activities. Erskine failed to execute the affidavit the Tennessee statute required, since he named himself as the trustee’s investment advisor and also the trust protector, both roles permitted under the Tennessee statute. Consequently, Erskine rationalized that an affidavit was unnecessary given his fiduciary role in the trust, i.e. the affidavit was to be given to himself, so he thought it unnecessary, apparently. It was easy for the Court to find the trust invalid under Tennessee’s asset protection trust law for not literally complying with the statute’s qualified affidavit condition.

Conclusion:  There will be lots of questions to work through once clients start adopting qualified dispositions in trusts as part of their estate plans. Until those questions are answered by the court, or the legislature, it would be best to assume that the courts will require strict compliance with all of the statute’s requirements, including a timely qualified affidiavit.