The Buckeye State stepped into the fiduciary spotlight when the Ohio Legacy Trust Act took effect in March. The new law provides individuals protection from future creditor claims by recognizing domestic asset protection trusts (DAPTs).
The development is particularly notable for high net worth individuals whose jobs make them targets for litigation. They can now shield their assets from creditors while taking advantage of generous trustee provisions established by the new law.Legacy trusts are typically established to provide for educational expenses or future income for children and grandchildren as part of an estate plan. They also can help reduce or eliminate federal estate taxes.
“Ohio joins a short list of states—14 or sothat allow asset protection through a DAPT from creditors for your own benefit. Previously, the only way a resident could establish such a trust was to go offshore or to another state that offered DAPTs,” says Joseph Chornyak Sr., a Certified Financial Planner and managing partner Chornyak & Associates.
“A DAPT shields assets from future creditor claims, but they’re not designed to harm creditors. The trust owner must be solvent without any pending claims, lawsuits or judgments when the asset transfers are made,” says attorney Charles McClenaghan, principal of his own Dublin law firm.
“Ohio’s legacy trusts provide incredible protection when you analyze what other types of trusts offer and what other states offer with their DAPTs,” says attorney Bea Wolper, president of Emens & Wolper Law Firm.
This safe harbor also allows the trustor to maintain essential control of assets, be the beneficiary and receive income generated by the trust. But as attractive as they are, legacy trusts are not a one-size-fits-all product. Local attorneys and financial planners say each individual should evaluate his or her own circumstances before implementing one.
DAPTs are a good fit for those with a high risk of being sued.“The greatest interest is coming from attorneys, doctors, engineers, developers and others whose business activities put their assets at risk. There’s a trade-off, though. That interest is tempered by the fact the trust is irrevocable. That’s why our clients are cautious,” Choryak says.
Once the trust is established, the assets are there to stay. However, the specter of losing their homes and personal assets to a lawsuit is enough motivation for many individuals to take the leap.
“Clients in high-risk professions must consider, beyond any professional liability and other insurance policies they might have, what happens to their assets when that coverage is exhausted. This could be an option, because it’s an added layer of protection,” Chornyak says.
People with high public profiles also should consider a DAPT. “Windfall recipients like trust beneficiaries, lottery winners and landowners in Eastern Ohio who are getting large sums of money from the Utica shale land rights could be sued because they’re perceived to have deep pockets, whether they do or not,” says Chris McGraw, vice president and senior wealth planner for Fifth Third Bank.
DAPTs can be a good tool for family-owned companies, too. “The founders can put their discretionary assets into a legacy trust and not worry about them even as they turn the business and its assets over to the next generation,” Wolper says.
Ohio legacy trusts must be in writing, include a spendthrift provision and are irrevocable.“You lose ownership and on-demand control of the assets in the legacy trust,” McGraw says. “The trustee handles the assets according to the terms of the trust agreement. The trustee must be an Ohio resident or a financial institution that settles its trusts in Ohio.”
Wolper says the trustee provisions are favorable. “You can name the individual who’s your trustee; even your spouse or adult child could be trustee. And you can change trustees at any time. That’s unheard of.”
Additionally, a DAPT is unique in that the transferor retains certain rights associated with the assets held by the trust. “You can continue to use the assets, be the beneficiary of those assets and receive any income stream from the assets. And you can use any real property held by the DAPT, so you can live in your house,” McClenaghan says.
The transferor can be an advisor to his DAPT, essentially retaining control of the investments. He or she also can veto trust distributions and pour trust-held assets back to the estate. Beneficiaries can be changed during the transferor’s lifetime or after death.
All told, the Ohio Legacy Trust Act lets the transferor “consume, invade or appropriate” up to 5 percent of the trust’s value each year.
“Even with the flexibility, we don’t recommend locking up all of your assets in a legacy trust,” McGraw says. “I consider it to be rainy day protection for assets that aren’t protected in other ways.”
With each asset transfer, or disposition, into the DAPT, the transferor executes an affidavit stating he has title to the assets, isn’t insolvent, doesn’t intend to defraud creditors, has no pending or threatened court actions and isn’t considering bankruptcy.“If you owe creditors today, you can’t put those assets in the trust,” McClenaghan says.
After a qualified disposition, a creditor generally has 18 months to make a claim to void that disposition. That 18-month statute of limitations is the shortest in the country. Other states allow creditors to bring claims from two to four years after the asset transfer.
“Carve out a piece of your net worth that you don’t need to live on. Eighteen months later, those assets are protected from future creditor claims. It’s that simple,” McClenaghan says.
Successful creditor claims can only impact the asset transfer that satisfies a particular debt. All other transfers remain valid. The burden of proof is on the creditor. “Using clear and convincing evidence, a creditor bringing suit must show that the transfer was done specifically to defraud them,” McClenaghan says.
“The losing side has to pay the other party’s attorneys’ fees, so that discourages filing a claim just to file a claim,” McGraw says.
“You can’t use the legacy trust to avoid child support or alimony,” Wolper says. “But if you established the trust before you get married and then later are divorced, assets within this trust cannot be touched.”
If division of martal property is involved, the spouse must have been married to the trustor when the asset was transferred into the legacy trust.McGraw says he expects legacy trusts to replace or supplement prenuptial agreements. “It takes the assets out of the marital mix. You don’t have to disclose the assets and you’re not subject to a court interpretation to uphold the contract,” he says.
Legacy trusts do not offer protection from governmental and tort creditor claims.
The legacy trust ct, passed by the legislature and signed by Gov. John Kasich in December, boosts the state’s attractiveness as a wealth-protecting jurisdiction. It’s intended to keep Ohioans assets in Ohio and attract DAPTs from elsewhere by easing ir transfer from other states. An added bonus: Ohio doesn’t levy income tax on legacy trusts established by out-of-state residents, unless a beneficiary lives here.
“Even though Ohio came in about 10 years later than other states in offering legacy trusts, Ohio’s law is as strong as any of the others. By some reports, we’re considered to have the best creditor protection in the nation. We’re certainly considered among the Big Five, along with Delaware, Alaska, Nevada and South Dakota,” McGraw says.
Attorneys, financial planners and even elected officials contend the ct is an economic development tool. “It’s about jobs, jobs, jobs,” says McClenaghan, who was involved in drafting and passing the law. “Previously, DAPTs had to be set up in other jurisdictions. Attorneys referred clients to firms in those states. Trust assets were transferred, so fees and taxes were paid to other jurisdictions. It cost clients more to set up these trusts and it wasn’t very convenient, either. The Ohio Legacy Trust Act makes Ohio friendlier to this business and keeps capital here.”
Lisa Hooker is a freelance writer.