You’ve worked hard, saved money, and made investments in order to achieve financial security for yourself, your family, and your retirement. Yet, all of it could be wiped out if you become the victim of an unexpected lawsuit judgment not fully covered by your liability insurance. On top of that, any attempt you make to protect your assets could mean prolonged litigation and tens of thousands in attorney fees.
But this doesn’t have to happen. Thanks to a recent Michigan law, you now have a way to stronghold your assets and legally shield them from potential creditors.
In 2017, Michigan lawmakers approved an estate planning option called the Domestic Asset Protection Trust (“DAPT”). This is a specialized form of an irrevocable trust, allowing you to place assets into the trust and beyond the reach of your creditors — provided that you, the trust, and the transfer of assets to the trust meet the statutory requirements. Michigan is among 17 states where DAPTs are permitted by statute.
Here are five reasons why putting a DAPT in place provides you with the closest thing to a safety net from financial ruin.
It just takes one lawsuit that exceeds the limits of your liability policy, or involves an allegation not covered by your liability insurance, and your personal assets are at risk — exposed to the creditor seeking full recovery for the loss.
And while it may seem easier to instead simply transfer the asset(s) to someone else, and avoid the formality of a trust altogether, there are dangers in doing so. It more than likely constitutes a fraudulent conveyance, which is specifically prohibited by law. The law doesn’t allow you to “hide the ball,” but it does allow you to make careful plans for your assets before any claims arise.
In DAPT, you can remove the assets from your personal possession — where they may be exposed for creditors to snatch — by transferring them to a specialized irrevocable trust, with a third-party trustee, such as a bank, accountant, or professional trustee. By doing so, your assets will be beyond creditors’ reach, even if challenged in court. The farther you are removed from the trustee in terms of a familial or business relationship, the more likely your trust will not be viewed as simply a masked extension of yourself, which would prevent the protection of your assets by a court challenge.
Although you are giving up direct personal ownership to a trust you cannot change, you can still legally retain some level of rights to receive trust income and even principal, according to a support or discretionary standard. Further, although you are giving away immediate control of the assets to someone else as trustee, you may still maintain the power to direct (but not consent to or veto) your trustee’s investment decisions; to veto (but not direct or approve) distribution decisions; and to remove and appoint trustees and trust advisors.
Two years after you transfer the asset to the DAPT, you may be able to protect an asset for the remainder of your life in a trust. Without a DAPT, the creditor has three times longer — up to six years after your transfer to an individual — to file a lawsuit to set aside that transaction and obtain that asset. In addition, without a DAPT, your assets may be at risk beyond the six years, because the trust or ownership method does not provide creditor protection.
Be advised, though: if a creditor’s claim arose before the assets were placed into the asset protection trust, the creditor may be able to extend the statute of limitations for bringing a claim to a year after the asset transfer to the trust was — or reasonably could have been — discovered by creditor, if the transferor fraudulently concealed the transfer.
It is clear that creditors do have rights under Michigan’s DAPT statute, and, under certain limited circumstances, they can reach assets in a Michigan asset protection trust. Accordingly, you need to be proactive in structuring your assets to obtain the full protection allowed by law. This is why it’s crucial to establish a DAPT when you have the assets, long before a potential claim arises.
If you had chosen to simply transfer your asset(s) to someone else, a creditor has an easier burden in proving by a “preponderance of the evidence” (more likely than not) that the transfer was fraudulent. But, should a creditor challenge a transfer to the DAPT, the creditor would have to prove by the higher standard of “clear and convincing evidence” that the transfer was improper. This higher standard requires evidence that it is substantially more likely than not that the debtor had the actual intent to defraud the creditor.
At the minimum, even if a challenge to the transfer to the DAPT has a chance to be successful, many have argued that you have put in place certain mechanisms, including a higher burden of proof. These could cause the creditor to seek a settlement for a percentage of the asset value, rather than incur the expenses of trying to obtain the entire asset by setting aside the transfer in court.
If you’re a doctor, attorney, accountant, business owner, professional athlete or celebrity, you face exposure due to the nature of your profession. This is why you especially should consider a DAPT: you have assets to protect, and transferring them to the trust won’t leave you insolvent.
Of course, nothing is a guarantee when attempting to protect assets. While it is clear that the DAPT is your best chance to save your assets, challenges to DAPTs nationally have been successful when an individual has placed all of his/her assets in a DAPT to shield them from creditors.
Therefore, in proceeding with a DAPT, you must be solvent outside of your DAPT, meaning you must have sufficient assets to sustain your daily, monthly, and yearly needs and expenses. Accordingly, you will not place all of your assets in a DAPT; instead, you will place those assets that are most valuable, as they can sustain you after a tragic loss. These may involve real estate and large financial accounts and investments that you don’t anticipate drawing from in order to sustain your cost of living.
As set forth above, with each of these, you will maintain the right to direct your trustee’s investment decisions.
In putting a DAPT in place, you will not need to do much more than provide your estate planning attorney with relevant information, and to engage in the same careful planning you would with any estate plan.
The information you provide will include a statement of your assets and liabilities, as well as an identification of those assets you seek to secure in a worst-case scenario. Once provided with that information, your attorney can prepare the appropriate trust to maintain the assets that will be most accessible to you, and then prepare a DAPT, which will protect the assets you wish to secure.
Further, your attorney will prepare an affidavit for you to sign, which will help qualify you for a DAPT.
Even if you believe that the risk is small — that you will never incur a judgment in excess of your insurance coverage or otherwise not covered by your insurer — failing to plan is to gamble with your financial security.
With so much at stake affecting your livelihood and hard-earned assets, now is the time to prepare a DAPT. Because a transfer to a DAPT can be more easily set aside in the first two years after the transfer, it is best to establish the safety net by transferring assets to a DAPT when you are not anticipating a lawsuit. If you work to protect assets now through transfer to a DAPT, you may create a stronghold only two years after transferring your valued items.
With a DAPT, you can act now to prevent future financial catastrophe. For more information and assistance in securing your assets through a DAPT, contact the estate planning attorneys at Chapman Law Group.
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