9-Jan-17
Michigan Asset Protection Trusts – Rethinking Reciprocal Durable Powers of Attorney
We can expect a fair amount of discussion and analysis in the coming year with regard to asset protection trusts now that Michigan has enacted its own Qualified Disposition in Trust Act, i.e. the legal authority to create a self-settled Michigan asset protection trust. There will no doubt be some interesting questions associated with the interpretation of Michigan’s new statute. One question will address the consequences if there is more than one transferor of assets to the qualified dispositions trust. Another will be if marital assets are transferred to the trust that benefits only one spouse.
Consider the statute’s provision that deals with the trust beneficiary’s interest in the qualified dispositions trust if the trust beneficiary is involved in is a subsequent divorce. The Michigan asset protection trust statute provides:
“(4) If a trust beneficiary who has an interest in a qualified disposition or in property that is subject to a qualified disposition is a party to an action for annulment of marriage, divorce, or separate maintenance, all of the following apply:
- If the trust beneficiary is not the transferor of the qualified disposition, the trust beneficiary’s interest in the qualified disposition or in property that is the subject of the qualified disposition is not considered marital property, not considered, directly or indirectly, part of the trust beneficiary’s real or personal estate, and shall not be awarded to the trust beneficiary’s spouse in a judgment or annulment of a marriage, divorce, or separate maintenance.
- If the trust beneficiary is the transferor of the qualified disposition, the trust beneficiary’s interest in the qualified disposition, or in property that is the subject of the qualified disposition is not considered marital property, is not considered directly or indirectly, part of the trust beneficiary’s real or personal estate, and shall not be awarded to the trust beneficiary’s spouse in a judgment or annulment of marriage, divorce, or separate maintenance IF EITHER OF THE FOLLOWING APPLY:
- The trust beneficiary transferred the property that is the subject of the qualified disposition more than 30 days before the marriage that is the subject of the action.
- The parties to the marriage agree that this subdivision applies to the qualified disposition.
- If subdivisions (a) and (b) do not apply, subsections (2) and (3) do not limit the transferor’s spouse’s property division claims.”
What if both spouses agree to transfer marital assets to a qualified dispositions trust of which only one of the spouses is the trust beneficiary? This might happen if the asset was acquired in another state that followed community property principles, yet the community-acquired asset was titled in the name of only one spouse who wishes to fund the qualified dispositions trust. If that asset is transferred to the qualified dispositions trust, are both spouses transferors to the trust? Both spouses would be transferring their community property interests to the qualified dispositions trust, yet only one spouse is named as its trust beneficiary. When the spouses later become involved in a divorce, the trial judge must deal with the existence of the trust and the spouse- beneficiary’s rights in the trust, yet the scope of statute may effectively tell the divorce judge ‘hands off!’
Or, consider that Michigan’s statute, subsection (b)(ii), requires that the spouses agree that the statute applies to the transferred asset, but the statute does not require that both of the spouses agree in writing or that the non-trust-beneficiary spouse must consent to the application of the qualified dispositions trust statute and its legal effect to the trust. The statute only requires that the non-beneficiary spouse agree. What if the spouses have exchanged reciprocal general durable powers of attorney, and the trust-beneficiary spouse using the durable powers of attorney signs their spouse’s name to the transfer of entireties owned assets, which authority is the equivalent to an implied consent when the durable power of attorney is exercised. When the spouses later become involved in a divorce the trial judge must deal with the existence of the trust and the statute’s ‘hands off!’ directive, which may turn on whether the facts warrant a finding of some agreement, which might be by implication with a general durable power of authority granted to the spouse to make gifts, or some inaction by the non-beneficiary spouse after the transfer is made.
This topic was indirectly addressed in a 2015 Utah Supreme Court decision, Dahl v Dahl, 345 P.3d 566(Utah 2015). There, the Husband, a Utah resident, created a self-settled asset protection trust in Nevada for his own benefit and the benefit of his Wife, his issue, and some charities. The asset protection trust had been funded with marital assets by Husband. Wife also transferred title to marital assets to the trust. In a subsequent divorce Wife claimed that Husband reserved the power to amend the trust, and because of that power to amend the trust, the trust was essentially revocable by him. The lower courts found that the trust was not revocable by Husband, but the Utah Supreme Court reversed, finding Husband’s power to amend the trust was equivalent to a retained power of revocation. Because Wife was also found to be a settlor to the trust [arising from her own contributions] Wife’s right to the trust property in their divorce would be based upon her own contributions to the trust. The Utah Supreme Court directed the divorce court to permit Wife to revoke the trust with regard to the portion of the trust corpus that was attributable to either her separate property contributed to the trust or any marital property. In short, because Wife was deemed to be a transferor to the asset protection trust she was able to reach trust assets in the subsequent divorce. What the Dahl Court avoided by finding the trust to be revocable by Husband was the more difficult question of whether an asset protection trust statute will circumvent a divorce court’s order to compel the qualified dispositions trustee to distribute the marital assets from the trust. The Utah court noted that had it found the trust to be irrevocable, “it would create a serious conflict between trust law and divorce law in Utah. The question of whether a spouse could create an irrevocable trust in which he or she placed marital property, thereby frustrating the equitable distribution of the property in the event of divorce, is not before us in this case. Accordingly, we take no position on a likely outcome of such conflict. Rather, we bring the potential pitfalls to the Legislature’s attention.”
The question exists under Michigan’s statute, as it is currently written, if a spouse knowingly allows community property assets, or marital assets, to be transferred to a qualified dispositions trust by the other spouse, will that presumed knowledge constitute an implied agreement to remove those assets, and his/her interest in the transferred assets, from the marital estate for divorce allocation purposes? A similar question arises if the beneficiary-spouse relies on a general durable power of attorney given by their spouse to transfer marital assets into the qualified dispositions trust; does the authority granted under the durable power of attorney constitute deemed consent or an implied agreement by the non-beneficiary spouse to the transfer of marital assets to a qualified disposition trust that benefits only one of the spouses?
My hope is that the qualified dispositions statute will be tightly construed by the courts to require that the agreement contemplated by subsection (b)(ii) must be knowingly made by the non-beneficiary spouse, and that any agreement must be in writing or be the equivalent of a written waiver of marital rights signed by the non-beneficiary spouse. Currently the statute’s use of the word agree seems too lose to protect the interests of the non-beneficiary spouse, especially if marital assets or community property interests are transferred to the qualified dispositions trust.
More importantly, for spousal estate planning, where the spouses often exchange broadly phrased general durable powers of attorney which include the ability to make transfers and lifetime gifts, renewed thought needs to be given to this authority in light of the way that the Michigan Qualified Dispositions in Trust Act is currently written, which can remove all assets, arguably marital assets, from the purview of a divorce court. The possible abuse of the general durable power of attorney to fund an asset-protection-trust at least something to think about when talking to a marital couple.