While in law school, I generally tuned out anything a professor said after uttering the words, “The law used to be….” I figured it was hard enough figuring out what the law is today; don’t bother me with what it used to be. In the context of self-settled trusts in Michigan, however, the history can be meaningful.
Historically, Michigan residents couldn’t protect their assets from the claims of their creditors by simply transferring their assets into a trust for their benefit. MCL 7506(1)(c) provides that creditors of the settlor of this “self-settled trust” can reach the maximum amount that can be distributed to or for the settlor’s benefit in satisfaction of the creditors’ claims. This was typical of the laws of other states regarding self-settled trusts.
In the late 1990s, states began enacting asset-protection trust statutes. These statutes enable a settlor to transfer assets to a trust and retain certain beneficial interests in the trust, while preventing the settlor’s creditors from reaching the assets in satisfaction of their claims. These statutes often exclude certain transfers from the afforded protection, including transfers made in bad faith or with the intent to defraud. Typically, the trust must be irrevocable and have spendthrift provisions prohibiting a beneficiary from assigning their interest in the trust. Also, at least one trustee must be a resident of the state of creation. Since Michigan law didn’t previously provide this protection, a Michigan resident who wanted to establish such a trust had to do so in another state and pay an annual fee to a trustee located in that state (for example, a bank or trustee company).
To attract and retain business, Michigan enacted the Qualified Dispositions in Trust Act. The Act took effect March 8, 2017. If the form and funding requirements summarized below are satisfied, a Michigan resident can transfer assets to a trust, continue to receive benefits from the assets, and protect the assets from claims of the settlor’s creditors, generally beginning two years after the date of transfer.
As the title of the Act indicates, it all starts with a “qualified disposition.” The person seeking asset protection (referred to as a “transferor”) must transfer property to a “qualified trustee” subject to a trust agreement under which the transferor has only rights that are permitted under the Act. A transfer isn’t a qualified disposition if the transferor is in arrears on a child-support obligation by more than 30 days at the time of transfer. The transferor must sign an affidavit stating generally that the transferor is solvent and the transfer isn’t an attempt to defraud creditors.
The trust must have at least one “qualified trustee." An individual who’s a Michigan resident can be a qualified trustee, as can a bank or trust company. The qualified trustee must maintain some of the trust property and records in Michigan. The transferor can’t be trustee.
The trust must: (1) be irrevocable, (2) contain a spendthrift provision, and (3) expressly incorporate Michigan law to govern the validity, construction and administration of the trust. Irrevocable means the transferor must have no power, directly or indirectly, to amend or revoke the trust. A spendthrift provision prohibits a trust beneficiary, including the transferor, from voluntarily or involuntarily assigning any interest the beneficiary has in the trust.
The trust may grant the transferor the following rights:
- Direct investment decisions
- Veto a distribution
- Appoint the trust assets effective on the death of the transferor
- Receive income
- Receive principal under a discretionary or support provision
- Remove a trustee and appoint a new trustee
Prior to the Act, a Michigan resident needed a friend or trusted advisor residing in an asset-protection trust state to avoid needing a corporate trustee and paying five-digit annual fees (even where the trustee basically serves in name only). Under the Act, the ability to appoint a Michigan resident as trustee greatly enhances the appeal of asset-protection trusts for Michigan residents.
Some may say Michigan is late to the party, while others may say, better late than never. Either way, the Act provides an effective means by which Michigan residents can achieve asset protection while avoiding the expense and administrative inconvenience of out-of-state corporate trustees.