On December 8, 2016 Michigan’s Governor signed into law the Qualified Dispositions in Trust Act. The Act went into effect on March 8, 2017.
This new law makes it possible for the first time for people to create a Domestic Asset Protection Trust (DAPT) in Michigan that benefits the person who created the trust. Michigan joins 16 other states that have been competing with each other to attract trust company business to their states. In many respects, this law was adopted to attempt to keep Michigan residents from creating DAPTs in other states.
So what can a person do under this law? One thing a person (herein called the Transferor) could do is create an irrevocable trust, name his spouse as Investments Trustee, and name his unrelated business advisor as Distributions Trustee. The Transferor can retain the power to remove the trustee and appoint a replacement trustee. However, the Transferor cannot control distributions from the trust, but he can veto distributions, and he can retain the power to direct the investments of the trust.
The Transferor’s spouse would have all the administrative and investment powers a trustee normally has, with the exception of distributions, which would be under the sole control of the Distributions Trustee. The Transferor can also retain a special power of appointment exercisable in his Will upon his death. The Transferor can also have the right to receive income and or principal from the trust in the discretion of the Distributions Trustee, for his support and maintenance.
If the Transferor creates this trust, a creditor of the Transferor would have to sue under the Fraudulent Transfer Act within two years of the creation of the trust, unless the Transferor fraudulently concealed the existence of the claim. The Creditor would have to prove actual intent to defraud by clear and convincing evidence, which is a higher than normal standard of proof for a civil case.
If the Transferor is the beneficiary of the trust, and the trust was created more than 30 days before the Transferor’s marriage, then the property in the trust is not considered marital property and shall not be awarded to his spouse in a divorce action.
If the Transferor is not the beneficiary of the trust, then the assets are further protected from claims in a divorce action. So, if the Transferor set up the trust for the benefit of one or more of his descendants, then the trust property is not considered marital property and shall not be awarded to the descendant’s spouse in a divorce action, regardless of when it was created.
This new law will alter the landscape of practically everyone’s estate planning process, and will demand that estate planners become very familiar with this new law. In many cases it will be advisable to individuals to have their estate plans reviewed to see if the application of this new law should be taken into account in their planning.