Beginning next month, Michigan will recognize the legality of Qualified Asset Protection Trusts, also known as Domestic Asset Protection Trust — or DAPT. This type of asset protection instrument is potentially a great way for an individual to protect their assets from the reach of creditors.
Signed into law at the end of the last legislative session by Gov. Rick Snyder, the law takes effect beginning on Feb. 5, 2017.
In short, a DAPT is a type of irrevocable trust that is self-settled and acts like a spendthrift trust; it doesn’t allow for “…the appointment of the trust’s assets to your creditors and permits you to be a beneficiary,” according to the Michigan Bar Association. In plain English, it’s a trust you can set up to protect assets from your future creditors and lawsuits against you.
With Michigan’s law coming into effect in February, there will be 14 states (15, if you include Colorado’s limited state statute) that allow for self-settled Domestic Asset Protection Trusts.
Other than in the case of a bankruptcy, DAPTs have proven to be quite effective as a bargaining chip for settling debts for a lesser amount and protecting assets from the reach of creditors and lawsuits, according to legal experts.
There are various state statutes for DAPTs across the country that govern how the trust needs to set up and how and from whom the assets can be protected. Most DAPT state statutes allow the DAPT to be a “Grantor” trust. This means, among other things, that the Grantor of the trust can pay the income tax on the income that the trust generates. Many types of assets can be transferred to a DAPT including cash, securities, real estate, and business interests, as examples.
Good candidates for this type of planning include doctors, lawyers, high-risk professionals, and other people of high net-worth who have high liability concerns. Naturally, the most effective way to guarantee a DAPT’s efficacy is to set the structure up far in advance of any creditor problem.
The lead time necessary for effect is due in large measure to a statutory waiting period required until the assets are protected. You also don’t want to get caught in the snare of a fraudulent transfer.
In the case of Michigan’s draft of the law, a two-year period beginning with the date the assets are transferred to the trust is required to satisfy statuary requirements, except in certain instances of fraudulent concealment. For bankruptcy, a longer statute of limitation may apply. A court could consider the transfer to a DAPT fraudulent if you transferred property to the trust after the threat of a creditor action or lawsuit has arisen.
In today’s litigious society, there is a definite increase in liability exposure. High net worth individuals exposed to liability often face a “victim mentality” world, where the revelation that someone has deep pockets can spur on a lawsuit or a threat of one.
Many professionals are fearful of malpractice lawsuits because of the notoriety of malpractice and errors and omissions legal actions. For instance, in 2006, there were more than 633,000 malpractice claims against physicians and surgeons alone, according to a report by the Physician Insurers Association.
Nearly all of states that allow for DAPTs also have exception creditor statutes. These statutes protect certain classes of creditors by allowing them access to a DAPT’s assets. One common exception creditor is a divorcing spouse.
To see whether a Qualified Asset Protection Trust is an instrument that would help shield your assets from liability, contact the Estate Planning practice group at Resnick Law for a consultation at (248) 642-5400 or contact us online.