Over the past 20 years, I have seen my clients become increasingly more interested in protecting themselves and their families from creditors. However, creditor protection planning had generally involved giving up all rights to the assets, moving the assets offshore (both of which come with their own set of complications and risks), or creating a domestic asset protection trust (DAPT) in a jurisdiction such as Nevada, South Dakota or Alaska. I am now happy to report that Michigan has a new law permitting the creation of Michigan DAPTs. In fact, Michigan’s DAPT law is one of the best in the country, offering convenience, flexibility and strong protection when used properly. So exactly what is a DAPT and why might you be interested?
A DAPT is an irrevocable trust that can shield assets from creditors. This is true even if you both create and fund the DAPT (as the “Settlor”) and name yourself as a beneficiary of the DAPT. As with all things legal, precision and timing are very important. Generally speaking, once two years have passed since the date on which you put assets into the DAPT, your creditors will not be able to seize those assets. A longer period of time may apply in bankruptcy or if there is fraud. Accordingly, a DAPT should be created and funded before a claim arises.
Under Michigan’s new law, you have a great deal of flexibility as a Settlor/Beneficiary so long as you follow the rules. You can receive both income and/or principal under the DAPT, can control investment decisions, can change the trustee and can veto distributions. You can also direct to whom and how the assets are to be distributed on your death.
A DAPT needs a Trustee, as this is who is in charge of running it. You are able to name another Michigan resident, a Michigan corporate or professional trustee to act as Trustee. The ability to name a Michigan individual (who must meet certain criteria) instead of mandating the use of a corporate or professional trustee, is a nice option for some.
Who might want a DAPT? The most likely candidates are business owners, physicians, surgeons or others in high risk occupations, and other high net worth individuals who like the additional security a DAPT can provide. Additionally, because of the way Michigan crafted its law, a DAPT is also an excellent complement to or partial replacement for a Prenuptial Agreement. This is because DAPT assets are well protected in divorce if either (1) the assets were conveyed to the DAPT more than 30 days prior to the marriage or (2) the couple agrees (for example, in a prenuptial agreement) that this protection applies to the assets in the DAPT. The strength of this law makes the combination of a DAPT and a Prenuptial Agreement the “gold standard” in premarital planning.
Is a DAPT for you? I would be happy to meet with you to help figure it out.
For further information regarding these matters, please contact Ms. Umphrey at 248.619.2591 or via email.